Molina Healthcare Annual Report 2012

FY2012 Annual Report · Molina Healthcare

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201 2 Annual Report

About Us

Company Profile

Historical Highlights

Molina Healthcare, Inc. (NYSE: MOH), a
FORTUNE 500 company, 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. The Company’s licensed health plans
in California, Florida, Michigan, New Mexico,
Ohio, Texas, Utah, Washington and Wisconsin
currently serve approximately 1.8 million
members, and its subsidiary, Molina Medicaid
Solutions, provides business processing and
information technology administrative services
to Medicaid agencies in Idaho, Louisiana,
Maine, New Jersey and West Virginia, and drug
rebate administration services in Florida. More
information about Molina Healthcare
is
available at www.MolinaHealthcare.com.

Membership (thousands)

Premium Revenues ($ millions)

1,797
1,797

1,697
1,697

1,613
1,613

1,455
1,455

1,256
1,256

$5,826
$5,826

$4,603
$4,603

$141
$141

$166

$155

$1.43

$1.32

$3,990
$3,990

$3,660
$3,660

$3,091
$3,091

$115

$0.79

$90

$0.452

$0.21

‘08
‘08

‘09
‘09

‘10
‘10

‘11
‘11

‘12
‘12

‘08
‘08

‘09
‘09

‘10
‘10

‘11
‘11

‘12
‘12

‘08
‘08

‘09

‘10

‘11

‘12

‘08

‘09

‘10

‘11

‘12

Membership Profile

1,797
1,797

1,697
1,697

1,613
1,613

1,455
1,455

1,256
1,256

Service Areas

Aged, Blind
or Disabled

$3,990
$3,990

15%

$3,660
$3,660

EBITDA1
($ millions)

Diluted Earnings Per Share

$5,826
$5,826

$4,603
$4,603

$141
$141

$166
$166

$155
$155

$1.43
$1.43

$1.32
$1.32

75%
Mothers,
Children &
Families
TANF

$3,091
$3,091

CHIP 8%

$90
$90

Medicare
2%

$115
$115

$0.79
$0.79

$0.452
$0.452

$0.21
$0.21

‘08
‘08

‘09
‘09

‘10
‘10

‘11
‘11

‘12
‘12

‘08
‘08

‘09
‘09

‘10
‘10

‘11
‘11

‘12
‘12

‘08
‘08

‘09
‘09

‘10
‘10

‘11
‘11

‘12
‘12

‘08
‘08

‘09
‘09

‘10
‘10

‘11
‘11

‘12
‘12

1 EBITDA is a non-GAAP
financial measure.

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

Mothers, Children & Families (TANF) 75%

Persons with Disabilities (ABD) 15%

Children’s Health Insurance Program (CHIP) 8%

Medicare 2%

Consolidated Results of Operations

(Amounts in thousands, except per-share data)
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
Other income
Total other expenses
Income before income taxes
Provision for income taxes

Net income

Net income per share:

Basic

Diluted

Weighted average shares outstanding:

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(1)
Service revenue ratio(2)
General and administrative expense ratio(3)
Premium tax ratio(1)
Effective tax rate

Year Ended
December 31,

2012

2011

5,826,491 $
187,710
5,188
9,374
6,028,763

5,096,760
141,208
532,627
158,991
63,704
5,993,290
-
35,473
16,769
(361)
16,408
19,065
9,275
9,790

0.21
0.21

46,380
46,999

87.6%
2.3%
89.9%
75.2%
8.8%
2.8%
48.6%

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
-
15,519
64,654
43,836
20,818

0.45
0.45

45,756
46,425

84.5%
2.3%
86.8%
89.7%
8.7%
3.5%
67.8%

(1) Medical care ratio represents medical care costs as a percentage of premium revenue, net of premium taxes; premium tax ratio represents premium

taxes as a percentage of premium revenue, net of premium taxes.
Service revenue ratio represents cost of service revenue as a percentage of service revenue.
Computed as a percentage of total revenue.

(2)
(3)

Molina Healthcare | Annual Report 2012

To Our Shareholders

As a company, we are fortunate to find ourselves
situated amid unprecedented opportunities.
In the years to come, continuing budget pressures will accelerate
the trend among states to shift Medicaid patients from costlier and
more episodic fee-for-service models into managed care. Those
pressures will intensify with the expansion of Medicaid eligibility
under the Affordable Care Act, which could bring approximately
12 million more Americans into the program before the end of
this decade. Both of these factors mean that the demand for the
services we offer is only going to increase. In fact, we project that
our revenues will grow from approximately $6 billion in 2012 to
approximately $12 billion by the end of 2015.

By far, the largest growth opportunity involves the population of
“dual-eligibles,” who qualify for both Medicare and Medicaid, and
who currently comprise a small segment of the beneficiaries we
serve. In contrast to the TANF (Temporary Assistance to Needy
Families) and CHIP (Children’s Health Insurance Program)
members who currently make up three-fourths of our membership,
dual-eligibles are elderly or disabled, tend to have chronic illnesses
(often, multiple chronic conditions, including mental illnesses),
and are more likely, because of their low incomes, to remain
continuously eligible for the program. Given these characteristics,
it’s easy to understand why a disproportionately large share of
Medicaid dollars goes toward caring for dual-eligibles, and why
states are especially motivated to bring them into plans that can
deliver a more cost-effective continuum of care.

Our experience and track record with Medicaid managed care
plans make Molina exceptionally well situated to capitalize on the
emerging opportunities in both the traditional Medicaid arena
and in the high-growth area of dual-eligibles. We did just that last
year in winning contracts for demonstration projects in several
key states where the federal government awarded grants to migrate
dual-eligibles into new, coordinated Medicare-Medicaid plans.

In Ohio, for example, our health plan was selected to participate
in the state’s Integrated Care Delivery System, which is expected
to begin in June 2013. We were selected to participate in the
maximum number of regions that any individual plan in the state
of Ohio is allowed to serve. The plan will serve approximately
45,000 dual-eligibles in the southwest part of the state – an area
in which we already have a well-established network of providers
due to our existing programs.

J. Mario Molina, MD
Chairman of the Board,
President and Chief
Executive Officer

For Molina Healthcare, 2012 was a year of opportunity, challenge
and validation. Our experience and track record continue to open
new doors of opportunity for our company, as more states move
beneficiaries of public health programs into managed care. As we
work to make the most of those opportunities and enter into new
contracts and new service areas, we inevitably encounter anew
the challenges of medical cost management, amid an already
challenging and complex reimbursement environment that differs
from state to state.

Over the course of three decades, our company and our experienced
management team have repeatedly demonstrated the ability to
manage through such challenges and place health plans on a solid
footing for quality, cost-effectiveness and financial performance. As
2012 progressed, we drew upon that ability once again, particularly
in the second quarter, in a way that we believe further validates our
approach and our expertise. We also received external validation,
having been selected to participate in new innovative partnerships
with government entities that we believe will propel further growth,
and from the renewal of our state contract in Ohio following a
successful appeal. Meanwhile, we continue to diversify our portfolio
of services and our revenue streams in ways that we believe allow us
to capitalize on our core strengths while adding value to our state
clients and plan members.

In spite of the challenges we experienced during the second
quarter, we achieved another year of very positive financial
results. Our cash flow from operations was $348 million, an
increase of 54% from 2011. Annual premium revenues were up
27%, from $4.6 billion in 2011 to $5.8 billion in 2012. And, we
reported earnings per share for 2012 of $0.21.

Molina Healthcare | Annual Report 2012

In Illinois, we were selected to serve a market that has roughly
18,000 dual-eligibles under a three-way agreement involving the
state’s Department of Healthcare and Family Services and the
federal Centers for Medicare and Medicaid Services (CMS).

In California, we were chosen to participate in an integrated health
plan for dual-eligibles in San Diego, Riverside and San Bernardino
Counties, where we already serve Medicaid beneficiaries. In all
three of these states, our extensive experience in coordinating care
for this vulnerable population – with demonstrable results – was a
critical factor in our selection. In California, for instance, we were
able to show that total bed days per 1,000 patients have decreased
25% among ABD (aged, blind and disabled) members who had
been in one of our plans for at least ten months.

As we leveraged our experience to make the
most of growing opportunities, we also encountered
new challenges.
In Texas, after winning new contracts in 2011, we began
administering plans in the El Paso, Rio Grande Valley and
Dallas service areas on March 1, 2012. As a result, our Texas
health plan more than doubled in membership and became our
company’s third largest in terms of revenue and enrollment. We
also ran into some of the challenges that typically can occur
when a managed care company enters a new territory. In Hidalgo

County in the Rio Grande Valley, where a large percentage of
our plan members are the aged, blind and disabled, the premium
rates we received were set too low to cover the benefits we were
required to deliver. Both of these factors significantly affected our
financial performance in the second quarter of last year. After we
aggressively implemented cost-management measures, including
new contracts with providers for lower rates, our medical care
ratio improved significantly in the third and fourth quarters.
Meanwhile, we successfully negotiated with the state of Texas for
a 4% blended rate increase that took effect later in the year.

Similarly, in Wisconsin, premium rates were low in relation to the
benefits we are required to offer. Here, too, we have worked with
the state to improve premium rates as well as providers to adjust
reimbursement rates while continuing to apply the full scope of
our utilization management tools and expertise. The improved
performance in the last half of the year confirms the success of
our efforts.

Through information services and primary care
clinics, we continued to build revenues, stability and
synergistic solutions.
In 2010, we took an important step to diversify our services with our
entry into the complementary business of Medicaid management
information systems. By processing Medicaid transactions and

Molina Healthcare | Annual Report 2012

delivering related IT services, Molina Medicaid Solutions (MMS)
augments our health plan business, providing state clients with
an integrated solution to manage the care of their Medicaid
beneficiaries and seamlessly handle the flow of information. MMS
gives us a broader suite of services and enables us to diversify
our revenue stream through a fee-based business. MMS also has
enabled us to penetrate new states where we do not administer
health plans or that lack Medicaid managed care programs.

Our primary care clinics represent another avenue of
diversification, and an important strategic advantage. We are
maintaining and expanding this business not simply because
direct delivery of care is part of our company’s heritage, nor
because it is a natural extension of our health plan business. We
are doing it because operating primary care clinics allows us to
manage our health plans more effectively and more competitively.
As the number of Medicaid beneficiaries grows, the shortage of
primary care physicians serving these beneficiaries will become
even more acute. But, because we can situate clinics (with
salaried primary care doctors) in areas where our plan members
encounter a shortage of providers, we can better meet their needs,
maintain greater control over costs and attain economies of scale.
Significant, too, are the increased patient satisfaction and loyalty
to the Molina brand name that accrue when our plan members
can see their primary care doctors in our clinics.

For all these reasons, we are building on our existing network of
primary care clinics in the states where we compete. In addition
to our existing clinics in California, Virginia and Washington, we
opened new clinics in California, Florida and New Mexico last
year, with more to come in 2013.

Recalling our roots as direct providers of care,
the quality of our health plans has always been of
paramount importance for our company.
We were especially proud last year that our focus on quality
continued to attract national recognition from sources such as the
National Committee for Quality Assurance (NCQA), which ranks
Medicaid health plans. Eight of our plans are not only accredited
but were nationally ranked for the 2012-13 cycles, and our New
Mexico, Utah and Washington plans ranked as the top Medicaid
health plans in their respective states.

Our health plans are also gaining recognition for innovative
partnerships and programs to better serve vulnerable populations.
For example, last year Molina Healthcare of California and
Sacramento County pioneered the Low-Income Health Program,
a safety net managed care plan administered by Molina that
allows uninsured, low-income residents who do not qualify
for Medicaid to receive health care. Two of our clinics in the
Sacramento area are participating as primary care providers, and

Molina Healthcare | Annual Report 2012

up to 14,000 low-income adults will be enrolled. The program,
which went into effect in November, not only meets an immediate
need; it serves as a bridge to the Medicaid expansion in California
and the creation of an insurance marketplace that will take place
under the Affordable Care Act.

Meanwhile, we joined forces with America’s Health Insurance
Plans and the Centers for Disease Control and Prevention to
implement the National Diabetes Prevention Program. As part
of this initiative, we will focus on preventing Type 2 diabetes in
individuals with “pre-diabetes,” a condition involving elevated
blood sugar levels, and we are leveraging our competencies and
resources to deliver this program to our members in Florida and
New Mexico. Because diabetes affects approximately 26 million
Americans and often contributes to an array of other serious
health-related problems, we believe this prevention program has
the potential to improve health outcomes while helping slow the
growth of health care costs.

As we look toward 2013 and beyond, we continue
to believe that we are well positioned to make the
most of an evolving marketplace.
With the Affordable Care Act going forward after last year’s
Supreme Court decision and the re-election of President Obama,
we have more certainty than was possible a year ago about the
direction in which health care will move. It is clear today that
our strength plays into the “new” health care environment, an
environment which continues to move patients who receive their
health care through government-sponsored health care to managed
care. Our focus on these programs and populations, we believe,
represents a competitive advantage for our company. Meeting the
diverse and complex health care needs of those who need it most,
but are least able to afford, it is the core of what we do.

While we are focused on an area of health care that will only
continue to grow, our company also has achieved a valuable
degree of diversity and balance. From the West Coast, where we
started, our business has grown to encompass Florida, Texas and
the Midwest, situating us in high-growth regions, while reducing
the risk that the loss of one state contract would have a significant
impact on our company.

We have diversified our income streams through our fee-based
MMS business, which provides a counterweight to the risk-based
health management of individual members. Also, our direct

delivery of care through an expanding number of clinics that
connect us with health plan members, distinguishes us in a way
that is unique in our field.

Finally, we approach a field of opportunity from a position of
strength. We have been in this business for three decades. Very
few companies can even approximate our depth of experience
with Medicaid recipients – experience that in turn gives us a
strong track record that is proving key to winning new contracts.
Even fewer companies can match the stability and experience
of our leadership team, especially in a field that has witnessed
so much evolution. We also maintain a strong balance sheet,
bolstered by ready access to capital, which we believe will be an
important advantage over smaller, provider-owned companies
and not-for-profits seeking to manage the costs and care of the
populations we serve.

More than 30 years ago, Molina Healthcare started with a single
clinic and a commitment. That commitment, the cornerstone
around which we built, was to provide better health care to those
most financially vulnerable in our communities. More than
anything, it was dedication to this commitment that enabled our
company to grow and succeed.

Last year, we passed another milestone in our journey, as Molina
Healthcare attained a spot on the FORTUNE 500 list. We are proud
to have expanded from a single neighborhood clinic to serve
approximately 1.8 million members in nine states. But, we have not
forgotten where we came from. Our presence as clinic operators in
communities we serve reminds us every day, as we see the faces of
health plan patients, what our business is truly about.

Building on our 30-year commitment, we are excited about where
our business can go in the years ahead. We believe we are in the
right place at the right time – with the right team – to seize the
emerging opportunities in our industry. As we move forward, we
remain grateful for your continued support and your investment.

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

Molina Healthcare | Annual Report 2012

Corporate Information
1.

SECURITIES AND EXCHANGE COMMISSION

10.

11.

John C. Molina, JD
Chief Financial Officer,
Molina Healthcare, Inc.
(2)

Ronna E. Romney
Director, Park-Ohio
Holding Corporation
(3)

Garrey E. Carruthers,
Ph.D.
Dean, College of
Business of New Mexico
State University
(8)

Daniel Cooperman,
JD, MBA
Of Counsel Bingham
McCutchen LLP
(9)

Charles Z. Fedak,
CPA, MBA
Founder, Charles Z.
Fedak & Co., CPAs
(4)

Steven James, CPA
Retired Audit Partner
Ernst & Young LLP
(10)

Frank E. Murray, MD
Retired Private
Practitioner
(5)

John P. Szabo, Jr.
Private Investor
(6)

Dale Wolf
Executive Chairman
Correctional Healthcare
Companies, Inc.
(11)

(*) Pictured

John C. Molina, JD
Chief Financial Officer
(2)

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

Board of Directors

J. Mario Molina, MD
Chairman of the Board,
President and Chief
Executive Officer, Molina
Healthcare, Inc.
(1)

Steven Orlando, CPA
Founder, Orlando
Consulting
(7)

Senior Leadership

J. Mario Molina, MD
Chairman of the Board,
President and Chief
Executive Officer
(1)

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

Shareholder Information

Annual
Meeting

Corporate
Headquarters

Common
Stock

Transfer
Agent

The annual meeting of stockholders will be held on Wednesday,
May 1, 2013, at 10:00 a.m. local time, at: Molina Center, 300
Oceangate, Suite 950, Long Beach, CA 90802, (562) 435-3666

Forward-Looking
Statements

Molina Healthcare, Inc.
200 Oceangate, Suite 100, Long Beach, CA 90802
(562) 435-3666 (phone); (562) 437-1335 (fax)
www.MolinaHealthcare.com

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

American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level, New York, New York 10038
(800) 937-5449; www.amstock.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

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, 2012.

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 2012

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, 2012

‘ 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). È 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. È

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, 2012, the last business

day of our most recently completed second fiscal quarter, was approximately $664.3 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, 2012).

As of February 22, 2013, approximately 45,154,000 shares of the registrant’s Common Stock, $0.001 par value per share,

were outstanding.

Portions of the registrant’s Proxy Statement for the 2013 Annual Meeting of Stockholders to be held on May 1, 2013, 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, 2012
or

‘ 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). È 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. È
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, 2012, the last business
day of our most recently completed second fiscal quarter, was approximately $664.3 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, 2012).
As of February 22, 2013, approximately 45,154,000 shares of the registrant’s Common Stock, $0.001 par value per share,
were outstanding.

Accelerated filer
‘
Smaller reporting company ‘

Portions of the registrant’s Proxy Statement for the 2013 Annual Meeting of Stockholders to be held on May 1, 2013, are
incorporated by reference into Part III of this Form 10-K.

DOCUMENTS INCORPORATED BY REFERENCE

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

PART II

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

Item 6. Selected Financial Data

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 11. Executive Compensation

PART III

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

135

136

139

140

141

142

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. 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,

Joseph M. Molina, M.D. (Dr. J. Mario Molina). We report our financial performance based on two reportable

segments: Health Plans and Molina Medicaid Solutions.

Our Health Plans segment consists of health plans in California, Florida, Michigan, New Mexico, Ohio,

Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. As of December 31, 2012,

these health plans served approximately 1.8 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. Our direct delivery business consists of 24 primary care clinics in California,

Florida, New Mexico, and Washington, and we manage three county-owned primary care clinics under a contract

with Fairfax County, Virginia.

Our Health Plans segment derives its revenue principally in the form of premiums received 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. MMIS is a core tool used to support the administration of state Medicaid and other health care

entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of Idaho,

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

services for the Florida Medicaid program. We 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,

reduce the variability in our earnings resulting from fluctuations in medical care costs, improve our operating

profit margin percentages, and 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 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 may 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

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

Item 11. Executive Compensation

PART III

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

Item 15. Exhibits and Financial Statement Schedules

Signatures

PART IV

Page

135

136

139

140

141

142

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. 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,
Joseph M. Molina, M.D. (Dr. J. Mario Molina). We report our financial performance based on two reportable
segments: Health Plans and Molina Medicaid Solutions.

Our Health Plans segment consists of health plans in California, Florida, Michigan, New Mexico, Ohio,

Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. As of December 31, 2012,
these health plans served approximately 1.8 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. Our direct delivery business consists of 24 primary care clinics in California,
Florida, New Mexico, and Washington, and we manage three county-owned primary care clinics under a contract
with Fairfax County, Virginia.

Our Health Plans segment derives its revenue principally in the form of premiums received 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. MMIS is a core tool used to support the administration of state Medicaid and other health care
entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of Idaho,
Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provide drug rebate administration
services for the Florida Medicaid program. We 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,
reduce the variability in our earnings resulting from fluctuations in medical care costs, improve our operating
profit margin percentages, and 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 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 may 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 the charters of our Audit Committee,
Compensation Committee, Corporate Governance and Nominating Committee, and Compliance Committee 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 21, 2012, we filed the annual certification by our Chief Executive
Officer certifying that he was unaware of any violation by us of the NYSE’s corporate governance listing
standards at the time of the certification.

Our Industry

The Medicaid and CHIP Programs. 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 laws and regulations, 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 is currently about 57 percent, and ranges from a federally established FMAP floor of 50% to as high as
74%.

The most common state-administered Medicaid program is the Temporary Assistance for Needy Families

program, or TANF. Another common state-administered Medicaid program is for 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 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 75% 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 2012, all of our health plans, except our Wisconsin health plan, 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 operates a Medicare Advantage private fee-for-

service plan. Total enrollment in our Medicare Advantage plans as of December 31, 2012 was approximately

36,000 members. For the year ended December 31, 2012, premium revenues from Medicare across all health

plans represented approximately 8% of our total premium revenues.

As of December 31, 2012, approximately 75% of our members were TANF, 15% were ABD, 8% were

CHIP, and 2% were 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, cost management, and direct delivery of health care services at our clinics through our

Health Plans segment, to state-level MMIS administration through our Molina Medicaid Solutions segment. 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. 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,

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 the charters of our Audit Committee,

Compensation Committee, Corporate Governance and Nominating Committee, and Compliance Committee 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 21, 2012, we filed the annual certification by our Chief Executive

Officer certifying that he was unaware of any violation by us of the NYSE’s corporate governance listing

standards at the time of the certification.

Our Industry

The Medicaid and CHIP Programs. 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 laws and regulations, 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 is currently about 57 percent, and ranges from a federally established FMAP floor of 50% to as high as

74%.

The most common state-administered Medicaid program is the Temporary Assistance for Needy Families

program, or TANF. Another common state-administered Medicaid program is for 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 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 75% 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 2012, all of our health plans, except our Wisconsin health plan, 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 operates a Medicare Advantage private fee-for-
service plan. Total enrollment in our Medicare Advantage plans as of December 31, 2012 was approximately
36,000 members. For the year ended December 31, 2012, premium revenues from Medicare across all health
plans represented approximately 8% of our total premium revenues.

As of December 31, 2012, approximately 75% of our members were TANF, 15% were ABD, 8% were

CHIP, and 2% were 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, cost management, and direct delivery of health care services at our clinics through our
Health Plans segment, to state-level MMIS administration through our Molina Medicaid Solutions segment. 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. 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
eight of our nine 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
1.8 million members as of December 31, 2012, expanded our Health Plans segment to nine 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, including as a result of the Affordable Care Act Medicaid
expansion, the duals pilot projects, and the insurance marketplaces. We plan to continue our growth in existing
markets. The Patient Protection and Affordable Care Act and the Health Care and Education Affordability
Reconciliation Act, commonly referred to together as the Affordable Care Act, or the ACA, provides us with
several opportunities for growth, including the expansion of Medicaid eligibility in the states that elect to
participate, the implementation of pilot projects for those who are dually eligible for Medicaid and Medicare, and
the implementation of insurance marketplaces.

• Medicaid expansion. As of February 27, 2013, among the states where we operate our health plans, the
states of California, Florida, Michigan, New Mexico, Ohio, and Washington have indicated that they
intend to participate in the Medicaid expansion; the states of Texas and Wisconsin have indicated that
they do not intend to participate in the expansion; and the state of Utah is undecided. We believe there
are significant opportunities to increase our revenues through the Medicaid expansion.

• Duals. Nine million low-income elderly and disabled people in the United States are covered under

both the Medicare and Medicaid programs. These beneficiaries, often called “dual eligibles” or simply
“duals,” are more likely than other Medicare beneficiaries to be frail, live with multiple chronic
conditions, and have functional and cognitive impairments. Policymakers at the federal and state level
are developing initiatives for dual eligibles both to improve the coordination of their care, and to
reduce spending for both Medicare and Medicaid. The Centers for Medicare and Medicaid Services, or
CMS, has implemented several demonstrations designed to improve the coordination of care for dual
eligibles and reduce spending under Medicare and Medicaid. These demonstrations include issuing
contracts to 15 states to design a program to integrate Medicare and Medicaid services for dual

eligibles in the state. Our health plans in California, Illinois, Michigan, Ohio, Texas, and Washington

intend to take part in the duals demonstrations in those states. Beginning in September 2013, our

California plan intends to serve duals in Riverside, San Bernardino and San Diego counties, and may

participate with Health Net, Inc. for the duals contract in Los Angeles County. Our new Illinois plan

will serve duals in Central Illinois beginning in 2014. Our Michigan plan will respond to a request for

proposals to serve duals also beginning in late 2013. Our Ohio plan will serve duals in three regions in

southwestern Ohio (Dayton, Columbus and Cincinnati) beginning in late 2013. The state of Texas

announced that it intends to cover duals through its existing Medicaid contracts beginning in 2014. Our

Washington plan will respond to a request for proposals to serve duals also beginning in 2014.

•

Insurance marketplaces. Under the ACA, insurance marketplaces will be online marketplaces

organized on a state-by-state basis (although in many instances the insurance marketplace in a state

will be operated by the federal government, and there could also be regional marketplaces where states

combine their marketplace products). In the insurance marketplace, individuals and groups can

purchase health insurance that in many instances will be federally subsidized (up to 400% of the

federal poverty level by individual or family). We currently intend to participate in the insurance

marketplaces in the states in which we operate our health plans. Our principal focus in participating in

the marketplace is to capture the transition in membership that may result from a Medicaid member’s

income rising above the 138% level of the federal poverty line. By retaining that member in the

marketplace, if the member’s income subsequently declines, we will continuously serve that same

member in all instances and not “lose” the member to another health plan. We endorse the so-called

“bridge plan” as the best way to serve low-income persons who may qualify for coverage through the

insurance marketplaces, and will be working with legislators and regulators during 2013 to advocate

for the merits of the bridge plan.

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. 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. 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 clinic model offers an integrated approach that helps us improve

both the quality and cost-effectiveness of the care our members receive. Our Health Plans segment direct

delivery business currently consists of primary care clinics in California, Florida, New Mexico, and Washington,

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

and aging of the population of the United States foreshadows an increasing shortage of physicians over the next

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

eight of our nine 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

1.8 million members as of December 31, 2012, expanded our Health Plans segment to nine 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, including as a result of the Affordable Care Act Medicaid

expansion, the duals pilot projects, and the insurance marketplaces. We plan to continue our growth in existing

markets. The Patient Protection and Affordable Care Act and the Health Care and Education Affordability

Reconciliation Act, commonly referred to together as the Affordable Care Act, or the ACA, provides us with

several opportunities for growth, including the expansion of Medicaid eligibility in the states that elect to

participate, the implementation of pilot projects for those who are dually eligible for Medicaid and Medicare, and

the implementation of insurance marketplaces.

• Medicaid expansion. As of February 27, 2013, among the states where we operate our health plans, the

states of California, Florida, Michigan, New Mexico, Ohio, and Washington have indicated that they

intend to participate in the Medicaid expansion; the states of Texas and Wisconsin have indicated that

they do not intend to participate in the expansion; and the state of Utah is undecided. We believe there

are significant opportunities to increase our revenues through the Medicaid expansion.

• Duals. Nine million low-income elderly and disabled people in the United States are covered under

both the Medicare and Medicaid programs. These beneficiaries, often called “dual eligibles” or simply

“duals,” are more likely than other Medicare beneficiaries to be frail, live with multiple chronic

conditions, and have functional and cognitive impairments. Policymakers at the federal and state level

are developing initiatives for dual eligibles both to improve the coordination of their care, and to

reduce spending for both Medicare and Medicaid. The Centers for Medicare and Medicaid Services, or

CMS, has implemented several demonstrations designed to improve the coordination of care for dual

eligibles and reduce spending under Medicare and Medicaid. These demonstrations include issuing

contracts to 15 states to design a program to integrate Medicare and Medicaid services for dual

eligibles in the state. Our health plans in California, Illinois, Michigan, Ohio, Texas, and Washington
intend to take part in the duals demonstrations in those states. Beginning in September 2013, our
California plan intends to serve duals in Riverside, San Bernardino and San Diego counties, and may
participate with Health Net, Inc. for the duals contract in Los Angeles County. Our new Illinois plan
will serve duals in Central Illinois beginning in 2014. Our Michigan plan will respond to a request for
proposals to serve duals also beginning in late 2013. Our Ohio plan will serve duals in three regions in
southwestern Ohio (Dayton, Columbus and Cincinnati) beginning in late 2013. The state of Texas
announced that it intends to cover duals through its existing Medicaid contracts beginning in 2014. Our
Washington plan will respond to a request for proposals to serve duals also beginning in 2014.

•

Insurance marketplaces. Under the ACA, insurance marketplaces will be online marketplaces
organized on a state-by-state basis (although in many instances the insurance marketplace in a state
will be operated by the federal government, and there could also be regional marketplaces where states
combine their marketplace products). In the insurance marketplace, individuals and groups can
purchase health insurance that in many instances will be federally subsidized (up to 400% of the
federal poverty level by individual or family). We currently intend to participate in the insurance
marketplaces in the states in which we operate our health plans. Our principal focus in participating in
the marketplace is to capture the transition in membership that may result from a Medicaid member’s
income rising above the 138% level of the federal poverty line. By retaining that member in the
marketplace, if the member’s income subsequently declines, we will continuously serve that same
member in all instances and not “lose” the member to another health plan. We endorse the so-called
“bridge plan” as the best way to serve low-income persons who may qualify for coverage through the
insurance marketplaces, and will be working with legislators and regulators during 2013 to advocate
for the merits of the bridge plan.

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. 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. 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 clinic model offers an integrated approach that helps us improve

both the quality and cost-effectiveness of the care our members receive. Our Health Plans segment direct
delivery business currently consists of primary care clinics in California, Florida, New Mexico, and Washington,
and three county-owned clinics in Fairfax County, Virginia that we manage on behalf of the county. 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 under-served 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 under-served by primary care providers.

Medicaid Contracts

With the exception of 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 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 three to
four 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 expired 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 Health Plans segment operates 24 company-owned primary care clinics located

in California, Florida, New Mexico and Washington. 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 subsidiary in Virginia that manages three health care

clinics for Fairfax County.

Medical Management

Our experience in medical management extends back to our roots as a provider organization. Primary care

physicians are the focal point of the delivery of health care to our members, providing routine and preventive

care, coordinating referrals to specialists, and assessing the need for hospital care. This model has proven to be

an effective method for coordinating medical care for our members. The underlying challenge we face is to

coordinate health care so that our members receive timely and appropriate care from the right provider at the

appropriate cost. In support of this goal, and to ensure medical management consistency among our various state

health plans, we continuously refine and upgrade our medical management efforts at both the corporate and

subsidiary levels.

We seek to ensure quality care for our members on a cost-effective basis through the use of certain key

medical management and cost control tools. These tools include utilization management, case and health

management, and provider network and contract management.

Utilization Management. We continuously review utilization patterns with the intent to optimize quality of

care and ensure that only appropriate services are rendered in the most cost-effective manner. Utilization

management, along with our other tools of medical management and cost control, is supported by a centralized

corporate medical informatics function which utilizes third-party software and data warehousing tools to convert

data into actionable information. We use predictive modeling that supports a proactive case and health

management approach both for us and our affiliated physicians.

Case and Health Management. We seek to encourage quality, cost-effective care through a variety of case

and health management programs, including disease management programs, educational programs, and

pharmacy management programs.

Disease Management Programs. We develop specialized disease management programs that address the

particular health care needs of our members. “motherhood matters!sm” is a comprehensive program designed to

improve pregnancy outcomes and enhance member satisfaction. “breathe with ease!” is a multi-disciplinary

disease management program that provides health education resources and case management services to assist

physicians caring for asthmatic members between the ages of three and 15. “Healthy Living with Diabetes” is a

diabetes disease management program. “Heart 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

15 years. Health care reform is expected to worsen this shortage. We believe the shortage will be felt most

acutely among already under-served 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 under-served by primary care providers.

Medicaid Contracts

With the exception of 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 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 three to

four 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 expired 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 Health Plans segment operates 24 company-owned primary care clinics located

in California, Florida, New Mexico and Washington. 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 subsidiary in Virginia that manages three health care
clinics for Fairfax County.

Medical Management

Our experience in medical management extends back to our roots as a provider organization. Primary care

physicians are the focal point of the delivery of health care to our members, providing routine and preventive
care, coordinating referrals to specialists, and assessing the need for hospital care. This model has proven to be
an effective method for coordinating medical care for our members. The underlying challenge we face is to
coordinate health care so that our members receive timely and appropriate care from the right provider at the
appropriate cost. In support of this goal, and to ensure medical management consistency among our various state
health plans, we continuously refine and upgrade our medical management efforts at both the corporate and
subsidiary levels.

We seek to ensure quality care for our members on a cost-effective basis through the use of certain key

medical management and cost control tools. These tools include utilization management, case and health
management, and provider network and contract management.

Utilization Management. We continuously review utilization patterns with the intent to optimize quality of

care and ensure that only appropriate services are rendered in the most cost-effective manner. Utilization
management, along with our other tools of medical management and cost control, is supported by a centralized
corporate medical informatics function which utilizes third-party software and data warehousing tools to convert
data into actionable information. We use predictive modeling that supports a proactive case and health
management approach both for us and our affiliated physicians.

Case and Health Management. We seek to encourage quality, cost-effective care through a variety of case

and health management programs, including disease management programs, educational programs, and
pharmacy management programs.

Disease Management Programs. We develop specialized disease management programs that address the
particular health care needs of our members. “motherhood matters!sm” is a comprehensive program designed to
improve pregnancy outcomes and enhance member satisfaction. “breathe with ease!” is a multi-disciplinary
disease management program that provides health education resources and case management services to assist
physicians caring for asthmatic members between the ages of three and 15. “Healthy Living with Diabetes” is a
diabetes disease management program. “Heart 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. Eight of our 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 4.8 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

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. Eight of our 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 4.8 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
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, 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, 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 jointly funded by federal and state governments, 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 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.

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, 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, 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 jointly funded by federal and state governments, 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 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 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

American Recovery and Reinvestment Act of 2009, or ARRA, modified certain provisions of HIPAA by, among
other things, extending the privacy and security provisions to business associates, mandating new regulations
around electronic medical records, expanding enforcement mechanisms, allowing the state Attorneys General to
bring enforcement actions, and increasing penalties for violations. 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, or 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, or 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, 2012, we had approximately 5,800 employees. Our employee base is multicultural and

reflects the diverse Medicaid and Medicare membership we serve. We believe we have good relations with our

employees. None of our employees is represented by a union.

Executive Officers of the Registrant

J. Mario Molina, M.D., 54, 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., 48, has served in the role of Chief Financial Officer since 1995, and has been

employed by the Company for over 30 years in a variety of positions. He also has served as a director since 1994.

Mr. Molina is a member of the Los Angeles branch of the Federal Reserve Bank of San Francisco’s board of

directors. Mr. Molina holds a Juris Doctorate from the University of Southern California School of Law.

Mr. Molina is the brother of Dr. J. Mario Molina.

Terry P. Bayer, 62, has served as our Chief Operating Officer since 2005. She had formerly served as our

Executive Vice President, Health Plan Operations. 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, 54, has served as our Chief Accounting Officer since 2007. 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 30 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.

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 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

American Recovery and Reinvestment Act of 2009, or ARRA, modified certain provisions of HIPAA by, among

other things, extending the privacy and security provisions to business associates, mandating new regulations

around electronic medical records, expanding enforcement mechanisms, allowing the state Attorneys General to

bring enforcement actions, and increasing penalties for violations. 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, or 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, or 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, 2012, we had approximately 5,800 employees. Our employee base is multicultural and

reflects the diverse Medicaid and Medicare membership we serve. We believe we have good relations with our
employees. None of our employees is represented by a union.

Executive Officers of the Registrant

J. Mario Molina, M.D., 54, 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., 48, has served in the role of Chief Financial Officer since 1995, and has been

employed by the Company for over 30 years in a variety of positions. He also has served as a director since 1994.
Mr. Molina is a member of the Los Angeles branch of the Federal Reserve Bank of San Francisco’s board of
directors. Mr. Molina holds a Juris Doctorate from the University of Southern California School of Law.
Mr. Molina is the brother of Dr. J. Mario Molina.

Terry P. Bayer, 62, has served as our Chief Operating Officer since 2005. She had formerly served as our

Executive Vice President, Health Plan Operations. 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, 54, has served as our Chief Accounting Officer since 2007. 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 30 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.

Jeff D. Barlow, 50, has served as our Senior Vice President, General Counsel, and Secretary since 2010. As

General Counsel, Mr. Barlow is responsible for setting the overall legal strategy of the Company, and for
providing legal counsel to senior management, to the board of directors, and to the consolidated organization.
Before joining the Company, Mr. Barlow worked for the national law firm of DLA Piper in its corporate
securities group. Mr. Barlow holds a Juris Doctorate from the University of Pittsburgh School of Law, a Master’s
degree in Public Health from the University of California, Berkeley, and a Bachelor’s degree in Philosophy from
the University of Utah.

Intellectual Property

We have registered and maintain various service marks, trademarks and trade names that we use in our
businesses, including marks and names incorporating the “Molina” or “Molina Healthcare” phrase, and from
time to time we apply for additional registrations of such marks. We utilize these and other marks and names in
connection with the marketing and identification of products and services. We believe such marks and names are
valuable and material to our marketing efforts.

Item 1A: Risk Factors

RISK FACTORS

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

This Annual Report on Form 10-K and the documents we incorporate by reference in this report contain

forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the

“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Other than statements of historical fact, all statements that we include in this report and in the documents we

incorporate by reference may be deemed to be forward-looking statements for purposes of the Securities Act and

the Exchange Act. Such forward-looking statements may be identified by words such as “anticipates,”

“believes,” “could,” “estimates,” “expects,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,”

“seeks,” “will,” or similar words or expressions.

Investing in our securities involves a high degree of risk. Before making an investment decision, you should

carefully read and consider the following risk factors, as well as the other information we include or incorporate

by reference in this report and the information in the other reports we file with the U.S. Securities Exchange

Commission, or SEC. Such risk factors should be considered not only with regard to the information contained in

this annual report, but also with regard to the information and statements in the other periodic or current reports

we file with the SEC, as well as our press releases, presentations to securities analysts or investors, or other

communications made by or with the approval of one of our executive officers. No assurance can be given that

we will actually achieve the results contemplated or disclosed in our forward-looking statements. Such

statements may turn out to be wrong due to the inherent uncertainties associated with future events. Accordingly,

you should not place undue reliance on our forward-looking statements, which reflect management’s analyses,

judgments, beliefs, or expectations only as of the date they are made.

If any of the events described in the following risk factors actually occur, our business, results of operations,

financial condition, cash flows, or prospects could be materially adversely affected. The risks and uncertainties

described below are those that we currently believe may materially affect us. Additional risks and uncertainties

not currently known to us or that we currently deem immaterial may also affect our business and operations. As

such, you should not consider this list to be a complete statement of all potential risks or uncertainties. Except to

the extent otherwise required by federal securities laws, we do not undertake to address or update forward-

looking statements in future filings or communications regarding our business or operating results, and do not

undertake to address how any of these factors may have caused results to differ from discussions or information

contained in previous filings or communications.

Risks Related to Our Health Plans Business

Numerous risks associated with the Affordable Care Act and its implementation 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 Affordable Care Act,

or the ACA. The ACA enacts comprehensive changes to the United States health care system, elements of which

will be phased in at various stages over the next several years. However, the most significant changes effected by

the ACA are currently scheduled to be implemented as of January 1, 2014. There are a multitude of risks

associated with the scope of change in the health care system represented by the ACA, including, but not limited

to, the following:

•

Risks associated with the health care excise tax. One notable provision of the ACA is an excise tax

that applies to most health plans, including both commercial health plans and Medicaid and/or

Medicare managed care plans like Molina Healthcare. While characterized as a “fee” in the text of the

ACA, the intent of Congress was to impose a broad-based health insurance industry excise tax, with the

Jeff D. Barlow, 50, has served as our Senior Vice President, General Counsel, and Secretary since 2010. As

Item 1A: Risk Factors

General Counsel, Mr. Barlow is responsible for setting the overall legal strategy of the Company, and for

providing legal counsel to senior management, to the board of directors, and to the consolidated organization.

Before joining the Company, Mr. Barlow worked for the national law firm of DLA Piper in its corporate

securities group. Mr. Barlow holds a Juris Doctorate from the University of Pittsburgh School of Law, a Master’s

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

the University of Utah.

Intellectual Property

We have registered and maintain various service marks, trademarks and trade names that we use in our

businesses, including marks and names incorporating the “Molina” or “Molina Healthcare” phrase, and from

time to time we apply for additional registrations of such marks. We utilize these and other marks and names in

connection with the marketing and identification of products and services. We believe such marks and names are

valuable and material to our marketing efforts.

RISK FACTORS

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

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

Investing in our securities involves a high degree of risk. Before making an investment decision, you should
carefully read and consider the following risk factors, as well as the other information we include or incorporate
by reference in this report and the information in the other reports we file with the U.S. Securities Exchange
Commission, or SEC. Such risk factors should be considered not only with regard to the information contained in
this annual report, but also with regard to the information and statements in the other periodic or current reports
we file with the SEC, as well as our press releases, presentations to securities analysts or investors, or other
communications made by or with the approval of one of our executive officers. No assurance can be given that
we will actually achieve the results contemplated or disclosed in our forward-looking statements. Such
statements may turn out to be wrong due to the inherent uncertainties associated with future events. Accordingly,
you should not place undue reliance on our forward-looking statements, which reflect management’s analyses,
judgments, beliefs, or expectations only as of the date they are made.

If any of the events described in the following risk factors actually occur, our business, results of operations,

financial condition, cash flows, or prospects could be materially adversely affected. The risks and uncertainties
described below are those that we currently believe may materially affect us. Additional risks and uncertainties
not currently known to us or that we currently deem immaterial may also affect our business and operations. As
such, you should not consider this list to be a complete statement of all potential risks or uncertainties. Except to
the extent otherwise required by federal securities laws, we do not undertake to address or update forward-
looking statements in future filings or communications regarding our business or operating results, and do not
undertake to address how any of these factors may have caused results to differ from discussions or information
contained in previous filings or communications.

Risks Related to Our Health Plans Business

Numerous risks associated with the Affordable Care Act and its implementation 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 Affordable Care Act,
or the ACA. The ACA enacts comprehensive changes to the United States health care system, elements of which
will be phased in at various stages over the next several years. However, the most significant changes effected by
the ACA are currently scheduled to be implemented as of January 1, 2014. There are a multitude of risks
associated with the scope of change in the health care system represented by the ACA, including, but not limited
to, the following:

•

Risks associated with the health care excise tax. One notable provision of the ACA is an excise tax
that applies to most health plans, including both commercial health plans and Medicaid and/or
Medicare managed care plans like Molina Healthcare. While characterized as a “fee” in the text of the
ACA, the intent of Congress was to impose a broad-based health insurance industry excise tax, with the

understanding that the tax could be passed on to consumers, most likely through slightly higher
commercial insurance premiums. However, Medicaid is jointly paid for by the federal government and
by state governments, so the cost of this excise tax, as it may be applied to Medicaid plans, will be
passed on in the form of higher Medicaid costs and rates. In Medicaid and Medicare, capitated rates
paid to managed care plans are required to be developed using generally accepted principles of
actuarial soundness. Actuarial soundness requires that the full costs of doing business, including the
costs of both federal and state taxes, be considered and factored into the applicable rate. Thus, for
Medicaid and/or Medicare managed care plans like Molina Healthcare, Inc., the excise tax will be
included in their capitated rates. Because of the novelty of this new tax, actuaries have never factored
the tax into the development of capitated rates, an exercise which must be undertaken during 2013 and
well in advance of the 2014 calendar year when the tax is scheduled to go into effect. Moreover,
because the tax will be based on a health plan’s market share as applied to a total excise tax base of $8
billion in 2014 (and rising thereafter), there is substantial uncertainty regarding the actual size of the
tax assessment on Molina. Currently, we project that the excise tax assessment on Molina will be
approximately $100 million. Since this amount is not deductible for income tax purposes under current
law, and since our total net income for fiscal year 2011 was $20.8 million, and our net income for fiscal
year 2012 was $9.8 million, our estimated tax rate for 2014 could be driven to 100%, and the excise tax
could effectively equal the entire amount of our projected earnings. We and others in the health care
industry are working with Congress to carve out the application of the excise tax on Medicaid plans. As
an alternative to the repeal of the tax as it applies to Medicaid managed care plans, we and others in the
health care industry will also be working with state actuaries to take account of the tax in the
calculation of our 2014 rates. However, state budget constraints, inaccurate actuarial calculations,
inadequate federal oversight of actuarial soundness, and market competition could result in a failure to
reflect in our rates the full amount of the excise tax. If the excise tax is imposed as enacted on
Medicaid managed care plans, or we are unable to obtain premium increases to fully offset the impact
of the tax or otherwise adjust our business model, our business, financial condition, cash flows, and
results of operations could be materially adversely affected.

Risks associated with the duals expansion. Nine million low-income elderly and disabled people are
covered under both the Medicare and Medicaid programs. These beneficiaries, often called “dual
eligibles,” are more likely than other Medicare beneficiaries to be frail, live with multiple chronic
conditions, and have functional and cognitive impairments. Medicare is their primary source of health
insurance coverage, as it is for the nearly 50 million elderly and under-65 disabled beneficiaries in
2012. Medicaid supplements Medicare by paying for services not covered by Medicare, such as dental
care and long-term care services and supports, and by helping to cover Medicare’s premiums and cost-
sharing requirements. Together, these two programs help to shield very low-income Medicare
beneficiaries from potentially unaffordable out-of-pocket medical and long-term care costs.
Policymakers at the federal and state level are increasingly developing initiatives for dual eligibles,
both to improve the coordination of their care, and to reduce spending. The Centers for Medicare and
Medicaid Services, or CMS, has implemented several demonstration projects designed to improve the
coordination of care for dual eligibles and to reduce Medicare and Medicaid spending. These
demonstrations include issuing contracts to 15 states to design a program to integrate Medicare and
Medicaid services for dual eligibles in the relevant state. Our health plans in California, Illinois,
Michigan, Ohio, Texas, and Washington intend to take part in the duals demonstrations in those states.
Beginning in September 2013, our California plan intends to serve duals in Riverside, San Bernardino,
and San Diego counties, and may participate with Health Net, Inc. for the duals contract in Los
Angeles County. Our new Illinois plan will serve duals in Central Illinois beginning in 2014. Our
Michigan plan will respond to a request for proposals to serve duals beginning in late 2013. Our Ohio
plan will serve duals in three regions in southwestern Ohio (Dayton, Columbus and Cincinnati)
beginning in late 2013. The state of Texas announced that it intends to cover duals through its existing
Medicaid contracts beginning in 2014. Our Washington plan will respond to a request for proposals to
serve duals also beginning in 2014.

•

There are numerous risks associated with the initial implementation of a new program, with a health

plan’s expansion into a new service area, or with the provision of medical services to a new population

which has not previously been in managed care. One such risk is the development of actuarially sound

rates. Because there is limited historical information on which to develop rates, certain assumptions are

required to be made which may subsequently prove to have been inaccurate. Rates of utilization could

be significantly higher than had been projected, or the assumptions of policymakers about the amount

of savings that could be achieved through the use of utilization management in managed care could be

seriously flawed. Moreover, because of our lack of actuarial experience for that program, region, or

population, our reserve levels may be set at an inadequate level. For instance, these problems arose at

our Texas health plan in the second quarter of 2012, leading to extremely elevated medical care costs

and substantial losses at the health plan. All of these risks are presented in the implementation of the

duals demonstration programs. In the event these risks materialize at one or more of our health plans,

the negative results of that health plan or plans could adversely affect our business, financial condition,

cash flows, and results of operations.

•

Risks associated with the Medicaid expansion. Among other things, by January 1, 2014, in the states

that elect to participate, the ACA provides that the Medicaid program will be greatly expanded to

provide eligibility to nearly all low-income people under age 65 with incomes at or below 138% 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. As of February 27, 2013, among the states

where we operate our health plans, the states of California, Florida, Michigan, New Mexico, Ohio, and

Washington have indicated that they intend to participate in the Medicaid expansion; the states of

Texas and Wisconsin have indicated that they do not intend to participate in the expansion; and the

state of Utah is undecided. In those states that participate in the expansion, our Medicaid membership

is likely to grow appreciably. The new enrollees in our health plans will represent a population that is

different from the population of Medicaid enrollees we have historically managed. In addition, such

enrollees may be unfamiliar with managed care, and may have substantial pent-up demand for medical

services that could result in greater than anticipated rates of utilization. All of the risk factors described

above with regard to the duals demonstration programs apply equally to the Medicaid expansion.

•

Risks associated with the insurance marketplaces. Under the ACA, insurance marketplaces will be

online marketplaces organized on a state-by-state basis (although in many instances the insurance

marketplace in a state will be operated by the federal government, and there could also be regional

marketplaces where states combine their marketplace products). In the insurance marketplace,

individuals and groups can purchase health insurance that in many instances will be federally

subsidized (up to 400% of the federal poverty level by individual or family). We currently intend to

participate in the insurance marketplaces in the states in which we operate our health plans. Our

principal focus in participating in the marketplace is to capture the transition in membership that may

result from a Medicaid member’s income rising above the 138% level of the federal poverty line. By

retaining that member in the marketplace, if the member’s income subsequently declines, we will

continuously serve that same member in all instances and not “lose” the member to another health plan.

We endorse the so-called “bridge plan” as the best way to serve low-income persons who may qualify

for coverage through the insurance marketplaces, and will be working with legislators and regulators

during 2013 to advocate for the merits of the bridge plan. All of the risk factors described above with

regard to the duals demonstration programs apply equally to our participation in the insurance

marketplaces.

•

Risk associated with implementing regulations. There are many parts of the ACA that will require

further guidance in the form of regulations. Due to the breadth and complexity of the ACA, the lack of

implementing regulations and interpretive guidance, and the phased-in nature of the ACA’s

implementation, the overall impact of the ACA on our business and on the health industry in general

over the coming years is difficult to predict and not yet fully known.

understanding that the tax could be passed on to consumers, most likely through slightly higher

commercial insurance premiums. However, Medicaid is jointly paid for by the federal government and

by state governments, so the cost of this excise tax, as it may be applied to Medicaid plans, will be

passed on in the form of higher Medicaid costs and rates. In Medicaid and Medicare, capitated rates

paid to managed care plans are required to be developed using generally accepted principles of

actuarial soundness. Actuarial soundness requires that the full costs of doing business, including the

costs of both federal and state taxes, be considered and factored into the applicable rate. Thus, for

Medicaid and/or Medicare managed care plans like Molina Healthcare, Inc., the excise tax will be

included in their capitated rates. Because of the novelty of this new tax, actuaries have never factored

the tax into the development of capitated rates, an exercise which must be undertaken during 2013 and

well in advance of the 2014 calendar year when the tax is scheduled to go into effect. Moreover,

because the tax will be based on a health plan’s market share as applied to a total excise tax base of $8

billion in 2014 (and rising thereafter), there is substantial uncertainty regarding the actual size of the

tax assessment on Molina. Currently, we project that the excise tax assessment on Molina will be

approximately $100 million. Since this amount is not deductible for income tax purposes under current

law, and since our total net income for fiscal year 2011 was $20.8 million, and our net income for fiscal

year 2012 was $9.8 million, our estimated tax rate for 2014 could be driven to 100%, and the excise tax

could effectively equal the entire amount of our projected earnings. We and others in the health care

industry are working with Congress to carve out the application of the excise tax on Medicaid plans. As

an alternative to the repeal of the tax as it applies to Medicaid managed care plans, we and others in the

health care industry will also be working with state actuaries to take account of the tax in the

calculation of our 2014 rates. However, state budget constraints, inaccurate actuarial calculations,

inadequate federal oversight of actuarial soundness, and market competition could result in a failure to

reflect in our rates the full amount of the excise tax. If the excise tax is imposed as enacted on

Medicaid managed care plans, or we are unable to obtain premium increases to fully offset the impact

of the tax or otherwise adjust our business model, our business, financial condition, cash flows, and

results of operations could be materially adversely affected.

•

Risks associated with the duals expansion. Nine million low-income elderly and disabled people are

covered under both the Medicare and Medicaid programs. These beneficiaries, often called “dual

eligibles,” are more likely than other Medicare beneficiaries to be frail, live with multiple chronic

conditions, and have functional and cognitive impairments. Medicare is their primary source of health

insurance coverage, as it is for the nearly 50 million elderly and under-65 disabled beneficiaries in

2012. Medicaid supplements Medicare by paying for services not covered by Medicare, such as dental

care and long-term care services and supports, and by helping to cover Medicare’s premiums and cost-

sharing requirements. Together, these two programs help to shield very low-income Medicare

beneficiaries from potentially unaffordable out-of-pocket medical and long-term care costs.

Policymakers at the federal and state level are increasingly developing initiatives for dual eligibles,

both to improve the coordination of their care, and to reduce spending. The Centers for Medicare and

Medicaid Services, or CMS, has implemented several demonstration projects designed to improve the

coordination of care for dual eligibles and to reduce Medicare and Medicaid spending. These

demonstrations include issuing contracts to 15 states to design a program to integrate Medicare and

Medicaid services for dual eligibles in the relevant state. Our health plans in California, Illinois,

Michigan, Ohio, Texas, and Washington intend to take part in the duals demonstrations in those states.

Beginning in September 2013, our California plan intends to serve duals in Riverside, San Bernardino,

and San Diego counties, and may participate with Health Net, Inc. for the duals contract in Los

Angeles County. Our new Illinois plan will serve duals in Central Illinois beginning in 2014. Our

Michigan plan will respond to a request for proposals to serve duals beginning in late 2013. Our Ohio

plan will serve duals in three regions in southwestern Ohio (Dayton, Columbus and Cincinnati)

beginning in late 2013. The state of Texas announced that it intends to cover duals through its existing

Medicaid contracts beginning in 2014. Our Washington plan will respond to a request for proposals to

serve duals also beginning in 2014.

There are numerous risks associated with the initial implementation of a new program, with a health
plan’s expansion into a new service area, or with the provision of medical services to a new population
which has not previously been in managed care. One such risk is the development of actuarially sound
rates. Because there is limited historical information on which to develop rates, certain assumptions are
required to be made which may subsequently prove to have been inaccurate. Rates of utilization could
be significantly higher than had been projected, or the assumptions of policymakers about the amount
of savings that could be achieved through the use of utilization management in managed care could be
seriously flawed. Moreover, because of our lack of actuarial experience for that program, region, or
population, our reserve levels may be set at an inadequate level. For instance, these problems arose at
our Texas health plan in the second quarter of 2012, leading to extremely elevated medical care costs
and substantial losses at the health plan. All of these risks are presented in the implementation of the
duals demonstration programs. In the event these risks materialize at one or more of our health plans,
the negative results of that health plan or plans could adversely affect our business, financial condition,
cash flows, and results of operations.

Risks associated with the Medicaid expansion. Among other things, by January 1, 2014, in the states
that elect to participate, the ACA provides that the Medicaid program will be greatly expanded to
provide eligibility to nearly all low-income people under age 65 with incomes at or below 138% 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. As of February 27, 2013, among the states
where we operate our health plans, the states of California, Florida, Michigan, New Mexico, Ohio, and
Washington have indicated that they intend to participate in the Medicaid expansion; the states of
Texas and Wisconsin have indicated that they do not intend to participate in the expansion; and the
state of Utah is undecided. In those states that participate in the expansion, our Medicaid membership
is likely to grow appreciably. The new enrollees in our health plans will represent a population that is
different from the population of Medicaid enrollees we have historically managed. In addition, such
enrollees may be unfamiliar with managed care, and may have substantial pent-up demand for medical
services that could result in greater than anticipated rates of utilization. All of the risk factors described
above with regard to the duals demonstration programs apply equally to the Medicaid expansion.

Risks associated with the insurance marketplaces. Under the ACA, insurance marketplaces will be
online marketplaces organized on a state-by-state basis (although in many instances the insurance
marketplace in a state will be operated by the federal government, and there could also be regional
marketplaces where states combine their marketplace products). In the insurance marketplace,
individuals and groups can purchase health insurance that in many instances will be federally
subsidized (up to 400% of the federal poverty level by individual or family). We currently intend to
participate in the insurance marketplaces in the states in which we operate our health plans. Our
principal focus in participating in the marketplace is to capture the transition in membership that may
result from a Medicaid member’s income rising above the 138% level of the federal poverty line. By
retaining that member in the marketplace, if the member’s income subsequently declines, we will
continuously serve that same member in all instances and not “lose” the member to another health plan.
We endorse the so-called “bridge plan” as the best way to serve low-income persons who may qualify
for coverage through the insurance marketplaces, and will be working with legislators and regulators
during 2013 to advocate for the merits of the bridge plan. All of the risk factors described above with
regard to the duals demonstration programs apply equally to our participation in the insurance
marketplaces.

Risk associated with implementing regulations. There are many parts of the ACA that will require
further guidance in the form of regulations. Due to the breadth and complexity of the ACA, the lack of
implementing regulations and interpretive guidance, and the phased-in nature of the ACA’s
implementation, the overall impact of the ACA on our business and on the health industry in general
over the coming years is difficult to predict and not yet fully known.

•

Our profitability depends on our ability to accurately predict and effectively manage our medical care costs.

A failure to accurately estimate incurred but not reported medical care costs may negatively impact our

Our profitability depends to a significant degree on our ability to accurately predict and effectively manage

our medical care costs. Historically, our medical care ratio, meaning our medical care costs as a percentage of
our premium revenue net of premium tax, has fluctuated substantially, and has also varied across our state health
plans. Because the premium payments we receive are generally fixed in advance and we operate with a narrow
profit margin, relatively small changes in our medical care ratio can create significant changes in our overall
financial results. For example, if our overall medical care ratio for the year ended December 31, 2012 of 89.9%
had been one percentage point higher, or 90.9%, our results for the year ended December 31, 2012 would have
been a net loss of approximately $(0.55) per diluted share rather than our actual net income of $0.21 per diluted
share, a decrease of over 300%.

Factors that may affect our medical care costs include the level of utilization of health care services,
unexpected patterns in the annual influenza, or 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 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, and results of operations.

State and federal budget deficits may result in Medicaid, CHIP, or Medicare funding cuts which could

reduce our revenues and profit margins.

Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid and CHIP

programs. Due to high unemployment levels, Medicaid enrollment levels and Medicaid costs remain elevated at
the same time that state budgets are suffering from significant fiscal strain. Because Medicaid is one of the
largest expenditures in every state budget, and one of the fastest-growing, it is a prime target for cost-
containment efforts. All of the states in which we currently operate our health plans are currently facing
significant budgetary pressures. These budgetary pressures may result in unexpected Medicaid, CHIP, or
Medicare rate cuts which could reduce our revenues and profit margins. Moreover, some federal deficit reduction
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.

In addition, potential reductions in Medicare and Medicaid spending have been included in the discussions

in Congress regarding deficit reduction measures. 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 associated with sequestration. At this time, we are unable to determine how any
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, and results of operations.

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 duals, Medicaid expansion members, or aged, blind or disabled Medicaid members, is impacted by the

more limited experience we have had with those populations. With regard to the new previously uninsured

Medicaid members we expect to enroll in 2014 due to the Medicaid expansion, certain new members may be

disproportionately costly due to high utilization in their first several months of Medicaid 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 2013 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. During December 2012 and January 2013, the CDC reported that the

incidence of the flu nationwide had been very high and is expected to continue through the 2013 flu season. We

have taken steps to appropriately set our IBNP reserves to account for the high incidence of the flu. However, if

the utilization rates of our members are higher than we anticipated our results in the first quarter of 2013 could be

materially and adversely affected.

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 Florida

health plan will be subject to competitive bidding in 2013 for a new contract commencing January 1, 2014. In the

event the responsive bid of our Florida health plan 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

Our profitability depends on our ability to accurately predict and effectively manage our medical care costs.

A failure to accurately estimate incurred but not reported medical care costs may negatively impact our

Our profitability depends to a significant degree on our ability to accurately predict and effectively manage

our medical care costs. Historically, our medical care ratio, meaning our medical care costs as a percentage of

our premium revenue net of premium tax, has fluctuated substantially, and has also varied across our state health

plans. Because the premium payments we receive are generally fixed in advance and we operate with a narrow

profit margin, relatively small changes in our medical care ratio can create significant changes in our overall

financial results. For example, if our overall medical care ratio for the year ended December 31, 2012 of 89.9%

had been one percentage point higher, or 90.9%, our results for the year ended December 31, 2012 would have

been a net loss of approximately $(0.55) per diluted share rather than our actual net income of $0.21 per diluted

share, a decrease of over 300%.

Factors that may affect our medical care costs include the level of utilization of health care services,

unexpected patterns in the annual influenza, or 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 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, and results of operations.

State and federal budget deficits may result in Medicaid, CHIP, or Medicare funding cuts which could

reduce our revenues and profit margins.

Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid and CHIP

programs. Due to high unemployment levels, Medicaid enrollment levels and Medicaid costs remain elevated at

the same time that state budgets are suffering from significant fiscal strain. Because Medicaid is one of the

largest expenditures in every state budget, and one of the fastest-growing, it is a prime target for cost-

containment efforts. All of the states in which we currently operate our health plans are currently facing

significant budgetary pressures. These budgetary pressures may result in unexpected Medicaid, CHIP, or

Medicare rate cuts which could reduce our revenues and profit margins. Moreover, some federal deficit reduction

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.

In addition, potential reductions in Medicare and Medicaid spending have been included in the discussions

in Congress regarding deficit reduction measures. 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 associated with sequestration. At this time, we are unable to determine how any

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, and results of operations.

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 duals, Medicaid expansion members, or aged, blind or disabled Medicaid members, is impacted by the
more limited experience we have had with those populations. With regard to the new previously uninsured
Medicaid members we expect to enroll in 2014 due to the Medicaid expansion, certain new members may be
disproportionately costly due to high utilization in their first several months of Medicaid 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 2013 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. During December 2012 and January 2013, the CDC reported that the
incidence of the flu nationwide had been very high and is expected to continue through the 2013 flu season. We
have taken steps to appropriately set our IBNP reserves to account for the high incidence of the flu. However, if
the utilization rates of our members are higher than we anticipated our results in the first quarter of 2013 could be
materially and adversely affected.

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 Florida
health plan will be subject to competitive bidding in 2013 for a new contract commencing January 1, 2014. In the
event the responsive bid of our Florida health plan 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 loss of our Missouri contract in 2012. 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, and
results of operations could be adversely affected.

In the event the expected reduction in the rates paid to our California health plan is not finally
implemented, is not made effective retroactively 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. It is
currently uncertain whether the rate cut will be implemented, and if it is implemented, whether it will be effective
retroactively to July 1, 2011. If the proposed rate cut is not finally implemented, if it is not made effective
retroactively to July 1, 2011, or if it is otherwise modified from its current form, the results of our California
health plan could be negatively affected 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.

The ACA includes certain provisions that change the way drug rebates are handled for drug claims filled by

Medicaid managed care plans. Retroactive to March 23, 2010, state Medicaid programs are now required to
collect federal rebates on all Medicaid-covered outpatient drugs dispensed or administered to Medicaid managed
care enrollees (excluding certain drugs that are already discounted), and pharmaceutical manufacturers are
required to pay specified rebates directly to the state Medicaid programs for those claims. This has impacted the
level of rebates received by managed care plans from the manufacturers for Medicaid managed care enrollees.
Many manufacturers have renegotiated or discontinued their rebate contracts with Medicaid managed care plans
and pharmacy benefits managers to offset these new rebates paid directly to state Medicaid programs. As a result,
the drug rebate amounts paid to managed care plans like ours continue to remain at levels that are much lower
than prior to the ACA implementation. 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, and 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 nine state health plans. If we are 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 are

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, 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, and 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

plans to satisfy one of these performance measure provisions could adversely affect our business, financial

condition, cash flows, and results of operations. In addition, the state contracts of our California, Florida, New

Mexico, Texas, and Washington health plans, and our contract with CMS, 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, and results of operations.

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

operations.

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

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

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

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

requirements, performance bonds or escrows, or contingency guaranties. If we are unsuccessful in obtaining the

certificate of authority, winning the bid to provide services, or attracting members in sufficient numbers to cover

our costs, any new business of ours would fail. We also could be required by the state 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 result in increased

net worth requirements. In such circumstances, we may not be able to fund on a timely basis or at all the

increased net worth requirements with our available cash resources. The expenses associated with starting up a

health plan in a new state or expanding a health plan in an existing state could have an adverse impact on our

business, financial condition, cash flows, and results of operations.

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 loss of our Missouri contract in 2012. 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, and

results of operations could be adversely affected.

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

implemented, is not made effective retroactively 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. It is

currently uncertain whether the rate cut will be implemented, and if it is implemented, whether it will be effective

retroactively to July 1, 2011. If the proposed rate cut is not finally implemented, if it is not made effective

retroactively to July 1, 2011, or if it is otherwise modified from its current form, the results of our California

health plan could be negatively affected 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.

The ACA includes certain provisions that change the way drug rebates are handled for drug claims filled by

Medicaid managed care plans. Retroactive to March 23, 2010, state Medicaid programs are now required to

collect federal rebates on all Medicaid-covered outpatient drugs dispensed or administered to Medicaid managed

care enrollees (excluding certain drugs that are already discounted), and pharmaceutical manufacturers are

required to pay specified rebates directly to the state Medicaid programs for those claims. This has impacted the

level of rebates received by managed care plans from the manufacturers for Medicaid managed care enrollees.

Many manufacturers have renegotiated or discontinued their rebate contracts with Medicaid managed care plans

and pharmacy benefits managers to offset these new rebates paid directly to state Medicaid programs. As a result,

the drug rebate amounts paid to managed care plans like ours continue to remain at levels that are much lower

than prior to the ACA implementation. 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, and 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 nine state health plans. If we are 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 are
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, 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, and 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
plans to satisfy one of these performance measure provisions could adversely affect our business, financial
condition, cash flows, and results of operations. In addition, the state contracts of our California, Florida, New
Mexico, Texas, and Washington health plans, and our contract with CMS, 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, and results of operations.

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

operations.

Start-up costs associated with a new business can be substantial. For example, to obtain a certificate of
authority to operate as a health maintenance organization in most jurisdictions, we must first establish a provider
network, have infrastructure and required systems in place, and demonstrate our ability to obtain a state contract
and process claims. Often, we are also required to contribute significant capital to fund mandated net worth
requirements, performance bonds or escrows, or contingency guaranties. If we are unsuccessful in obtaining the
certificate of authority, winning the bid to provide services, or attracting members in sufficient numbers to cover
our costs, any new business of ours would fail. We also could be required by the state 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 result in increased
net worth requirements. In such circumstances, we may not be able to fund on a timely basis or at all the
increased net worth requirements with our available cash resources. The expenses associated with starting up a
health plan in a new state or expanding a health plan in an existing state could have an adverse impact on our
business, financial condition, cash flows, and results of operations.

Receipt of inadequate or significantly delayed premiums could negatively affect our business, financial

condition, cash flows, and 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,
and results of operations.

Furthermore, a state undergoing a budget crisis may significantly delay the premiums paid to one of our

health plans. For instance, due to a prolonged budget impasse during 2010, some of the monthly premium
payments made by the state of California to our California health plan were several months late. Any significant
delay in the monthly payment of premiums to any of our health plans could have a material adverse affect on our
business, financial condition, cash flows, and 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 paid, 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 profitably. Furthermore, we may incur significant

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

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

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

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

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

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

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

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

of those laws and regulations, could result in the imposition of civil or criminal penalties, the cancellation of our

contracts to provide managed care services, the suspension or revocation of our licenses, the exclusion from

participation in government sponsored health programs, or the revision and recoupment of past payments made

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

other sanctions, we 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 make or have made related payments to

providers and are 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

Receipt of inadequate or significantly delayed premiums could negatively affect our business, financial

condition, cash flows, and 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,

and results of operations.

Furthermore, a state undergoing a budget crisis may significantly delay the premiums paid to one of our

health plans. For instance, due to a prolonged budget impasse during 2010, some of the monthly premium

payments made by the state of California to our California health plan were several months late. Any significant

delay in the monthly payment of premiums to any of our health plans could have a material adverse affect on our

business, financial condition, cash flows, and 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 paid, 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 profitably. Furthermore, we may incur significant
transaction expenses in connection with a potential acquisition which may or may not be consummated. These
expenses could impact our selling, general and administrative expense ratio.

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

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

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

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

We are subject to various routine and non-routine governmental reviews, audits, and investigations.
Violation of the laws, regulations, or contract provisions governing our operations, or changes in interpretations
of those laws and regulations, could result in the imposition of civil or criminal penalties, the cancellation of our
contracts to provide managed care services, the suspension or revocation of our licenses, the exclusion from
participation in government sponsored health programs, or the revision and recoupment of past payments made
based on audit findings. If we are unable to correct any noted deficiencies, or become subject to material fines or
other sanctions, we 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 make or have made related payments to
providers and are 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.

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, CMS has now postponed implementation of ICD-10 to October 2014. 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, and results of operations.

The insolvency of a delegated provider could obligate us to pay its referral claims, which could have an

adverse effect on our business, cash flows, and results of operations.

Circumstances may arise where providers to whom we have delegated risk, due to insolvency or other

circumstances, are unable to pay claims they have incurred with third parties in connection with referral services

provided to our members. The inability of delegated providers to pay referral claims presents us with both

immediate financial risk and potential disruption to member care. Depending on states’ laws, we may be held

liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk.

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

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

provider becomes insolvent. To reduce the risk that delegated providers are unable to pay referral claims, we

monitor the operational and financial performance of such providers. We also maintain contingency plans that

include transferring members to other providers in response to potential network instability. In certain instances,

we have required providers to place funds on deposit with us as protection against their potential insolvency.

These funds are frequently in the form of segregated funds received from the provider and held by us or placed in

a third-party financial institution. These funds may be used to pay claims that are the financial responsibility of

the provider in the event the provider is unable to meet these obligations. However, there can be no assurances

that these precautionary steps will fully protect us against the insolvency of a delegated provider. Liabilities

incurred or losses suffered as a result of provider insolvency could have an adverse effect on our business,

financial condition, cash flows, and results of operations.

Regulatory actions and negative publicity regarding Medicaid managed care and Medicare Advantage may

lead to programmatic changes and intensified regulatory scrutiny and regulatory burdens.

Several of our health care competitors have recently been involved in governmental investigations and

regulatory actions which have resulted in significant volatility in the price of their stock. In addition, there has

been negative publicity and proposed programmatic changes regarding Medicare Advantage private fee-for-

service plans, a part of the Medicare Advantage program in which we do not participate. These actions and the

resulting negative publicity could become associated with or imputed to us, regardless of our actual regulatory

compliance or programmatic participation. Such an association, as well as any perception of a recurring pattern

of abuse among the health plan participants in government programs and the diminished reputation of the

managed care sector as a whole, could result in public distrust, political pressure for changes in the programs in

which we do 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, and

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.

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.

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, CMS has now postponed implementation of ICD-10 to October 2014. 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, and results of operations.

The insolvency of a delegated provider could obligate us to pay its referral claims, which could have an

adverse effect on our business, cash flows, and results of operations.

Circumstances may arise where providers to whom we have delegated risk, due to insolvency or other
circumstances, are unable to pay claims they have incurred with third parties in connection with referral services
provided to our members. The inability of delegated providers to pay referral claims presents us with both
immediate financial risk and potential disruption to member care. Depending on states’ laws, we may be held
liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk.
Additionally, competitive pressures may force us to pay such claims even when we have no legal obligation to do
so or we have already paid claims to a delegated provider and payments cannot be recouped when the delegated
provider becomes insolvent. To reduce the risk that delegated providers are unable to pay referral claims, we
monitor the operational and financial performance of such providers. We also maintain contingency plans that
include transferring members to other providers in response to potential network instability. In certain instances,
we have required providers to place funds on deposit with us as protection against their potential insolvency.
These funds are frequently in the form of segregated funds received from the provider and held by us or placed in
a third-party financial institution. These funds may be used to pay claims that are the financial responsibility of
the provider in the event the provider is unable to meet these obligations. However, there can be no assurances
that these precautionary steps will fully protect us against the insolvency of a delegated provider. Liabilities
incurred or losses suffered as a result of provider insolvency could have an adverse effect on our business,
financial condition, cash flows, and results of operations.

Regulatory actions and negative publicity regarding Medicaid managed care and Medicare Advantage may

lead to programmatic changes and intensified regulatory scrutiny and regulatory burdens.

Several of our health care competitors have recently been involved in governmental investigations and
regulatory actions which have resulted in significant volatility in the price of their stock. In addition, there has
been negative publicity and proposed programmatic changes regarding Medicare Advantage private fee-for-
service plans, a part of the Medicare Advantage program in which we do not participate. These actions and the
resulting negative publicity could become associated with or imputed to us, regardless of our actual regulatory
compliance or programmatic participation. Such an association, as well as any perception of a recurring pattern
of abuse among the health plan participants in government programs and the diminished reputation of the
managed care sector as a whole, could result in public distrust, political pressure for changes in the programs in
which we do 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, and
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 inter-company 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 ordinary dividends must usually provide
notice to the regulators ten or fifteen days in advance of the intended distribution date of the ordinary dividend.
For the years ended December 31, 2012, 2011 and 2010, we received dividends from our health plan subsidiaries
amounting to $80.0 million, $76.6 million and $81.3 million, respectively. The aggregate additional amounts our
health plan subsidiaries could have paid us at December 31, 2012, 2011 and 2010, without approval of the
regulatory authorities, were approximately $8.1 million, $17.5 million, and $18.8 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 or service our outstanding indebtedness.

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, and results of operations.

A security breach or 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, or HITECH, provisions of the HITECH American Reinvestment and
Recovery Act of 2009 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 the health information of more than 500
individuals.

Under HITECH, civil penalties for HIPAA violations by covered entities and business associates are
increased up to an amount of $1.5 million per calendar year for HIPAA violations. In addition, imposition of
these penalties is now more likely because HITECH 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, HITECH requires us to notify affected

individuals, HHS, and in some cases the media when unsecured protected health information is subject to a

security breach.

HITECH also contains a number of provisions that provide incentives for providers and states to initiate

certain programs related to health care and health care technology, such as electronic health records. While some

HITECH provisions may not apply to us directly, states wishing to apply for grants under HITECH, 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 HITECH 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 HITECH and may require us to incur

significant costs in order to seek to comply with its requirements.

While we currently expend significant resources and have 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, acts of malicious insiders, 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

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 are

significantly curtailed, the revenues and cash flows of Molina Medicaid Solutions could decrease materially, and

as a result our profitability would be negatively impacted.

If 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 inter-company 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 ordinary dividends must usually provide

notice to the regulators ten or fifteen days in advance of the intended distribution date of the ordinary dividend.

For the years ended December 31, 2012, 2011 and 2010, we received dividends from our health plan subsidiaries

amounting to $80.0 million, $76.6 million and $81.3 million, respectively. The aggregate additional amounts our

health plan subsidiaries could have paid us at December 31, 2012, 2011 and 2010, without approval of the

regulatory authorities, were approximately $8.1 million, $17.5 million, and $18.8 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 or service our outstanding indebtedness.

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, and results of operations.

A security breach or 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, or HITECH, provisions of the HITECH American Reinvestment and

Recovery Act of 2009 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 the health information of more than 500

individuals.

Under HITECH, civil penalties for HIPAA violations by covered entities and business associates are

increased up to an amount of $1.5 million per calendar year for HIPAA violations. In addition, imposition of

these penalties is now more likely because HITECH 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, HITECH requires us to notify affected
individuals, HHS, and in some cases the media when unsecured protected health information is subject to a
security breach.

HITECH also contains a number of provisions that provide incentives for providers and states to initiate
certain programs related to health care and health care technology, such as electronic health records. While some
HITECH provisions may not apply to us directly, states wishing to apply for grants under HITECH, 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 HITECH 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 HITECH and may require us to incur
significant costs in order to seek to comply with its requirements.

While we currently expend significant resources and have 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, acts of malicious insiders, 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

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 are
significantly curtailed, the revenues and cash flows of Molina Medicaid Solutions could decrease materially, and
as a result our profitability would be negatively impacted.

If the responsive bids to RFPs of Molina Medicaid Solutions are not successful, our revenues could be

materially reduced and our operating results could be negatively impacted.

The government contracts of Molina Medicaid Solutions may be subject to periodic competitive bidding. In

such process, Molina Medicaid Solutions may face competition as other service providers, some with much
greater financial resources and greater name recognition, attempt to enter our markets through the competitive
bidding process. For instance, in 2012, the government contract of Molina Medicaid Solutions in Louisiana was
subject to competitive bidding, and we were unsuccessful in being awarded a new contract. Molina Medicaid
Solutions also anticipates bidding in other states which have issued RFPs for procurement of a new MMIS. In the
event our responsive bids in other states are not successful, we will be unable to grow in a manner consistent with
our projections. Even if our responsive bids are successful, the bids may be based upon assumptions or other
factors which could result in the contract being less profitable than we had expected or had been the case prior to
competitive re-bidding.

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

The state contracts of Molina Medicaid Solutions typically require significant investment in the early stages

that is expected to be recovered through billings over the life of the contracts. These contracts involve the
construction of new computer systems and communications networks and the development and deployment of
complex technologies. Substantial performance risk exists under each contract. Some or all elements of service
delivery under these contracts are dependent upon successful completion of the design, development,
construction, and implementation phases. Any increased or unexpected costs or 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, and 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, and results of operations.

System security risks and systems integration issues that disrupt our internal operations or information

technology services provided to customers could adversely affect our financial results and damage our
reputation.

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.

If the responsive bids to RFPs of Molina Medicaid Solutions are not successful, our revenues could be

materially reduced and our operating results could be negatively impacted.

The government contracts of Molina Medicaid Solutions may be subject to periodic competitive bidding. In

such process, Molina Medicaid Solutions may face competition as other service providers, some with much

greater financial resources and greater name recognition, attempt to enter our markets through the competitive

bidding process. For instance, in 2012, the government contract of Molina Medicaid Solutions in Louisiana was

subject to competitive bidding, and we were unsuccessful in being awarded a new contract. Molina Medicaid

Solutions also anticipates bidding in other states which have issued RFPs for procurement of a new MMIS. In the

event our responsive bids in other states are not successful, we will be unable to grow in a manner consistent with

our projections. Even if our responsive bids are successful, the bids may be based upon assumptions or other

factors which could result in the contract being less profitable than we had expected or had been the case prior to

competitive re-bidding.

under the contracts.

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

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, and 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, and results of operations.

System security risks and systems integration issues that disrupt our internal operations or information

technology services provided to customers could adversely affect our financial results and damage our

reputation.

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

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

results of operations.

Depending on acquisitions and other opportunities, we expect to continue to grow our membership and to
expand into other markets. 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 their 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 are unsuccessful or without merit, we

may have to defend ourselves against such claims. The defense of any such actions may be time-consuming and

costly, and may distract our management’s attention. As a result, we may incur significant expenses and may be

unable to effectively operate our business.

Furthermore, claimants often sue managed care organizations for improper denials of or delays in care, and

in some instances improper authorizations of care. Claims of this nature could result in substantial damage

awards against us and our providers that could exceed the limits of any applicable medical malpractice insurance

coverage. Successful malpractice or tort claims asserted against us, our providers, or our employees could

adversely affect our 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

Risks Related to our General Business Operations

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

results of operations.

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

expand into other markets. 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.

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.

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 their 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 are unsuccessful or without merit, we
may have to defend ourselves against such claims. The defense of any such actions may be time-consuming and
costly, and may distract our management’s attention. As a result, we may incur significant expenses and may be
unable to effectively operate our business.

Furthermore, claimants often sue managed care organizations for improper denials of or delays in care, and

in some instances improper authorizations of care. Claims of this nature could result in substantial damage
awards against us and our providers that could exceed the limits of any applicable medical malpractice insurance
coverage. Successful malpractice or tort claims asserted against us, our providers, or our employees could
adversely affect our 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 provide assurance 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, and 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 and could result in the loss of members to other health plans.

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 controls

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 New York Stock Exchange, SEC, or other regulatory authorities, which would require
additional financial and management resources.

Changes in accounting may affect our results of operations.

U.S. generally accepted accounting principles 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, and results of operations.

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

profitability.

We are subject to income taxes in the United States. Our effective tax rate could be adversely affected by

changes in the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax

assets and liabilities, changes in U.S. tax laws and regulations, and changes in our interpretations of tax laws,

including pending tax law changes, such as the ACA excise tax discussed above. In addition, we are subject to

the routine examination of our income tax returns by the Internal Revenue Service and other local and state tax

authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the

adequacy of our estimated income tax liabilities. Adverse outcomes from tax examinations could have an adverse

effect on our provision for income taxes, estimated income tax liabilities, and results of operations.

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

Our operations are highly dependent on the efforts of our executive officers. The loss of their leadership,

knowledge, and experience could negatively impact our operations. Replacing many of our executive officers

might be difficult or take an extended period of time because a limited number of individuals in the managed

care industry have the breadth and depth of skills and experience necessary to operate and expand successfully a

business such as ours. Our success is also dependent on our ability to hire and retain qualified management,

technical, and medical personnel. It is critical that we recruit, manage, enable, and retain talent to successfully

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

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

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

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

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

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

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

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

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

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

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 provide assurance 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, and 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 and could result in the loss of members to other health plans.

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 controls

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 New York Stock Exchange, SEC, or other regulatory authorities, which would require

additional financial and management resources.

Changes in accounting may affect our results of operations.

U.S. generally accepted accounting principles 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, and results of operations.

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

profitability.

We are subject to income taxes in the United States. Our effective tax rate could be adversely affected by
changes in the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax
assets and liabilities, changes in U.S. tax laws and regulations, and changes in our interpretations of tax laws,
including pending tax law changes, such as the ACA excise tax discussed above. In addition, we are subject to
the routine examination of our income tax returns by the Internal Revenue Service and other local and state tax
authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the
adequacy of our estimated income tax liabilities. Adverse outcomes from tax examinations could have an adverse
effect on our provision for income taxes, estimated income tax liabilities, and results of operations.

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

Our operations are highly dependent on the efforts of our executive officers. The loss of their leadership,
knowledge, and experience could negatively impact our operations. Replacing many of our executive officers
might be difficult or take an extended period of time because a limited number of individuals in the managed
care industry have the breadth and depth of skills and experience necessary to operate and expand successfully a
business such as ours. Our success is also dependent on our ability to hire and retain qualified management,
technical, and medical personnel. It is critical that we recruit, manage, enable, and retain talent to successfully
execute our strategic objections which requires aligned policies, a positive work environment, and a robust
succession and talent development process. Further, particularly in light of the changing health care environment,
we must focus on building employee capabilities to help ensure that we can meet upcoming challenges and
opportunities. If we are unsuccessful in recruiting, retaining, managing, and enabling such personnel and are
unable to meet upcoming challenges and opportunities, our operations could be negatively impacted.

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

We contract with independent third party vendors and service providers who provide services to us and our
subsidiaries or to whom we delegate selected functions. Our arrangements with third party vendors and service
providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us,
including their obligations to maintain and protect the security and confidentiality of our information and data. In

addition, we may have disagreements with third party vendors and service providers regarding relative
responsibilities for any such failures under applicable business associate agreements or other applicable
outsourcing agreements. Further, we may not be adequately indemnified against all possible losses through the
terms and conditions of our contracts with third party vendors and service providers. Our outsourcing
arrangements could be adversely impacted by changes in vendors’ or service providers’ operations or financial
condition or other matters outside of our control. If we fail to adequately monitor and regulate the performance of
our third party vendors and service providers, we could be subject to additional risk. Violations of, or
noncompliance with, laws and/or regulations governing our business or noncompliance with contract terms by
third party vendors and service providers could increase our exposure to liability to our members, providers, or
other third parties, or sanctions and/or fines from the regulators that oversee our business. In turn, this could
increase the costs associated with the operation of our business or have an adverse impact on our business and
reputation. Moreover, if these vendor and service provider relationships were terminated for any reason, we may
not be able to find alternative partners in a timely manner or on acceptable financial terms, and may incur
significant costs in connection with any such vendor or service provider transition. As a result, we may not be
able to meet the full demands of our customers and, in turn, our business, financial condition, 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 and indefinite-lived intangible assets, or our

finite-lived intangible assets, could have a material impact on our financial results.

As of December 31, 2012, the balance of goodwill and indefinite-lived intangible assets was $151.1 million.

Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing.
Testing is performed more frequently if events occur or circumstances change that would more likely than not
reduce the fair value of the underlying reporting units below their carrying amounts. The underlying reporting
units generally comprise our health plan subsidiaries and our Molina Medicaid Solutions segment. As of
December 31, 2012, the balance of intangible assets, net, was $77.7 million. Intangible assets are amortized
generally on a straight-line basis over their estimated useful lives. Our intangible assets are subject to impairment
tests when events or circumstances indicate that such an asset’s (or asset group’s) carrying value may not be
recoverable. Consideration is given to a number of potential impairment indicators, including legal factors,
market conditions, and operational performance. Such evaluation is significantly impacted by estimates and
assumptions of future revenues, costs and expenses, and other factors.

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.

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 adverse 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. We also own a nearby 32,000 square-foot
office building in Long Beach, California, a 160,000 square-foot office building in Columbus, Ohio, a 26,000
square-foot data center in Albuquerque, New Mexico, and a 24,000 square-foot mixed use (office and clinic)
facility in Pomona, California. Accordingly, we are subject to all of the risks generally associated with owning
real estate, which include, but are not limited to: the possibility of environmental contamination, the costs

associated with fixing any environmental problems and the risk of damages resulting from such contamination;

risks related to natural disasters, such as earthquakes, flooding or severe weather; 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, or Molina Center, 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, and results of operations.

Risks Related to Our Common Stock

Delaware law and our charter documents may impede or discourage a takeover, which could cause the

market price of our common stock to decline.

We are 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,

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, and

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

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

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

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

arrangements could be adversely impacted by changes in vendors’ or service providers’ operations or financial

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

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

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

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

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

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

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

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

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

able to meet the full demands of our customers and, in turn, our business, financial condition, 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 and indefinite-lived intangible assets, or our

finite-lived intangible assets, could have a material impact on our financial results.

As of December 31, 2012, the balance of goodwill and indefinite-lived intangible assets was $151.1 million.

Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing.

Testing is performed more frequently if events occur or circumstances change that would more likely than not

reduce the fair value of the underlying reporting units below their carrying amounts. The underlying reporting

units generally comprise our health plan subsidiaries and our Molina Medicaid Solutions segment. As of

December 31, 2012, the balance of intangible assets, net, was $77.7 million. Intangible assets are amortized

generally on a straight-line basis over their estimated useful lives. Our intangible assets are subject to impairment

tests when events or circumstances indicate that such an asset’s (or asset group’s) carrying value may not be

recoverable. Consideration is given to a number of potential impairment indicators, including legal factors,

market conditions, and operational performance. Such evaluation is significantly impacted by estimates and

assumptions of future revenues, costs and expenses, and other factors.

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.

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 adverse 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. We also own a nearby 32,000 square-foot

office building in Long Beach, California, a 160,000 square-foot office building in Columbus, Ohio, a 26,000

square-foot data center in Albuquerque, New Mexico, and a 24,000 square-foot mixed use (office and clinic)

facility in Pomona, California. Accordingly, we are subject to all of the risks generally associated with owning

real estate, which include, but are not limited to: the possibility of environmental contamination, the costs

associated with fixing any environmental problems and the risk of damages resulting from such contamination;
risks related to natural disasters, such as earthquakes, flooding or severe weather; 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, or Molina Center, 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, and results of operations.

Risks Related to Our Common Stock

Delaware law and our charter documents may impede or discourage a takeover, which could cause the

market price of our common stock to decline.

We are 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,

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, and

•

the ability of our board of directors, without stockholder approval, to designate the terms of one or
more series of preferred stock and issue shares of preferred stock.

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

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 to a high of $36.83. A number of factors could continue to influence the market price of our common
stock, including:

•

the implementation of the ACA and duals demonstration programs,

state and federal budget pressures,

changes in expectations as to our future financial performance or changes in financial estimates, if any,
by us or by security analysts or investors,

revisions in securities analysts’ estimates,

announcements by us or our competitors of significant acquisitions or dispositions, strategic
partnerships, joint ventures, or capital commitments,

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,

Item 1B: Unresolved Staff Comments

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

additional space is required, and where it would be best located.

the other factors set forth under “Risk factors” in this Annual Report on Form 10-K.

Our common 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 common stock does not continue to develop, securities
analysts may not maintain or initiate research coverage of us and our common stock, and this could depress the
market for our common stock.

Members of the Molina family own a significant amount of our capital stock, decreasing the influence of

other stockholders on stockholder decisions.

Members of the Molina family, either directly or as trustees or beneficiaries of Molina family trusts, in the

aggregate own or are entitled to receive upon certain events approximately 37% of our capital stock as of
December 31, 2012. Our president and chief executive officer, as well as our chief financial officer, are members
of the Molina family, and they are also on our board of directors. Because of the amount of their shareholdings,
Molina family members, if they were to act as a group with the trustees of their family trusts, have the ability to
significantly influence all matters submitted to stockholders for approval, including the election of directors,
amendments to our charter, and any merger, consolidation, or sale of the 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.

Future sales of our common stock or equity-linked securities in the public market could adversely affect the

trading price of our common stock and our ability to raise funds in new stock offerings.

We may issue equity securities in the future, or securities that are convertible into or exchangeable for, or

that represent the right to receive, shares of our common stock. Sales of a substantial number of shares of our

common stock or other equity securities, including sales of shares in connection with any future acquisitions,

could be substantially dilutive to our stockholders. These sales may have a harmful effect on prevailing market

prices for our common stock and our ability to raise additional capital in the financial markets at a time and price

favorable to us. Moreover, to the extent that we issue restricted stock units, stock appreciation rights, options, or

warrants to purchase our common stock in the future and those stock appreciation rights, options, or warrants are

exercised or as the restricted stock units vest, our stockholders may experience further dilution. Holders of our

shares of common stock have no preemptive rights that entitle holders to purchase a pro rata share of any

offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to

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, 2012, approximately 46,762,000

shares of common stock and no shares of preferred or other capital stock were issued and outstanding.

None.

Item 2: Properties

We lease a total of 75 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 160,000 square-foot office building in Columbus, Ohio, a 26,000 square-foot data center in

Albuquerque, New Mexico, and a 24,000 square-foot mixed use (office and clinic) facility in Pomona,

California. We anticipate leasing additional space in the Long Beach, California area during 2013. While we

believe our current and anticipated facilities will be adequate to meet our operational needs for the foreseeable

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

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.

•

the ability of our board of directors, without stockholder approval, to designate the terms of one or

more series of preferred stock and issue shares of preferred stock.

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

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.

Future sales of our common stock or equity-linked securities in the public market could adversely affect the

trading price of our common stock and our ability to raise funds in new stock offerings.

We may issue equity securities in the future, or securities that are convertible into or exchangeable for, or

that represent the right to receive, shares of our common stock. Sales of a substantial number of shares of our
common stock or other equity securities, including sales of shares in connection with any future acquisitions,
could be substantially dilutive to our stockholders. These sales may have a harmful effect on prevailing market
prices for our common stock and our ability to raise additional capital in the financial markets at a time and price
favorable to us. Moreover, to the extent that we issue restricted stock units, stock appreciation rights, options, or
warrants to purchase our common stock in the future and those stock appreciation rights, options, or warrants are
exercised or as the restricted stock units vest, our stockholders may experience further dilution. Holders of our
shares of common stock have no preemptive rights that entitle holders to purchase a pro rata share of any
offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to
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, 2012, approximately 46,762,000
shares of common stock and no shares of preferred or other capital stock were issued and outstanding.

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

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

We lease a total of 75 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 160,000 square-foot office building in Columbus, Ohio, a 26,000 square-foot data center in
Albuquerque, New Mexico, and a 24,000 square-foot mixed use (office and clinic) facility in Pomona,
California. We anticipate leasing additional space in the Long Beach, California area during 2013. While we
believe our current and anticipated facilities will be adequate to meet our operational needs for the foreseeable
future, we are continuing to periodically evaluate our employee and operations growth prospects to determine if
additional space is required, and where it would be best located.

Item 3: Legal Proceedings

The health care 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.

approval.

stock, including:

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 to a high of $36.83. A number of factors could continue to influence the market price of our common

•

the implementation of the ACA and duals demonstration programs,

state and federal budget pressures,

changes in expectations as to our future financial performance or changes in financial estimates, if any,

by us or by security analysts or investors,

revisions in securities analysts’ estimates,

announcements by us or our competitors of significant acquisitions or dispositions, strategic

partnerships, joint ventures, or capital commitments,

announcements relating to our business or the business of our competitors,

changes in government payment levels,

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 other factors set forth under “Risk factors” in this Annual Report on Form 10-K.

Our common 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 common stock does not continue to develop, securities

analysts may not maintain or initiate research coverage of us and our common stock, and this could depress the

market for our common stock.

Members of the Molina family own a significant amount of our capital stock, decreasing the influence of

other stockholders on stockholder decisions.

Members of the Molina family, either directly or as trustees or beneficiaries of Molina family trusts, in the

aggregate own or are entitled to receive upon certain events approximately 37% of our capital stock as of

December 31, 2012. Our president and chief executive officer, as well as our chief financial officer, are members

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

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

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

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

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
December 31, 2012, there were 130 holders of record of our common stock. The high and low intra-day sales
prices of our common stock for specified periods are set forth below:

Date Range

2012

2011

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$36.83
$35.37
$27.73
$29.82

$26.86
$29.03
$28.21
$26.31

$22.25
$17.63
$21.62
$21.74

$17.77
$24.72
$14.82
$13.93

Dividends

To date we have not paid cash dividends on our common stock. We currently intend to retain any future
earnings to fund our projected business growth. However, we intend to periodically evaluate our cash position to
determine whether to pay a cash dividend in the future.

Our ability to pay dividends is partially dependent on, among other things, our receipt of cash dividends
from our regulated subsidiaries. The ability of our regulated subsidiaries to pay dividends to us is limited by the
state departments of insurance in the states in which we operate or may operate, as well as requirements of the
government-sponsored health programs in which we participate. 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 and regulatory 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 — Liquidity and Capital Resources —
Regulatory Capital and Dividends Restrictions.

Unregistered Issuances of Equity Securities

None.

Stock Repurchase Programs

Common Stock Repurchase in Connection with Offering of 1.125% Cash Convertible Senior Notes Due

2020. We used a portion of the net proceeds in this offering to repurchase $50 million of our common stock in
negotiated transactions with institutional investors in the offering, concurrently with the pricing of the offering.
On February 12, 2013, we repurchased a total of 1,624,959 shares at $30.77 per share, which was our closing
stock price on that date.

Securities Repurchases and Repurchase Programs. Effective as of February 13, 2013, our board of directors

authorized the repurchase of $75 million in aggregate of either our common stock or our convertible senior note
due 2014. The repurchase program extends through December 31, 2014.

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

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

October 25, 2012. No securities were purchased under this program in 2012.

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

2012, 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)(b)

Average Price

Paid per Share

2,150

1,892

194,974

199,016

$25.03

$25.31

$27.97

$27.91

—

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

Maximum Number

(or Approximate

Dollar Value) of

Shares That May Yet

Be Purchased Under

the Plans or Programs

$—

(a) During the three months ended December 31, 2012, we repurchased shares of our common stock from

certain Molina family trusts. Janet M. Watt is the sister, and her husband Lawrence B. Watt is the brother-

in-law, of Dr. J. Mario Molina, the Company’s Chief Executive Officer, and John Molina, the Company’s

Chief Financial Officer. Ms. Watt is the sole trustee of the Janet M. Watt Separate Property Trust dated

10/22/2007 (the “Separate Property Trust”) and a co-trustee with Lawrence B. Watt, of the Watt Family

Trust dated 10/11/1996 (the “Family Trust” and together with the Separate Property Trust, the “Trusts”). On

December 26, 2012, pursuant to a Stock Purchase Agreement between the Company and the Trusts, the

Company purchased an aggregate of 110,988 shares of its common stock from the Trusts for an aggregate

purchase price of $3,000,005.64, as follows: (i) 43,767 shares from the Family Trust for an aggregate

purchase price of $ 1,183,022.01 and (ii) 67,221 shares from the Separate Property Trust for an aggregate

purchase price of $1,816,983.63. The shares were purchased at a price per share of $27.03, representing the

closing price per share of the Company’s common stock on December 26, 2012, as reported by the New

York Stock Exchange. The transaction was approved by the Company’s board of directors. Other than these

repurchases from the Trusts, we did not repurchase any shares of our common stock outside of our publicly

announced repurchase program except shares of common stock withheld to settle our employees’ income

tax obligations described below.

(b) During the quarter we withheld 88,028 shares of common stock under our 2002 Equity Incentive Plan and

2011 Equity Incentive Plan to settle our employees’ income tax obligations.

Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2012)

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)

414,061 (1)

$22.39

6,537,592 (2)

(1) Options to purchase shares of our common stock issued under the 2002 Equity Incentive Plan. Further

grants under the 2002 Equity Incentive Plan have been suspended.

(2)

Includes only shares remaining available to issue under the 2011 Equity Incentive Plan, and the 2011

Employee Stock Purchase Plan. Further grants under the 2002 Equity Incentive Plan and the 2002 Employee

Stock Purchase Plan have been suspended.

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

December 31, 2012, there were 130 holders of record of our common stock. The high and low intra-day sales

prices of our common stock for specified periods are set forth below:

Date Range

2012

2011

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

High

Low

$36.83

$35.37

$27.73

$29.82

$26.86

$29.03

$28.21

$26.31

$22.25

$17.63

$21.62

$21.74

$17.77

$24.72

$14.82

$13.93

Dividends

To date we have not paid cash dividends on our common stock. We currently intend to retain any future

earnings to fund our projected business growth. However, we intend to periodically evaluate our cash position to

determine whether to pay a cash dividend in the future.

Our ability to pay dividends is partially dependent on, among other things, our receipt of cash dividends

from our regulated subsidiaries. The ability of our regulated subsidiaries to pay dividends to us is limited by the

state departments of insurance in the states in which we operate or may operate, as well as requirements of the

government-sponsored health programs in which we participate. 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 and regulatory 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 — Liquidity and Capital Resources —

Regulatory Capital and Dividends Restrictions.

Unregistered Issuances of Equity Securities

None.

Stock Repurchase Programs

Common Stock Repurchase in Connection with Offering of 1.125% Cash Convertible Senior Notes Due

2020. We used a portion of the net proceeds in this offering to repurchase $50 million of our common stock in

negotiated transactions with institutional investors in the offering, concurrently with the pricing of the offering.

On February 12, 2013, we repurchased a total of 1,624,959 shares at $30.77 per share, which was our closing

stock price on that date.

Securities Repurchases and Repurchase Programs. Effective as of February 13, 2013, our board of directors

authorized the repurchase of $75 million in aggregate of either our common stock or our convertible senior note

due 2014. The repurchase program extends through December 31, 2014.

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

aggregate of either our common stock or our convertible senior notes due 2014. The repurchase program expired
October 25, 2012. No securities were purchased under this program in 2012.

Purchases of common stock made by or on behalf of the Company during the quarter ended December 31,
2012, 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)(b)

Average Price
Paid per Share

2,150
1,892
194,974

199,016

$25.03
$25.31
$27.97

$27.91

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

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

—
—
—

—

$—
$—
$—

(a) During the three months ended December 31, 2012, we repurchased shares of our common stock from

certain Molina family trusts. Janet M. Watt is the sister, and her husband Lawrence B. Watt is the brother-
in-law, of Dr. J. Mario Molina, the Company’s Chief Executive Officer, and John Molina, the Company’s
Chief Financial Officer. Ms. Watt is the sole trustee of the Janet M. Watt Separate Property Trust dated
10/22/2007 (the “Separate Property Trust”) and a co-trustee with Lawrence B. Watt, of the Watt Family
Trust dated 10/11/1996 (the “Family Trust” and together with the Separate Property Trust, the “Trusts”). On
December 26, 2012, pursuant to a Stock Purchase Agreement between the Company and the Trusts, the
Company purchased an aggregate of 110,988 shares of its common stock from the Trusts for an aggregate
purchase price of $3,000,005.64, as follows: (i) 43,767 shares from the Family Trust for an aggregate
purchase price of $ 1,183,022.01 and (ii) 67,221 shares from the Separate Property Trust for an aggregate
purchase price of $1,816,983.63. The shares were purchased at a price per share of $27.03, representing the
closing price per share of the Company’s common stock on December 26, 2012, as reported by the New
York Stock Exchange. The transaction was approved by the Company’s board of directors. Other than these
repurchases from the Trusts, we did not repurchase any shares of our common stock outside of our publicly
announced repurchase program except shares of common stock withheld to settle our employees’ income
tax obligations described below.

(b) During the quarter we withheld 88,028 shares of common stock under our 2002 Equity Incentive Plan and

2011 Equity Incentive Plan to settle our employees’ income tax obligations.

Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2012)

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)

414,061 (1)

$22.39

6,537,592 (2)

(1) Options to purchase shares of our common stock issued under the 2002 Equity Incentive Plan. Further

(2)

grants under the 2002 Equity Incentive Plan have been suspended.
Includes only shares remaining available to issue under the 2011 Equity Incentive Plan, and the 2011
Employee Stock Purchase Plan. Further grants under the 2002 Equity Incentive Plan and the 2002 Employee
Stock Purchase Plan have been suspended.

STOCK PERFORMANCE GRAPH

The following graph and related discussion are being furnished solely to accompany this Annual Report on
Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to
be “filed” with the SEC (other than as provided in Item 201) nor shall this information be incorporated by
reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the
date hereof and irrespective of any general incorporation language contained therein, except to the extent that
the Company specifically incorporates it by reference into a filing.

The following line graph compares the percentage change in the cumulative total return on our common

stock against the cumulative total return of the Standard & Poor’s Corporation Composite 500 Index (the “S&P
500”), our old peer group index (as described below), and a new peer group index (as described below) for the
five-year period from December 31, 2007 to December 31, 2012. We have revised our peer group to match the
peer group that is used by our Compensation Committee in benchmarking our executive officers’ compensation.
The comparison assumes $100 was invested on December 31, 2007, in the Company’s common stock and in
each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph
below represents historical stock performance and is not necessarily indicative of future stock price performance.

The old peer group index, used in last year’s Annual Report on Form 10-K and also set forth below, 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).

The new peer group index consists of Centene Corporation (CNC), Community Health Systems, Inc.
(CYH), Coventry Health Care, Inc. (CVH), Health Management Associates, Inc. (HMA), Health Net, Inc.
(HNT), Laboratory Corporation of America Holdings (LH), Lifepoint Hospitals, Inc. (LPNT), Magellan Health
Services, Inc. (MGLN), Select Medical Holdings Corporation (SEM), Team Health Holdings, Inc. (TMH),
Triple-S Management Corporation (GTS), Universal American Corporation (UAM), and WellCare Health Plans,
Inc. (WCG).

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Molina Healthcare, Inc., the S&P 500 Index,

Old Peer Group and New Peer Group

$120

$100

$80

$60

$40

$20

12/07

12/08

12/09

12/10

12/11

12/12

Molina Healthcare, Inc.

S&P 500

Old Peer Group

New Peer Group

Molina Healthcare, Inc.

$100.00

Name

S&P 500

Old Peer Group

New Peer Group

12/07

100.00

12/08

$45.50

63.00

44.97

48.44

12/09

$59.10

79.67

56.76

74.11

12/10

$71.96

91.67

63.52

83.64

12/11

$86.55

93.61

86.09

97.61

12/12

$104.88

108.59

87.78

109.47

STOCK PERFORMANCE GRAPH

The following graph and related discussion are being furnished solely to accompany this Annual Report on

Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to

be “filed” with the SEC (other than as provided in Item 201) nor shall this information be incorporated by

reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the

date hereof and irrespective of any general incorporation language contained therein, except to the extent that

the Company specifically incorporates it by reference into a filing.

The following line graph compares the percentage change in the cumulative total return on our common

stock against the cumulative total return of the Standard & Poor’s Corporation Composite 500 Index (the “S&P

500”), our old peer group index (as described below), and a new peer group index (as described below) for the

five-year period from December 31, 2007 to December 31, 2012. We have revised our peer group to match the

peer group that is used by our Compensation Committee in benchmarking our executive officers’ compensation.

The comparison assumes $100 was invested on December 31, 2007, in the Company’s common stock and in

each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph

below represents historical stock performance and is not necessarily indicative of future stock price performance.

The old peer group index, used in last year’s Annual Report on Form 10-K and also set forth below, 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).

The new peer group index consists of Centene Corporation (CNC), Community Health Systems, Inc.

(CYH), Coventry Health Care, Inc. (CVH), Health Management Associates, Inc. (HMA), Health Net, Inc.

(HNT), Laboratory Corporation of America Holdings (LH), Lifepoint Hospitals, Inc. (LPNT), Magellan Health

Services, Inc. (MGLN), Select Medical Holdings Corporation (SEM), Team Health Holdings, Inc. (TMH),

Triple-S Management Corporation (GTS), Universal American Corporation (UAM), and WellCare Health Plans,

Inc. (WCG).

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Molina Healthcare, Inc., the S&P 500 Index,
Old Peer Group and New Peer Group

$120

$100

$80

$60

$40

$20

12/07

12/08

12/09

12/10

12/11

12/12

Molina Healthcare, Inc.

S&P 500

Old Peer Group

New Peer Group

Name

Molina Healthcare, Inc.
S&P 500
Old Peer Group
New Peer Group

12/07

$100.00
100.00
100.00
100.00

12/08

$45.50
63.00
44.97
48.44

12/09

$59.10
79.67
56.76
74.11

12/10

$71.96
91.67
63.52
83.64

12/11

$86.55
93.61
86.09
97.61

12/12

$104.88
108.59
87.78
109.47

2012

2011

2010

2009

2008

Year Ended December 31,

Balance Sheet Data:

Cash and cash equivalents

Total assets

Total liabilities

Stockholders’ equity

Long-term debt (including current maturities)

795,770

493,827

455,886

469,501

387,162

1,934,822

262,939

1,152,508

782,314

1,652,146

1,509,214

1,244,035

1,148,068

218,126

897,073

755,073

164,014

790,157

719,057

158,900

701,297

542,738

164,873

616,306

531,762

(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 expired without renewal on June 30, 2012. In connection with this

notification, we recorded a non-cash impairment charge of $64.6 million in the fourth quarter of 2011.

(3) Medical care ratio represents medical care costs as a percentage of premium revenue, net of premium tax. We now

compute the medical care ratio by dividing total medical care costs by premium revenue, net of premium taxes.

Previously, we did not adjust premium revenue to remove the impact of premium taxes. We have made this change for

all periods presented. The medical care ratio is a key operating indicator used to measure our performance in delivering

efficient and cost effective health care services. Changes in the medical care ratio from period to period result from

changes in Medicaid funding by the states, utilization of medical services, our ability to effectively manage costs,

contract changes, and changes in accounting estimates related to incurred but not paid claims. See Item 7 —

Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

(4) General and administrative expense ratio represents such expenses as a percentage of total revenue.

(5) Premium tax ratio represents such expenses as a percentage of premium revenue, net of premium tax.

(6) Number of members at end of period.

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, 2012 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.

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

2012

2011

2010

2009

2008

Year Ended December 31,

$ 5,826,491
187,710
5,188
9,374

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

$ 3,989,909
89,809
6,259
—

$ 3,660,207
—
9,149
—

$ 3,091,240

—
21,126
—

6,028,763

4,769,940

4,085,977

3,669,356

3,112,366

5,096,760
141,208
532,627
158,991
63,704

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

2,621,312

—

249,646
100,165
33,688

Total operating costs and expenses

5,993,290

4,625,192

3,980,976

3,618,954

3,004,811

Impairment of goodwill and intangible assets (2)
Gain on purchase of convertible senior notes

—
—

(64,575)
—

—
—

—
1,532

—
—

Operating income

Other expenses (income):
Interest expense
Other income

Total other expenses

Income before income taxes
Provision for income taxes

Net income

Net income per share:

Basic

Diluted

35,473

80,173

105,001

51,934

107,555

16,769
(361)

16,408

19,065
9,275

9,790

0.21

15,519
—

15,519

64,654
43,836

20,818

0.45

15,509
—

15,509

89,492
34,522

54,970

1.34

1.32

13,777
—

13,777

38,157
7,289

30,868

0.80

0.79

13,231
—

13,231

94,324
34,726

59,598

1.44

1.43

Weighted average number of common shares

outstanding

46,380,000

45,756,000

41,174,000

38,765,000

41,514,000

Weighted average number of common shares and
potential dilutive common shares outstanding

Operating Statistics:
Medical care ratio (3)
General and administrative expense ratio (4)
Premium tax ratio (5)
Members (6)

46,999,000

46,425,000

41,631,000

38,976,000

41,658,000

89.9%
8.8%
2.8%

86.8%
8.7%
3.5%

87.6%
8.5%
3.6%

89.9%
7.5%
3.6%

87.6%
8.0%
3.3%

1,797,000

1,697,000

1,613,000

1,455,000

1,256,000

2012

2011

2010

2009

2008

Year Ended December 31,

Balance Sheet Data:
Cash and cash equivalents
Total assets
Long-term debt (including current maturities)
Total liabilities
Stockholders’ equity

795,770
1,934,822
262,939
1,152,508
782,314

493,827
1,652,146
218,126
897,073
755,073

455,886
1,509,214
164,014
790,157
719,057

469,501
1,244,035
158,900
701,297
542,738

387,162
1,148,068
164,873
616,306
531,762

(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 expired without renewal on June 30, 2012. In connection with this
notification, we recorded a non-cash impairment charge of $64.6 million in the fourth quarter of 2011.

(3) Medical care ratio represents medical care costs as a percentage of premium revenue, net of premium tax. We now
compute the medical care ratio by dividing total medical care costs by premium revenue, net of premium taxes.
Previously, we did not adjust premium revenue to remove the impact of premium taxes. We have made this change for
all periods presented. The medical care ratio is a key operating indicator used to measure our performance in delivering
efficient and cost effective health care services. Changes in the medical care ratio from period to period result from
changes in Medicaid funding by the states, utilization of medical services, our ability to effectively manage costs,
contract changes, and changes in accounting estimates related to incurred but not paid claims. See Item 7 —
Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

(4) General and administrative expense ratio represents such expenses as a percentage of total revenue.
(5) Premium tax ratio represents such expenses as a percentage of premium revenue, net of premium tax.
(6) Number of members at end of period.

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, 2012 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.

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

2012

2011

2010

2009

2008

Year Ended December 31,

$ 5,826,491

$ 4,603,407

$ 3,989,909

$ 3,660,207

$ 3,091,240

187,710

160,447

5,188

9,374

5,539

547

89,809

6,259

—

9,149

—

21,126

—

6,028,763

4,769,940

4,085,977

3,669,356

3,112,366

5,096,760

3,859,994

3,370,857

3,176,236

2,621,312

141,208

532,627

158,991

63,704

143,987

415,932

154,589

50,690

78,647

345,993

139,775

45,704

—

276,027

128,581

38,110

—

249,646

100,165

33,688

Total operating costs and expenses

5,993,290

4,625,192

3,980,976

3,618,954

3,004,811

Impairment of goodwill and intangible assets (2)

Gain on purchase of convertible senior notes

—

(64,575)

—

1,532

—

35,473

80,173

105,001

51,934

107,555

Operating income

Other expenses (income):

Interest expense

Other income

Total other expenses

Income before income taxes

Provision for income taxes

Net income

Net income per share:

Basic

Diluted

outstanding

Weighted average number of common shares

16,769

(361)

16,408

19,065

9,275

9,790

0.21

15,519

—

15,519

64,654

43,836

20,818

0.45

15,509

—

15,509

89,492

34,522

54,970

1.34

1.32

13,777

—

13,777

38,157

7,289

30,868

0.80

0.79

13,231

—

13,231

94,324

34,726

59,598

1.44

1.43

46,380,000

45,756,000

41,174,000

38,765,000

41,514,000

Weighted average number of common shares and

potential dilutive common shares outstanding

46,999,000

46,425,000

41,631,000

38,976,000

41,658,000

Operating Statistics:

Medical care ratio (3)

Premium tax ratio (5)

Members (6)

General and administrative expense ratio (4)

89.9%

8.8%

2.8%

86.8%

8.7%

3.5%

87.6%

8.5%

3.6%

89.9%

7.5%

3.6%

87.6%

8.0%

3.3%

1,797,000

1,697,000

1,613,000

1,455,000

1,256,000

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

The following discussion of our financial condition and results of operations should be read in conjunction

with the “Selected Financial Data” and the accompanying consolidated financial statements and the notes to
those statements appearing elsewhere in this report. This discussion contains forward-looking statements that
involve known and unknown risks and uncertainties, including those set forth under Item 1A — Risk Factors,
above.

Overview

Molina Healthcare, Inc. 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. We report our financial performance based on two reportable segments: Health Plans and
Molina Medicaid Solutions.

Our Health Plans segment comprises health plans in California, Florida, Michigan, New Mexico, Ohio,
Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. As of December 31, 2012,
these health plans served approximately 1.8 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. Our direct delivery business consists of primary care clinics in California,
Florida, New Mexico and Washington; additionally, we manage three county-owned primary care clinics under a
contract with Fairfax County, Virginia.

Our health plans’ state Medicaid contracts generally have terms of three to four years with annual

adjustments to premium rates. These contracts are renewable 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. 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,
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 prior contract with the state expired without renewal on June 30, 2012 subject to certain
transition obligations. As of December 31, 2012, we continued to process claims that were incurred by the
Missouri health plan’s members through the June 30, 2012 termination date. For the six months ended June 30,
2012, our Missouri health plan contributed premium revenue of $113.8 million, or 4.1% of total premium
revenue, and comprised 79,000 members, or 4.3% of total Health Plans segment membership as of June 30,
2012.

With regard to our Ohio health plan, as a result of a lawsuit challenging the selection of several plans
including our health plan for the new Medicaid managed care program in Ohio, the Ohio Office of Medical
Assistance announced on October 5, 2012, that the operation of the program is being delayed from the previously
scheduled January 1, 2013 start date and will now commence on July 1, 2013. Following the trial court’s
dismissal of the lawsuit, the court of appeals has permitted the state of Ohio to move forward with
implementation of the new program and finalizing the provider agreements with our Ohio plan and the other
selected managed care plans.

service areas); and among populations we had not previously served within existing service areas, such as the

Temporary Assistance for Needy Families, or TANF, population in the Dallas service area. Additionally, the

health benefits provided to our TANF and ABD members in Texas under our contracts with the state were

expanded to include inpatient facility and pharmacy services.

During fiscal year 2012, we responded to several RFPs and invitations to negotiate with respect to new

business, including proposals to serve dual eligible populations and applications to participate in the Centers for

Medicare and Medicaid Services, or CMS’, Capitated Financial Alignment Demonstration project. On

August 27, 2012, our Ohio health plan was chosen to participate in the Southwest, West Central, and Central

markets under the Ohio Integrated Care Delivery System, or ICDS. The Ohio ICDS is intended to improve care

coordination for individuals enrolled in both Medicaid and Medicare. The selection of our Ohio health plan was

made by the Ohio Department of Jobs and Family Services, or ODJFS, pursuant to the request for applications

for qualified health plans to serve in the ICDS issued in April 2012. The commencement of the ICDS is subject

to the readiness review of the selected health plans, and the execution of three-way provider agreements between

the health plans, ODJFS, and CMS. Enrollment of dual eligible members in the ICDS is expected to begin during

the second half of 2013.

On November 15, 2012, we announced that our new Illinois health plan had been chosen to serve members

in Central Illinois under the state’s Medicare-Medicaid Alignment Initiative (MMAI). The operational start date

for the program is currently scheduled for October 2013 with an effective date of January 2014. In addition to the

MMAI, we will also serve other seniors and persons with disabilities in the Medicaid Program as the state

expands the Integrated Care Program that was implemented in suburban Cook County and the five collar

counties in May of 2011.

On February 14, 2013, we announced that the Florida Agency for Health Care Administration awarded our

Florida health plan contracts in three regions under the Statewide Medicaid Managed Care Long-Term Care

program. As a result of the awards, we will now enter into a comprehensive pre-contracting assessment, with the

program currently scheduled to commence on December 1, 2013. Under the program, we will provide long-term

care benefits, including institutional and home and community-based services.

On February 11, 2013, we announced that our New Mexico health plan was selected by the New Mexico

Human Services Department, or HSD, to participate in the new Centennial Care program. In addition to

continuing to provide physical and acute health care services, under the new program our New Mexico health

plan will expand its services to provide behavioral health and long-term care services. The selection of our New

Mexico health plan was made by HSD pursuant to its request for proposals issued in August 2012. The

operational start date for the program is currently scheduled for January 2014.

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 October 12, 2012, the Governor of the U.S. Virgin Islands announced a partnership in which we will

provide MMIS to the U.S. Virgin Islands through our West Virginia fiscal agent operation. The contract outlining

the sharing of our platform went through several rounds of review at the federal level and has been approved by

CMS. The partnership will benefit both the Virgin Islands and taxpayers by circumventing the costs associated

with establishing an independent system while gaining leverage from operating under a common platform. This

partnership can serve as a model for the country by demonstrating that state and territorial governments can

reduce local and federal costs by sharing such technologies for their Medicaid populations.

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

The following discussion of our financial condition and results of operations should be read in conjunction

with the “Selected Financial Data” and the accompanying consolidated financial statements and the notes to

those statements appearing elsewhere in this report. This discussion contains forward-looking statements that

involve known and unknown risks and uncertainties, including those set forth under Item 1A — Risk Factors,

above.

Overview

Molina Healthcare, Inc. 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. We report our financial performance based on two reportable segments: Health Plans and

Molina Medicaid Solutions.

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

Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. As of December 31, 2012,

these health plans served approximately 1.8 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. Our direct delivery business consists of primary care clinics in California,

Florida, New Mexico and Washington; additionally, we manage three county-owned primary care clinics under a

contract with Fairfax County, Virginia.

Our health plans’ state Medicaid contracts generally have terms of three to four years with annual

adjustments to premium rates. These contracts are renewable 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. 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,

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 prior contract with the state expired without renewal on June 30, 2012 subject to certain

transition obligations. As of December 31, 2012, we continued to process claims that were incurred by the

Missouri health plan’s members through the June 30, 2012 termination date. For the six months ended June 30,

2012, our Missouri health plan contributed premium revenue of $113.8 million, or 4.1% of total premium

revenue, and comprised 79,000 members, or 4.3% of total Health Plans segment membership as of June 30,

2012.

With regard to our Ohio health plan, as a result of a lawsuit challenging the selection of several plans

including our health plan for the new Medicaid managed care program in Ohio, the Ohio Office of Medical

Assistance announced on October 5, 2012, that the operation of the program is being delayed from the previously

scheduled January 1, 2013 start date and will now commence on July 1, 2013. Following the trial court’s

dismissal of the lawsuit, the court of appeals has permitted the state of Ohio to move forward with

implementation of the new program and finalizing the provider agreements with our Ohio plan and the other

selected managed care plans.

Our state Medicaid contracts may be periodically adjusted to include or exclude certain health benefits (such

as pharmacy services, behavioral health services, or long-term care services); populations (such as the aged, blind

or disabled, or ABD); and regions or service areas. For example, our Texas health plan added significant

membership effective March 1, 2012, in service areas we had not previously served (the Hidalgo and El Paso

service areas); and among populations we had not previously served within existing service areas, such as the
Temporary Assistance for Needy Families, or TANF, population in the Dallas service area. Additionally, the
health benefits provided to our TANF and ABD members in Texas under our contracts with the state were
expanded to include inpatient facility and pharmacy services.

During fiscal year 2012, we responded to several RFPs and invitations to negotiate with respect to new
business, including proposals to serve dual eligible populations and applications to participate in the Centers for
Medicare and Medicaid Services, or CMS’, Capitated Financial Alignment Demonstration project. On
August 27, 2012, our Ohio health plan was chosen to participate in the Southwest, West Central, and Central
markets under the Ohio Integrated Care Delivery System, or ICDS. The Ohio ICDS is intended to improve care
coordination for individuals enrolled in both Medicaid and Medicare. The selection of our Ohio health plan was
made by the Ohio Department of Jobs and Family Services, or ODJFS, pursuant to the request for applications
for qualified health plans to serve in the ICDS issued in April 2012. The commencement of the ICDS is subject
to the readiness review of the selected health plans, and the execution of three-way provider agreements between
the health plans, ODJFS, and CMS. Enrollment of dual eligible members in the ICDS is expected to begin during
the second half of 2013.

On November 15, 2012, we announced that our new Illinois health plan had been chosen to serve members
in Central Illinois under the state’s Medicare-Medicaid Alignment Initiative (MMAI). The operational start date
for the program is currently scheduled for October 2013 with an effective date of January 2014. In addition to the
MMAI, we will also serve other seniors and persons with disabilities in the Medicaid Program as the state
expands the Integrated Care Program that was implemented in suburban Cook County and the five collar
counties in May of 2011.

On February 14, 2013, we announced that the Florida Agency for Health Care Administration awarded our

Florida health plan contracts in three regions under the Statewide Medicaid Managed Care Long-Term Care
program. As a result of the awards, we will now enter into a comprehensive pre-contracting assessment, with the
program currently scheduled to commence on December 1, 2013. Under the program, we will provide long-term
care benefits, including institutional and home and community-based services.

On February 11, 2013, we announced that our New Mexico health plan was selected by the New Mexico

Human Services Department, or HSD, to participate in the new Centennial Care program. In addition to
continuing to provide physical and acute health care services, under the new program our New Mexico health
plan will expand its services to provide behavioral health and long-term care services. The selection of our New
Mexico health plan was made by HSD pursuant to its request for proposals issued in August 2012. The
operational start date for the program is currently scheduled for January 2014.

On October 12, 2012, the Governor of the U.S. Virgin Islands announced a partnership in which we will
provide MMIS to the U.S. Virgin Islands through our West Virginia fiscal agent operation. The contract outlining
the sharing of our platform went through several rounds of review at the federal level and has been approved by
CMS. The partnership will benefit both the Virgin Islands and taxpayers by circumventing the costs associated
with establishing an independent system while gaining leverage from operating under a common platform. This
partnership can serve as a model for the country by demonstrating that state and territorial governments can
reduce local and federal costs by sharing such technologies for their Medicaid populations.

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:

On July 13, 2012, our Molina Medicaid Solutions segment received full federal certification of its Medicaid

Management Information System, or MMIS, in the state of Idaho from CMS. As a result of the CMS
certification, the state of Idaho is entitled to receive federal reimbursement of 75% of its MMIS operations costs
retroactive to June 1, 2010, the date that the system first began processing claims. Our MMIS in Maine received
full federal certification from CMS on December 19, 2011.

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 MMIS to another company. For the year ended December 31,
2012, our revenue under the Louisiana MMIS contract was $54.9 million, or 29.2% of total service revenue. 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 approximately $40
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, 2012, we received approximately 96% of our premium
revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contracts with state
agencies, our Medicare contracts with CMS, and our contracts with other managed care organizations for which
we operate as a subcontractor. These premium revenues are recognized in the month that members are entitled to
receive health care services. The state Medicaid programs and the federal Medicare program periodically adjust
premium rates.

For the year ended December 31, 2012, we recognized approximately 4% of our premium revenue in the
form of “birth income” — a one-time payment for the delivery of a child — from the Medicaid programs in all of
our state health plans except New Mexico. Such payments are recognized as revenue in the month the birth
occurs.

The amount of the premiums paid to us may vary substantially between states and among various

government programs. PMPM premiums for the Children’s Health Insurance Program, or CHIP, members are
generally among our lowest, with rates as low as approximately $75 PMPM in California. Premium revenues for
Medicaid members are generally higher. Among the TANF, Medicaid population — the Medicaid group that
includes mostly mothers and children — PMPM premiums range between approximately $110 in California to
$260 in Ohio. Among our 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 PMPM premiums in the aggregate, at approximately $1,200 PMPM.

indicated:

California

Florida

Michigan

Missouri (1)

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin

Total

California

Florida

Michigan

New Mexico

Ohio

Texas

Utah

Total

Washington

Population:

California

Florida

Michigan

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin

Total

Total Ending Membership by State for our Medicare Advantage Plans:

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

As of December 31,

2012

2011

2010

336,000

73,000

220,000

—

91,000

244,000

282,000

87,000

418,000

46,000

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

1,797,000

1,697,000

1,613,000

35,700

31,000

24,500

7,700

900

9,700

900

300

1,500

8,200

6,500

44,700

10,300

41,900

5,700

28,200

95,900

9,000

30,000

1,700

6,900

800

8,200

800

200

700

8,400

5,000

31,500

10,400

37,500

5,600

29,100

63,700

8,500

4,800

1,700

4,900

500

6,300

600

—

700

8,900

2,600

13,900

10,000

31,700

5,700

28,200

19,000

8,000

4,000

1,700

267,400

192,800

122,200

(1) Our contract with the state of Missouri expired without renewal on June 30, 2012

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

an 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

On July 13, 2012, our Molina Medicaid Solutions segment received full federal certification of its Medicaid

Management Information System, or MMIS, in the state of Idaho from CMS. As a result of the CMS

certification, the state of Idaho is entitled to receive federal reimbursement of 75% of its MMIS operations costs

retroactive to June 1, 2010, the date that the system first began processing claims. Our MMIS in Maine received

full federal certification from CMS on December 19, 2011.

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 MMIS to another company. For the year ended December 31,

2012, our revenue under the Louisiana MMIS contract was $54.9 million, or 29.2% of total service revenue. 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 approximately $40

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, 2012, we received approximately 96% of our premium

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

agencies, our Medicare contracts with CMS, and our contracts with other managed care organizations for which

we operate as a subcontractor. These premium revenues are recognized in the month that members are entitled to

receive health care services. The state Medicaid programs and the federal Medicare program periodically adjust

premium rates.

occurs.

For the year ended December 31, 2012, we recognized approximately 4% 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

The amount of the premiums paid to us may vary substantially between states and among various

government programs. PMPM premiums for the Children’s Health Insurance Program, or CHIP, members are

generally among our lowest, with rates as low as approximately $75 PMPM in California. Premium revenues for

Medicaid members are generally higher. Among the TANF, Medicaid population — the Medicaid group that

includes mostly mothers and children — PMPM premiums range between approximately $110 in California to

$260 in Ohio. Among our 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 PMPM premiums in the aggregate, 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 (1)
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin

Total

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

Total

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

Population:

California
Florida
Michigan
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin

Total

As of December 31,

2012

2011

2010

336,000
73,000
220,000
—
91,000
244,000
282,000
87,000
418,000
46,000

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

1,797,000 1,697,000 1,613,000

7,700
900
9,700
900
300
1,500
8,200
6,500

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

4,900
500
6,300
600
—
700
8,900
2,600

35,700

31,000

24,500

44,700
10,300
41,900
5,700
28,200
95,900
9,000
30,000
1,700

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

267,400

192,800

122,200

(1) Our contract with the state of Missouri expired without renewal on June 30, 2012

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
an 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.

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

Composition of Expenses

Health Plans Segment

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

services, general and administrative 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 manager are included in fee-for-service costs.

• Capitation: Many of our primary care physicians and a small portion of our specialists and hospitals
are paid on a capitated basis. Under capitation contracts, we typically pay a fixed PMPM payment to
the provider without regard to the frequency, extent, or nature of the medical services actually
furnished. Under capitated contracts, we remain liable for the provision of certain health care services.
Certain of our capitated contracts also contain incentive programs based on service delivery, quality of
care, utilization management, and other criteria. Capitation payments are fixed in advance of the
periods covered and are not subject to significant accounting estimates. These payments are expensed
in the period the providers are obligated to provide services. The financial risk for pharmacy services
for a small portion of our membership is delegated to capitated providers.

• Pharmacy: Pharmacy costs include all drug, injectibles, and immunization costs paid through our
pharmacy benefit manager. As noted above, drugs and injectibles not paid through our pharmacy
benefit manager are included in fee-for-service costs, except in those limited instances where we
capitate drug and injectible costs.

• Other: Other medical care costs include medically related administrative costs, certain provider

incentive costs, reinsurance cost, and other health care expense. Medically related administrative costs
include, for example, expenses relating to health education, quality assurance, case management,
disease management, and 24-hour on-call nurses. Salary and benefit costs are a substantial portion of
these expenses. For the years ended December 31, 2012, 2011, and 2010, medically related
administrative costs were approximately $127.5 million, $102.3 million, and $85.5 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 MMIS contracts. General and administrative costs consist primarily of
indirect administrative costs and business development costs.

recognition period.

2012 Financial Performance Summary

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

ended December 31, 2012, 2011, and 2010. 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, net of premium tax, because there are direct relationships

between premium revenue earned, and the cost of health care and premium taxes.

We have changed our method of calculating the medical care ratio effective December 31, 2012. We now

calculate the medical care ratio by dividing total medical care costs by premium revenue, net of premium taxes.

Previously, we did not adjust premium revenue to remove the impact of premium taxes when calculating the

medical care ratio. We made this change for all periods presented to allow better comparability of the medical

care ratio between periods for health plans operating in states where premium taxes are either increased or

decreased. Two states where we operate health plans (Michigan and California) either reduced or eliminated their

premium tax during 2012.

Total ending membership

1,797,000

1,697,000

Earnings per diluted share

Premium revenue

Service revenue

Operating income

Net income

Premium revenue

Service revenue

Investment income

Rental income

Total revenue

Medical care ratio (1)

General and administrative expense ratio

Premium tax ratio (1)

Operating income

Net income

Effective tax rate

Year Ended December 31,

2012

2011

2010

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

0.21

$5,826,491

$ 187,710

35,473

9,790

0.45

$4,603,407

$ 160,447

80,173

20,818

1.32

$3,989,909

89,809

$ 105,001

54,970

1,613,000

100.0%

96.6%

3.1%

0.1%

0.2%

89.9%

8.8%

2.8%

0.6%

0.2%

48.6%

96.5%

3.4%

0.1%

—

86.8%

8.7%

3.5%

1.7%

0.4%

67.8%

97.6%

2.2%

0.2%

—

87.6%

8.5%

3.6%

2.6%

1.3%

38.6%

(1) Medical care ratio represents medical care costs as a percentage of premium revenue, net of premium taxes;

premium tax ratio represents premium taxes as a percentage of premium revenue, net of premium taxes.

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, general and administrative 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 manager are included in fee-for-service costs.

• Capitation: Many of our primary care physicians and a small portion of our specialists and hospitals

are paid on a capitated basis. Under capitation contracts, we typically pay a fixed PMPM payment to

the provider without regard to the frequency, extent, or nature of the medical services actually

furnished. Under capitated contracts, we remain liable for the provision of certain health care services.

Certain of our capitated contracts also contain incentive programs based on service delivery, quality of

care, utilization management, and other criteria. Capitation payments are fixed in advance of the

periods covered and are not subject to significant accounting estimates. These payments are expensed

in the period the providers are obligated to provide services. The financial risk for pharmacy services

for a small portion of our membership is delegated to capitated providers.

• Pharmacy: Pharmacy costs include all drug, injectibles, and immunization costs paid through our

pharmacy benefit manager. As noted above, drugs and injectibles not paid through our pharmacy

benefit manager are included in fee-for-service costs, except in those limited instances where we

capitate drug and injectible costs.

• Other: Other medical care costs include medically related administrative costs, certain provider

incentive costs, reinsurance cost, and other health care expense. Medically related administrative costs

include, for example, expenses relating to health education, quality assurance, case management,

disease management, and 24-hour on-call nurses. Salary and benefit costs are a substantial portion of

these expenses. For the years ended December 31, 2012, 2011, and 2010, medically related

administrative costs were approximately $127.5 million, $102.3 million, and $85.5 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 MMIS contracts. 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.

2012 Financial Performance Summary

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

ended December 31, 2012, 2011, and 2010. 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, net of premium tax, because there are direct relationships
between premium revenue earned, and the cost of health care and premium taxes.

We have changed our method of calculating the medical care ratio effective December 31, 2012. We now
calculate the medical care ratio by dividing total medical care costs by premium revenue, net of premium taxes.
Previously, we did not adjust premium revenue to remove the impact of premium taxes when calculating the
medical care ratio. We made this change for all periods presented to allow better comparability of the medical
care ratio between periods for health plans operating in states where premium taxes are either increased or
decreased. Two states where we operate health plans (Michigan and California) either reduced or eliminated their
premium tax during 2012.

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

Total revenue

Medical care ratio (1)
General and administrative expense ratio
Premium tax ratio (1)
Operating income
Net income
Effective tax rate

Year Ended December 31,

2012

2011

2010

(Dollar amounts in thousands, except per-share data)
$
$
1.32
0.21
$3,989,909
$5,826,491
$
$ 187,710
89,809
$ 105,001
35,473
$
54,970
9,790
$
$
1,613,000
1,797,000

$
0.45
$4,603,407
$ 160,447
80,173
$
20,818
$
1,697,000

96.6%
3.1%
0.1%
0.2%

96.5%
3.4%
0.1%
—

97.6%
2.2%
0.2%
—

100.0%

89.9%
8.8%
2.8%
0.6%
0.2%
48.6%

86.8%
8.7%
3.5%
1.7%
0.4%
67.8%

87.6%
8.5%
3.6%
2.6%
1.3%
38.6%

(1) Medical care ratio represents medical care costs as a percentage of premium revenue, net of premium taxes;
premium tax ratio represents premium taxes as a percentage of premium revenue, net of premium taxes.

Earnings before Interest, Taxes, Depreciation and Amortization, or EBITDA

We calculate a non-GAAP measure, EBITDA, which management uses 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. The reconciliation of this non-GAAP to GAAP financial measure is as follows (GAAP stands for U.S.
generally accepted accounting principles):

Net income
Add back:
Depreciation and amortization reported in the consolidated statements of cash

flows

Interest expense
Provision for income taxes

EBITDA (1)

Year Ended December 31,

2012

2011

2010

(In thousands)
$ 9,790 $ 20,818 $ 54,970

78,764
16,769
9,275

74,383
15,519
43,836

60,765
15,509
34,522

$114,598 $154,556 $165,766

(1) 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.

Year Ended December 31, 2012 Compared with the Year Ended December 31, 2011

Fiscal Year 2012 Overview and Highlights

Earnings decreased in 2012 compared with 2011 because lower margins in the Health Plans segment more

than offset higher premium revenue. Net income for the year ended December 31, 2012, was $9.8 million, or
$0.21 per diluted share, compared with net income of $20.8 million, or $0.45 per diluted share, for the year ended
December 31, 2011. Results for the quarter and year ended December 31, 2011, were affected by an impairment
charge of $64.6 million related to our Missouri health plan.

Lower net income in 2012 was in large part tied to growth in our ABD membership in California and Texas,

where margins were considerably lower than our margins in the aggregate. During 2012, both California and
Texas transitioned large numbers of ABD members from fee-for-service reimbursement to managed care
contracts. It has been our experience that members transitioning from fee-for-service reimbursement to managed
care often bring with them pent up demand for medical services; and that the realization of both improved
medical outcomes and costs savings from the application of managed care practices takes time as both members
and providers acquaint themselves to new ways of accessing and providing care.

The initial reduction to margins associated with the transition of members from fee-for-service

reimbursement to managed care was exacerbated by premium rates that assumed unrealistic costs savings from
managed care practices. Premium rate increases received later in 2012 at least partially addressed this issue.

Those rate increases, together with the improved health outcomes and the gradual reduction in medical costs

resulting from the application of managed care practices, produced improved financial results in the fourth
quarter of 2012. Nevertheless, the aggregate impact of the ABD membership transitioned in 2012 was to
substantially reduce margins. We believe, however, that in time the higher premium revenue associated with
ABD members will allow us to earn acceptable returns on a total dollar basis even if percentage margins remain
lower than those earned by serving TANF members, for whom PMPM revenue is much lower.

Health Plans Segment

Premium Revenue

Premium revenue grew 27% in the year ended December 31, 2012, compared with the year ended

December 31, 2011, primarily due to a shift in member mix to populations generating higher premium revenue

PMPM, benefit expansions, and an increase in membership. Medicare premium revenue was $468 million in the

year ended December 31, 2012, compared with $388 million in the year ended December 31, 2011.

Growth in our ABD membership led to higher premium revenue PMPM in 2012. ABD membership, as a

percent of total membership, has increased approximately 31% year over year. Premium revenue PMPM also

increased in the year ended December 31, 2012, as a result of the inclusion of revenue from the pharmacy benefit

for our Ohio health plan effective October 1, 2011, and as a result of the inclusion of revenue for the inpatient

facility and pharmacy benefits across all of our Texas health plan membership effective March 1, 2012.

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,

2012

2011

Amount

PMPM

Amount

PMPM

$3,521,960

$162.60

69.1% $2,764,309

$139.02

71.6%

557,087

835,830

181,883

25.72

38.59

8.39

518,835

418,007

158,843

26.09

21.02

8.00

% of

Total

13.4

10.8

4.2

% of

Total

10.9

16.4

3.6

$5,096,760

$235.30

100.0% $3,859,994

$194.13

100.0%

Medical care costs increased in 2012 primarily due to the same shifts in member mix and the benefit

expansions that led to increased premium revenue, particularly in California and Texas. Medical care costs as a

percentage of premium revenue, net of premium taxes (the medical care ratio) also increased in 2012 when

compared with 2011 because increases in premium rates have not kept pace with increases in medical costs.

Individual Health Plan Analysis

Membership and premium revenue increased significantly at the Texas health plan in 2012 as a result of the

transition of large numbers of ABD, TANF and CHIP members from fee-for-service reimbursement into

managed care effective March 1, 2012. Also on that date inpatient facility and pharmacy benefits that had

previously been reimbursed through fee for service for managed care members were transitioned into managed

care contracts; further increasing premium revenue and related medical costs. As noted above, margins on newly

transitioned ABD members were considerably less than those experienced by the Company overall. The medical

care ratio for the Texas health plan’s ABD membership in total was approximately 97.8% for all of 2012.

Nevertheless, the medical care ratio for the Texas health plan overall decreased to 93.7% for all of 2012

compared with 95.1% for 2011.

The medical care ratio at the California health plan increased significantly in 2012, to 91.1% in 2012 from

86.9% in 2011. As noted above, margins on newly transitioned ABD members were considerably less than those

experienced by the Company overall.

The medical care ratio of the Florida health plan decreased to 85.3% in 2012, from 91.9% in 2011 due to a

premium rate increase effective September 1, 2011, the re-contracting of portions of the health plan’s specialty

care network, lower inpatient utilization and lower pharmacy costs.

Earnings before Interest, Taxes, Depreciation and Amortization, or EBITDA

We calculate a non-GAAP measure, EBITDA, which management uses 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. The reconciliation of this non-GAAP to GAAP financial measure is as follows (GAAP stands for U.S.

generally accepted accounting principles):

Depreciation and amortization reported in the consolidated statements of cash

Net income

Add back:

flows

Interest expense

Provision for income taxes

EBITDA (1)

Year Ended December 31,

2012

2011

2010

(In thousands)

9,790

$ 20,818

$ 54,970

78,764

16,769

9,275

74,383

15,519

43,836

60,765

15,509

34,522

$114,598

$154,556

$165,766

(1) 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.

Year Ended December 31, 2012 Compared with the Year Ended December 31, 2011

Fiscal Year 2012 Overview and Highlights

Earnings decreased in 2012 compared with 2011 because lower margins in the Health Plans segment more

than offset higher premium revenue. Net income for the year ended December 31, 2012, was $9.8 million, or

$0.21 per diluted share, compared with net income of $20.8 million, or $0.45 per diluted share, for the year ended

December 31, 2011. Results for the quarter and year ended December 31, 2011, were affected by an impairment

charge of $64.6 million related to our Missouri health plan.

Lower net income in 2012 was in large part tied to growth in our ABD membership in California and Texas,

where margins were considerably lower than our margins in the aggregate. During 2012, both California and

Texas transitioned large numbers of ABD members from fee-for-service reimbursement to managed care

contracts. It has been our experience that members transitioning from fee-for-service reimbursement to managed

care often bring with them pent up demand for medical services; and that the realization of both improved

medical outcomes and costs savings from the application of managed care practices takes time as both members

and providers acquaint themselves to new ways of accessing and providing care.

The initial reduction to margins associated with the transition of members from fee-for-service

reimbursement to managed care was exacerbated by premium rates that assumed unrealistic costs savings from

managed care practices. Premium rate increases received later in 2012 at least partially addressed this issue.

Those rate increases, together with the improved health outcomes and the gradual reduction in medical costs

resulting from the application of managed care practices, produced improved financial results in the fourth

quarter of 2012. Nevertheless, the aggregate impact of the ABD membership transitioned in 2012 was to

substantially reduce margins. We believe, however, that in time the higher premium revenue associated with

ABD members will allow us to earn acceptable returns on a total dollar basis even if percentage margins remain

lower than those earned by serving TANF members, for whom PMPM revenue is much lower.

Health Plans Segment

Premium Revenue

Premium revenue grew 27% in the year ended December 31, 2012, compared with the year ended

December 31, 2011, primarily due to a shift in member mix to populations generating higher premium revenue
PMPM, benefit expansions, and an increase in membership. Medicare premium revenue was $468 million in the
year ended December 31, 2012, compared with $388 million in the year ended December 31, 2011.

Growth in our ABD membership led to higher premium revenue PMPM in 2012. ABD membership, as a
percent of total membership, has increased approximately 31% year over year. Premium revenue PMPM also
increased in the year ended December 31, 2012, as a result of the inclusion of revenue from the pharmacy benefit
for our Ohio health plan effective October 1, 2011, and as a result of the inclusion of revenue for the inpatient
facility and pharmacy benefits across all of our Texas health plan membership effective March 1, 2012.

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,

2012

2011

Amount

PMPM

$3,521,960
557,087
835,830
181,883

$162.60
25.72
38.59
8.39

% of
Total

Amount

PMPM

69.1% $2,764,309
518,835
10.9
418,007
16.4
158,843
3.6

$139.02
26.09
21.02
8.00

% of
Total

71.6%
13.4
10.8
4.2

$5,096,760

$235.30

100.0% $3,859,994

$194.13

100.0%

Medical care costs increased in 2012 primarily due to the same shifts in member mix and the benefit
expansions that led to increased premium revenue, particularly in California and Texas. Medical care costs as a
percentage of premium revenue, net of premium taxes (the medical care ratio) also increased in 2012 when
compared with 2011 because increases in premium rates have not kept pace with increases in medical costs.

Individual Health Plan Analysis

Membership and premium revenue increased significantly at the Texas health plan in 2012 as a result of the

transition of large numbers of ABD, TANF and CHIP members from fee-for-service reimbursement into
managed care effective March 1, 2012. Also on that date inpatient facility and pharmacy benefits that had
previously been reimbursed through fee for service for managed care members were transitioned into managed
care contracts; further increasing premium revenue and related medical costs. As noted above, margins on newly
transitioned ABD members were considerably less than those experienced by the Company overall. The medical
care ratio for the Texas health plan’s ABD membership in total was approximately 97.8% for all of 2012.
Nevertheless, the medical care ratio for the Texas health plan overall decreased to 93.7% for all of 2012
compared with 95.1% for 2011.

The medical care ratio at the California health plan increased significantly in 2012, to 91.1% in 2012 from

86.9% in 2011. As noted above, margins on newly transitioned ABD members were considerably less than those
experienced by the Company overall.

The medical care ratio of the Florida health plan decreased to 85.3% in 2012, from 91.9% in 2011 due to a
premium rate increase effective September 1, 2011, the re-contracting of portions of the health plan’s specialty
care network, lower inpatient utilization and lower pharmacy costs.

The medical care ratio of the Michigan health plan increased to 88.3% in 2012, from 86.3% in 2011. The
primary reason for the increase in the medical care ratio in 2012 was a reduction to premium rates linked to a
decrease in premium taxes effective April 1, 2012. The result was a higher medical care ratio in 2012 because
premium revenue decreased. There was no impact on profitability because premium tax expense was reduced by
the same amount as premium revenue. The remainder of the deterioration in the Michigan plan’s medical care
ratio was the result of higher pharmacy and fee for service costs. We received a blended rate increase in
Michigan of approximately 2%, effective October 1, 2012.

The medical care ratio of the New Mexico health plan increased to 84.7% in 2012, from 82.4% in 2011,
primarily as a result of lower premiums and higher inpatient facility costs. The New Mexico health plan received
a premium rate reduction of approximately 2.5% effective July 1, 2011.

The medical care ratio of the Ohio health plan increased to 88.6% in 2012, from 84.1% in 2011. The

increase in the Ohio health plan’s medical care ratio was partially the result of a 2% rate reduction effective
January 1, 2012, together with the assumption of the lower margin pharmacy benefit effective October 1, 2011.

The medical care ratio of the Utah health plan increased to 82.3% in 2012 from 78.1% in 2011. The Utah

health plan received a premium rate reduction of approximately 2% effective July 1, 2012.

The addition of ABD members to the Washington health plan effective July 1, 2012 increased its medical
care ratio to 86.8% in the 2012, compared with 85.4% in 2011. The higher premium revenue PMPM associated
with the ABD membership, however, offset the increased medical care ratio so that income from operations was
consistent between 2012 and 2011.

The medical care ratio of the Wisconsin health plan increased to 96.2% in 2012, compared with 92.5% in

2011 primarily due to increases in inpatient costs. The plan has implemented provider contracting initiatives and
new utilization management techniques as a part of its efforts to improve profitability.

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):

California

Florida

Michigan

Missouri (2)

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin

Other (3)

Year Ended December 31, 2011

Member

Months (1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Premium

Tax Expense

MCR Excluding

Premium Tax

Expense (4)

$ 575,176 $137.27

$ 493,419 $117.75

7,499

86.9%

4,190

788

2,660

959

1,074

2,966

1,616

972

4,171

488

—

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

—

38,733

—

9,285

76,677

7,117

—

14,865

328

91.9

86.3

85.3

82.4

84.1

95.1

78.1

85.4

92.5

—

19,884

$4,603,407 $231.51

$3,859,994 $194.13

$154,589

86.8%

(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.

(2) Our contract with the state of Missouri expired without renewal on June 30, 2012. The Missouri health

plan’s claims run-out activity subsequent to June 30, 2012, is reported in “Other.”

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

(4) The “MCR Excluding Premium Tax Expense” represents medical costs as a percentage of premium

revenues, where premium revenue is reduced by premium tax expense.

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,

2012

2011

2010

40 days

122,700

40 days

111,100

42 days

143,600

$255,200

$207,600

$218,900

Member
Months (1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Premium
Tax Expense

MCR Excluding
Premium Tax
Expense (4)

Performance of the Molina Medicaid Solutions segment was as follows:

Year Ended December 31, 2012

Molina Medicaid Solutions Segment

California
Florida
Michigan
Missouri (2)
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin
Other (3)

4,177
850
2,639
483
1,069
3,065
3,245
1,026
4,600
508
—

$ 671,489 $160.77 $ 606,494 $145.20
229.80
216.20
234.15
262.03
316.69
356.08
239.41
183.87
133.91
—

228,828
658,741
113,818
338,770
1,187,422
1,255,722
298,392
992,748
70,673
9,888

195,226
570,636
113,101
280,108
970,504
1,155,433
245,671
845,733
67,968
45,886

269.36
249.59
236.87
316.90
387.48
386.99
290.78
215.83
139.24
—

$ 5,697
(4)
12,190
—
8,208
92,285
22,101
—
18,036
(5)
483

21,662

$5,826,491 $268.99 $5,096,760 $235.30

$158,991

91.1%
85.3
88.3
99.4
84.7
88.6
93.7
82.3
86.8
96.2
—

89.9%

Service revenue before amortization

Amortization recorded as reduction of service revenue

Service revenue

Cost of service revenue

General and administrative costs

Operating income

Amortization of customer relationship intangibles recorded as amortization

Year Ended December 31,

2012

2011

(In thousands)

$189,281

$167,269

(1,571)

(6,822)

187,710

141,208

17,648

5,127

160,447

143,987

9,270

5,127

$ 23,727

2,063

Operating income for our Molina Medicaid Solutions segment improved $21.7 million for the year ended

December 31, 2012, compared with 2011. This improvement was primarily the result of stabilization of our

newest contracts in Idaho and Maine.

The medical care ratio of the Michigan health plan increased to 88.3% in 2012, from 86.3% in 2011. The

primary reason for the increase in the medical care ratio in 2012 was a reduction to premium rates linked to a

decrease in premium taxes effective April 1, 2012. The result was a higher medical care ratio in 2012 because

premium revenue decreased. There was no impact on profitability because premium tax expense was reduced by

the same amount as premium revenue. The remainder of the deterioration in the Michigan plan’s medical care

ratio was the result of higher pharmacy and fee for service costs. We received a blended rate increase in

Michigan of approximately 2%, effective October 1, 2012.

The medical care ratio of the New Mexico health plan increased to 84.7% in 2012, from 82.4% in 2011,

primarily as a result of lower premiums and higher inpatient facility costs. The New Mexico health plan received

a premium rate reduction of approximately 2.5% effective July 1, 2011.

The medical care ratio of the Ohio health plan increased to 88.6% in 2012, from 84.1% in 2011. The

increase in the Ohio health plan’s medical care ratio was partially the result of a 2% rate reduction effective

January 1, 2012, together with the assumption of the lower margin pharmacy benefit effective October 1, 2011.

The medical care ratio of the Utah health plan increased to 82.3% in 2012 from 78.1% in 2011. The Utah

health plan received a premium rate reduction of approximately 2% effective July 1, 2012.

The addition of ABD members to the Washington health plan effective July 1, 2012 increased its medical

care ratio to 86.8% in the 2012, compared with 85.4% in 2011. The higher premium revenue PMPM associated

with the ABD membership, however, offset the increased medical care ratio so that income from operations was

consistent between 2012 and 2011.

The medical care ratio of the Wisconsin health plan increased to 96.2% in 2012, compared with 92.5% in

2011 primarily due to increases in inpatient costs. The plan has implemented provider contracting initiatives and

new utilization management techniques as a part of its efforts to improve profitability.

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):

California

Florida

Michigan

Missouri (2)

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin

Other (3)

Member

Months (1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Premium

Tax Expense

MCR Excluding

Premium Tax

Expense (4)

$ 671,489 $160.77 $ 606,494

$145.20

$ 5,697

91.1%

4,177

850

2,639

483

1,069

3,065

3,245

1,026

4,600

508

—

228,828

658,741

113,818

338,770

1,187,422

1,255,722

298,392

992,748

70,673

9,888

269.36

249.59

236.87

316.90

387.48

386.99

290.78

215.83

139.24

—

195,226

570,636

113,101

280,108

970,504

1,155,433

245,671

845,733

67,968

45,886

229.80

216.20

234.15

262.03

316.69

356.08

239.41

183.87

133.91

—

(4)

12,190

—

8,208

92,285

22,101

—

18,036

(5)

483

85.3

88.3

99.4

84.7

88.6

93.7

82.3

86.8

96.2

—

21,662

$5,826,491 $268.99 $5,096,760

$235.30

$158,991

89.9%

Member
Months (1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Premium
Tax Expense

MCR Excluding
Premium Tax
Expense (4)

Year Ended December 31, 2011

California
Florida
Michigan
Missouri (2)
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin
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
—

$ 7,499
41
38,733
—
9,285
76,677
7,117
—
14,865
44
328

19,884

$4,603,407 $231.51 $3,859,994 $194.13

$154,589

86.9%
91.9
86.3
85.3
82.4
84.1
95.1
78.1
85.4
92.5
—

86.8%

plan’s claims run-out activity subsequent to June 30, 2012, is reported in “Other.”

(3) “Other” medical care costs also include medically related administrative costs of the parent company.
(4) The “MCR Excluding Premium Tax Expense” represents medical costs as a percentage of premium

revenues, where premium revenue is reduced by premium tax expense.

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,

2012

2011

2010

42 days
40 days
40 days
122,700
143,600
111,100
$255,200 $207,600 $218,900

Year Ended December 31, 2012

Molina Medicaid Solutions 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

Year Ended December 31,

2012

2011

(In thousands)

$189,281
(1,571)

$167,269
(6,822)

187,710
141,208
17,648
5,127

160,447
143,987
9,270
5,127

$ 23,727

$ 2,063

Operating income for our Molina Medicaid Solutions segment improved $21.7 million for the year ended

December 31, 2012, compared with 2011. This improvement was primarily the result of stabilization of our
newest contracts in Idaho and Maine.

Consolidated Expenses

General and Administrative Expenses

General and administrative expenses increased to 8.8% of total revenue for the year ended December 31,

2012, compared with 8.7% of total revenue for the year ended December 31, 2011.

Premium Tax Expense

Premium tax expense decreased to 2.8% of premium revenue net of premium tax for the year ended
December 31, 2012, compared with 3.5% of total premium revenue for the year ended December 31, 2011. The
decrease in 2012 was primarily due to the reduction of premium taxes at the Michigan and California health
plans effective in 2012, and the growth in revenue at our Texas health plan, which is subject to a lower premium
tax rate (measured as a percentage of premium revenue) than our consolidated average.

Depreciation and Amortization

Depreciation and amortization related to our Health Plans segment is all recorded in “Depreciation and

Amortization” in the consolidated statements of income. Depreciation and amortization related to our Molina
Medicaid Solutions segment is recorded within three different headings in the consolidated statements of income
as follows:

• Amortization of purchased intangibles relating to customer relationships is reported as amortization

within the heading “Depreciation and amortization;”

• Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of

“Service revenue;” and

• Depreciation is recorded within the heading “Cost of service revenue.”

The following table presents all depreciation and amortization recorded in our consolidated statements of
income, regardless of whether the item appears as depreciation and amortization, a reduction of revenue, or as
cost of service revenue.

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,

2012

2011

Amount

% of Total
Revenue

Amount

% of Total
Revenue

$43,201
20,503

(Dollar amounts in thousands)
0.7% $30,864
19,826
0.3

0.7%
0.4

63,704
1,571

1.0
—

50,690
6,822

13,489

0.2

16,871

1.1
0.1

0.4

$78,764

1.2% $74,383

1.6%

Impairment of Goodwill and Intangible Assets

We did not record an impairment charge in 2012. On February 17, 2012, our Missouri health plan was
notified that it was not awarded a new contract under the state’s RFP, and therefore its contract expired on
June 30, 2012. As a result, we recorded a non-cash impairment charge of approximately $64.6 million, or $1.34
per diluted share, in the fourth quarter of 2011. Of the total charge, $58.5 million was not tax deductible,
resulting in a disproportionate impact to net income and to the effective tax rate.

Interest expense was $16.8 million for the year ended December 31, 2012, compared with $15.5 million for

the year ended December 31, 2011. Interest expense includes non-cash interest expense relating to our

convertible senior notes, which amounted to $5.9 million and $5.5 million for the years ended December 31,

Interest Expense

2012 and 2011, respectively.

Income Taxes

Income tax expense is recorded at an effective rate of 48.6% for the year ended December 31, 2012,

compared with 67.8% for the year ended December 31, 2011. The effective rate for the year ended December 31,

2012 is higher than our statutory rate primarily due to nondeductible expenses primarily relating to compensation

and changes in the fair value of contingent consideration. The effective rate for the year ended December 31,

2011 reflects the nondeductible nature of the majority of the Missouri impairment charge and certain discrete tax

benefits.

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. 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 86.8%, compared with a medical care ratio of 87.6% for fiscal year 2010.

Health Plans Segment

Premium Revenue

Premium revenue increased 15.4% in the year ended December 31, 2011, compared with the year ended

December 31, 2010, 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 million for the year ended December 31, 2011, compared with $265

million for the year ended December 31, 2010.

Consolidated Expenses

General and Administrative Expenses

General and administrative expenses increased to 8.8% of total revenue for the year ended December 31,

2012, compared with 8.7% of total revenue for the year ended December 31, 2011.

Premium Tax Expense

Premium tax expense decreased to 2.8% of premium revenue net of premium tax for the year ended

December 31, 2012, compared with 3.5% of total premium revenue for the year ended December 31, 2011. The

decrease in 2012 was primarily due to the reduction of premium taxes at the Michigan and California health

plans effective in 2012, and the growth in revenue at our Texas health plan, which is subject to a lower premium

tax rate (measured as a percentage of premium revenue) than our consolidated average.

Depreciation and Amortization

Depreciation and amortization related to our Health Plans segment is all recorded in “Depreciation and

Amortization” in the consolidated statements of income. Depreciation and amortization related to our Molina

Medicaid Solutions segment is recorded within three different headings in the consolidated statements of income

as follows:

• Amortization of purchased intangibles relating to customer relationships is reported as amortization

within the heading “Depreciation and amortization;”

• Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of

“Service revenue;” and

• Depreciation is recorded within the heading “Cost of service revenue.”

The following table presents all depreciation and amortization recorded in our consolidated statements of

income, regardless of whether the item appears as depreciation and amortization, a reduction of revenue, or as

cost of service revenue.

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,

2012

2011

Amount

% of Total

Revenue

Amount

% of Total

Revenue

(Dollar amounts in thousands)

$43,201

20,503

0.7% $30,864

0.3

19,826

0.7%

0.4

63,704

1,571

1.0

—

50,690

6,822

13,489

0.2

16,871

$78,764

1.2% $74,383

1.6%

1.1

0.1

0.4

Impairment of Goodwill and Intangible Assets

We did not record an impairment charge in 2012. On February 17, 2012, our Missouri health plan was

notified that it was not awarded a new contract under the state’s RFP, and therefore its contract expired on

June 30, 2012. As a result, we recorded a non-cash impairment charge of approximately $64.6 million, or $1.34

per diluted share, in the fourth quarter of 2011. Of the total charge, $58.5 million was not tax deductible,

resulting in a disproportionate impact to net income and to the effective tax rate.

Interest Expense

Interest expense was $16.8 million for the year ended December 31, 2012, compared with $15.5 million for

the year ended December 31, 2011. Interest expense includes non-cash interest expense relating to our
convertible senior notes, which amounted to $5.9 million and $5.5 million for the years ended December 31,
2012 and 2011, respectively.

Income Taxes

Income tax expense is recorded at an effective rate of 48.6% for the year ended December 31, 2012,

compared with 67.8% for the year ended December 31, 2011. The effective rate for the year ended December 31,
2012 is higher than our statutory rate primarily due to nondeductible expenses primarily relating to compensation
and changes in the fair value of contingent consideration. The effective rate for the year ended December 31,
2011 reflects the nondeductible nature of the majority of the Missouri impairment charge and certain discrete tax
benefits.

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. 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 86.8%, compared with a medical care ratio of 87.6% for fiscal year 2010.

Health Plans Segment

Premium Revenue

Premium revenue increased 15.4% in the year ended December 31, 2011, compared with the year ended

December 31, 2010, 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 million for the year ended December 31, 2011, compared with $265
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 86.8% for the year ended December 31, 2011, compared with 87.6% for

December 31, 2011 compared with the year ended December 31, 2010. Higher fee-for-service and pharmacy

the year ended December 31, 2010.

costs were offset by lower capitation costs.

The medical care ratio of the California health plan increased to 86.9% for the year ended December 31,

2011, from 84.6% 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
behavioral 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 86.3% for the year ended December 31,
2011, from 89.3% 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 82.4% for the year ended December 31,
2011, from 82.7% 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 that 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 84.1% for the year ended December 31, 2011,

from 85.9% 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 95.1% for the year ended December 31, 2011,
from 87.7% 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 87.2% 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 85.4% for the year ended

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.

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):

California

Florida

Michigan

Missouri (2)

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin

Other (3)

Year Ended December 31, 2011

Member

Months (1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Premium

Tax Expense

MCR Excluding

Premium Tax

Expense (4)

$ 575,176 $137.27

$ 493,419 $117.75

7,499

86.9%

4,190

788

2,660

959

1,074

2,966

1,616

972

4,171

488

—

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

—

38,733

—

9,285

76,677

7,117

—

14,865

328

91.9

86.3

85.3

82.4

84.1

95.1

78.1

85.4

92.5

—

19,884

$4,603,407 $231.51

$3,859,994 $194.13

$154,589

86.8%

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 86.8% for the year ended December 31, 2011, compared with 87.6% for

the year ended December 31, 2010.

The medical care ratio of the California health plan increased to 86.9% for the year ended December 31,

2011, from 84.6% 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

behavioral 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 86.3% for the year ended December 31,

2011, from 89.3% 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 82.4% for the year ended December 31,

2011, from 82.7% 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 that 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 84.1% for the year ended December 31, 2011,

from 85.9% 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 95.1% for the year ended December 31, 2011,

from 87.7% 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 87.2% 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 85.4% 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.

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):

Member
Months (1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Premium
Tax Expense

MCR Excluding
Premium Tax
Expense (4)

Year Ended December 31, 2011

California
Florida
Michigan
Missouri (2)
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin
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
—

187,358
537,779
195,832
277,338
766,949
382,390
224,513
690,513
64,346
39,557

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
—

$ 7,499
41
38,733
—
9,285
76,677
7,117
—
14,865
44
328

19,884

$4,603,407 $231.51 $3,859,994 $194.13

$154,589

86.9%
91.9
86.3
85.3
82.4
84.1
95.1
78.1
85.4
92.5
—

86.8%

Member
Months (1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Premium
Tax Expense

MCR Excluding
Premium Tax
Expenses (4)

Year Ended December 31, 2010

Premium Tax Expense

Premium tax expense decreased to 3.5% of premium revenue net of premium tax for the year ended

December 31, 2011, compared with 3.6% for December 31, 2010.

18,340

$3,989,909 $217.56 $3,370,857 $183.80

$139,775

256.87
232.66
222.98
332.02
305.42
266.72
280.27
183.27
224.75
—

84.6%
95.4
89.3
85.5
82.7
85.9
87.7
91.3
85.4
91.8
—

87.6%

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

$ 6,912
1
39,187
—
9,300
67,358
3,251
—
13,513
—
253

California
Florida
Michigan
Missouri (2)
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin
Other (3)

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
—

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

Year Ended December 31,

2011

2010

Amount

% of Total

Revenue

Amount

% of Total

Revenue

(Dollar amounts in thousands)

0.7% $27,230

$30,864

19,826

50,690

6,822

16,871

0.4

1.1

0.1

0.4

18,474

45,704

8,316

6,745

0.7%

0.4

1.1

0.2

$74,383

1.6% $60,765

1.5%

Impairment of Goodwill and Intangible Assets

On February 17, 2012, our Missouri health plan was notified that it was not awarded a new contract under

the state’s RFP, and therefore its contract expired on June 30, 2012. As a result, we recorded a non-cash

impairment charge of approximately $64.6 million, or $1.34 per diluted share, in the fourth quarter of 2011. Of

the total charge, $58.5 million is not tax deductible, resulting in a disproportionate impact to net income and the

effective tax rate. We did not record an impairment charge in 2010.

Interest expense was $15.5 million for each of 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 was 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%.

Interest Expense

Income Taxes

Acquisitions

(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2) Our contract with the state of Missouri expired without renewal on June 30, 2012.
(3) “Other” medical care costs also include medically related administrative costs at the parent company.
(4) The “MCR Excluding Premium Tax Expense” represents medical costs as a percentage of premium

revenues, where premium revenue is reduced by premium tax expense.

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

Year Ended
December 31, 2011

Eight Months Ended
December 31, 2010

(In thousands)

$167,269
(6,822)

160,447
143,987
9,270
5,127

$98,125
(8,316)

89,809
78,647
5,135
3,418

Operating income

$ 2,063

$ 2,609

For the year ended December 31, 2011, cost of service revenue included $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.

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

California

Florida

Michigan

Missouri (2)

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin

Other (3)

Year Ended December 31, 2010

Member

Months (1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Premium

Tax Expense

MCR Excluding

Premium Tax

Expenses (4)

$ 506,871 $120.77 $ 423,021

$100.79

$ 6,912

84.6%

4,197

664

2,708

946

1,104

2,817

4,141

708

921

134

—

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

—

39,187

—

9,300

67,358

3,251

—

13,513

—

253

95.4

89.3

85.5

82.7

85.9

87.7

91.3

85.4

91.8

—

18,340

$3,989,909 $217.56 $3,370,857

$183.80

$139,775

87.6%

(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.

(2) Our contract with the state of Missouri expired without renewal on June 30, 2012.

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

(4) The “MCR Excluding Premium Tax Expense” represents medical costs as a percentage of premium

revenues, where premium revenue is reduced by premium tax expense.

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:

Year Ended

December 31, 2011

Eight Months Ended

December 31, 2010

(In thousands)

$167,269

(6,822)

160,447

143,987

9,270

5,127

$98,125

(8,316)

89,809

78,647

5,135

3,418

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

2,063

$ 2,609

For the year ended December 31, 2011, cost of service revenue included $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

Premium Tax Expense

Premium tax expense decreased to 3.5% of premium revenue net of premium tax for the year ended

December 31, 2011, compared with 3.6% for December 31, 2010.

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

Year Ended December 31,

2011

2010

Amount

% of Total
Revenue

Amount

% of Total
Revenue

$30,864
19,826

(Dollar amounts in thousands)
0.7% $27,230
18,474
0.4

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

On February 17, 2012, our Missouri health plan was notified that it was not awarded a new contract under

the state’s RFP, and therefore its contract expired on June 30, 2012. As a result, we recorded a non-cash
impairment charge of approximately $64.6 million, or $1.34 per diluted share, in the fourth quarter of 2011. Of
the total charge, $58.5 million is not tax deductible, resulting in a disproportionate impact to net income and the
effective tax rate. We did not record an impairment charge in 2010.

Interest Expense

Interest expense was $15.5 million for each of 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 was 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%.

Acquisitions

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.

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.

Other Transactions

As described above, our Missouri health plan, Alliance for Community Health, LLC, or ACH, was not
awarded a contract under the Missouri HealthNet Managed Care Request for Proposal; therefore, our Missouri
health plan’s prior contract with the state (the “MC+ Contract”) expired without renewal on June 30, 2012,
subject to certain transition obligations which terminate 365 days after June 30, 2012. ACH intends to enter into
an assignment and assumption agreement with another one of our wholly owned subsidiaries, Molina Healthcare
of Illinois, Inc., or Molina Illinois, pursuant to which ACH intends to assign to Molina Illinois substantially all of
its assets and liabilities, including its surviving rights, duties and obligations, including all of the post-expiration
duties and services under the MC+ Contract. Such assignment is subject to prior approval by the Missouri
Department of Insurance, Financial Institutions and Professional Registration, the Illinois Department of
Insurance, and the written consent of Mo HealthNet. Subsequent to the effectiveness of the assignment and
assumption agreement between ACH and Molina Illinois and ACH’s surrender of its Missouri certificate of
authority, we intend to abandon our equity interests in ACH to an unrelated entity. Subject to appropriate
regulatory approvals discussed above, ACH will retain certain assets and investments, to which we will no longer
have access after the abandonment transaction is effected and which amounts we intend to write off.

Liquidity and Capital Resources

Introduction

We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our

business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to
enable prudent investment management and financing within the confines of our financial strategy.

Our regulated subsidiaries generate significant cash flows from premium revenue. Such cash flows are our

primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our
liquidity. We generally receive premium revenue 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, and
marketable debt securities to improve our overall investment return. These investments are made pursuant to
board approved investment policies which conform to applicable state laws and regulations. Our investment
policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a
manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may
invest. These investment policies require that our investments have final maturities of 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, 2012, 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 $5.2 million for the year ended December 31, 2012, compared with $5.5

million for the year ended December 31, 2011. Our annualized portfolio yields for the years ended December 31,

2012, 2011, and 2010 were 0.5%, 0.6%, and 0.7%, 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. See further discussion below, under Regulatory Capital and Dividend Restrictions.

Liquidity

Cash provided by operating activities was $347.8 million in 2012 compared with $225.4 million in 2011, an

increase of $122.4 million. In 2012, deferred revenue was a source of cash from operations amounting to $90.9

million, compared with a use of cash amounting to $8.2 million in 2011. This increase was primarily due to an

increase in deferred revenue relating to an advance premium payment received by our Washington health plan in

December 2012. In 2011, cash provided by operating activities was $225.4 million compared with $161.4 million

for 2010, an increase of $64.0 million. This increase was primarily due to higher operating income before giving

effect to the $64.6 million non-cash impairment of goodwill and intangible assets relating to our Missouri health

plan’s state contract termination recorded in the fourth quarter of 2011.

Cash used in investing activities was $93.6 million in 2012 compared with $236.9 million in 2011, a

decrease of $143.3 million. This decrease was primarily due to the change in cash paid in business combinations

resulting from our fourth quarter 2011 acquisition of the Molina Center amounting to $81.0 million, with no

comparable activity in 2012. In 2011, cash provided by financing activities was $236.9 million compared with

$288.8 million in 2010, a decrease of $51.9 million. This decrease was primarily due to $46.5 million less cash

paid for business combinations in 2011. We acquired Molina Medicaid Solutions in the second quarter of 2010

for $131.1 million, compared with $81.0 million spent to acquire the Molina Center in 2011.

Cash provided by financing activities was $47.7 million in 2012 compared with $49.5 million in 2011, a

decrease of $1.8 million. Cash provided from borrowings under our credit facility in 2012 amounting to $40.0

million was consistent with cash provided from the $48.6 million term loan in 2011 used to finance the

acquisition of the Molina Center. In 2011, cash provided by financing activities was $49.5 million compared with

$113.8 million in 2010, a decrease of $64.3 million. This decrease was due to $111.1 million of net proceeds

from our common stock offering in the third quarter of 2010, compared with the $48.6 million term loan to

acquire the Molina Center in 2011.

Financial Condition

On a consolidated basis, at December 31, 2012, we had working capital of $521.1 million compared with

$446.2 million at December 31, 2011. At December 31, 2012 we had cash and investments of $1,196.1 million,

compared with $893.0 million of cash and investments at December 31, 2011. We believe that our cash resources

and internally generated funds will be sufficient to support our operations, regulatory requirements, and capital

expenditures for at least the next 12 months.

Regulatory Capital and Dividend Restrictions

Our health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject

to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory

capital, as defined by each state. Such state laws and regulations also restrict the timing, payment, and amount of

dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries

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.

Other Transactions

As described above, our Missouri health plan, Alliance for Community Health, LLC, or ACH, was not

awarded a contract under the Missouri HealthNet Managed Care Request for Proposal; therefore, our Missouri

health plan’s prior contract with the state (the “MC+ Contract”) expired without renewal on June 30, 2012,

subject to certain transition obligations which terminate 365 days after June 30, 2012. ACH intends to enter into

an assignment and assumption agreement with another one of our wholly owned subsidiaries, Molina Healthcare

of Illinois, Inc., or Molina Illinois, pursuant to which ACH intends to assign to Molina Illinois substantially all of

its assets and liabilities, including its surviving rights, duties and obligations, including all of the post-expiration

duties and services under the MC+ Contract. Such assignment is subject to prior approval by the Missouri

Department of Insurance, Financial Institutions and Professional Registration, the Illinois Department of

Insurance, and the written consent of Mo HealthNet. Subsequent to the effectiveness of the assignment and

assumption agreement between ACH and Molina Illinois and ACH’s surrender of its Missouri certificate of

authority, we intend to abandon our equity interests in ACH to an unrelated entity. Subject to appropriate

regulatory approvals discussed above, ACH will retain certain assets and investments, to which we will no longer

have access after the abandonment transaction is effected and which amounts we intend to write off.

Liquidity and Capital Resources

Introduction

We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our

business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to

enable prudent investment management and financing within the confines of our financial strategy.

Our regulated subsidiaries generate significant cash flows from premium revenue. Such cash flows are our

primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our

liquidity. We generally receive premium revenue 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, and

marketable debt securities to improve our overall investment return. These investments are made pursuant to

board approved investment policies which conform to applicable state laws and regulations. Our investment

policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a

manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may

invest. These investment policies require that our investments have final maturities of 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, 2012, 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 $5.2 million for the year ended December 31, 2012, compared with $5.5
million for the year ended December 31, 2011. Our annualized portfolio yields for the years ended December 31,
2012, 2011, and 2010 were 0.5%, 0.6%, and 0.7%, 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. See further discussion below, under Regulatory Capital and Dividend Restrictions.

Liquidity

Cash provided by operating activities was $347.8 million in 2012 compared with $225.4 million in 2011, an

increase of $122.4 million. In 2012, deferred revenue was a source of cash from operations amounting to $90.9
million, compared with a use of cash amounting to $8.2 million in 2011. This increase was primarily due to an
increase in deferred revenue relating to an advance premium payment received by our Washington health plan in
December 2012. In 2011, cash provided by operating activities was $225.4 million compared with $161.4 million
for 2010, an increase of $64.0 million. This increase was primarily due to higher operating income before giving
effect to the $64.6 million non-cash impairment of goodwill and intangible assets relating to our Missouri health
plan’s state contract termination recorded in the fourth quarter of 2011.

Cash used in investing activities was $93.6 million in 2012 compared with $236.9 million in 2011, a
decrease of $143.3 million. This decrease was primarily due to the change in cash paid in business combinations
resulting from our fourth quarter 2011 acquisition of the Molina Center amounting to $81.0 million, with no
comparable activity in 2012. In 2011, cash provided by financing activities was $236.9 million compared with
$288.8 million in 2010, a decrease of $51.9 million. This decrease was primarily due to $46.5 million less cash
paid for business combinations in 2011. We acquired Molina Medicaid Solutions in the second quarter of 2010
for $131.1 million, compared with $81.0 million spent to acquire the Molina Center in 2011.

Cash provided by financing activities was $47.7 million in 2012 compared with $49.5 million in 2011, a
decrease of $1.8 million. Cash provided from borrowings under our credit facility in 2012 amounting to $40.0
million was consistent with cash provided from the $48.6 million term loan in 2011 used to finance the
acquisition of the Molina Center. In 2011, cash provided by financing activities was $49.5 million compared with
$113.8 million in 2010, a decrease of $64.3 million. This decrease was due to $111.1 million of net proceeds
from our common stock offering in the third quarter of 2010, compared with the $48.6 million term loan to
acquire the Molina Center in 2011.

Financial Condition

On a consolidated basis, at December 31, 2012, we had working capital of $521.1 million compared with

$446.2 million at December 31, 2011. At December 31, 2012 we had cash and investments of $1,196.1 million,
compared with $893.0 million of cash and investments at December 31, 2011. We believe that our cash resources
and internally generated funds will be sufficient to support our operations, regulatory requirements, and capital
expenditures for at least the next 12 months.

Regulatory Capital and Dividend Restrictions

Our health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject

must comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net
assets in these subsidiaries (after inter-company eliminations) which may not be transferable to us in the form of
loans, advances, or cash dividends was $549.7 million at December 31, 2012, and $492.4 million at
December 31, 2011. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net
assets to us, the amount of retained earnings readily available to pay dividends to our stockholders are generally
limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such
cash, cash equivalents and investments amounted to $46.9 million and $23.6 million as of December 31, 2012,
and 2011, respectively. This increase was primarily due to increased dividends received from our subsidiaries
during 2012.

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, 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, 2012, our health plans had aggregate statutory capital and surplus of approximately
$557.9 million compared with the required minimum aggregate statutory capital and surplus of approximately
$345.7 million. All of our health plans were in compliance with the minimum capital requirements at
December 31, 2012. 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.

Future Sources and Uses of Liquidity

1.125% Cash Convertible Senior Notes due 2020

On February 15, 2013, we issued $550 million aggregate principal amount of 1.125% Cash Convertible
Senior Notes due 2020, or the Notes. The Notes bear interest at a rate of 1.125% per year, payable semiannually
in arrears on January 15 and July 15 of each year, beginning on July 15, 2013. The Notes will mature on
January 15, 2020.

The Notes are not convertible into our common stock or any other securities under any circumstances.
Holders may convert their Notes solely into cash at their option at any time prior to the close of business on the
business day immediately preceding July 15, 2019 only under the following circumstances: (1) during any
calendar quarter commencing after the calendar quarter ending on June 30, 2013 (and only during such calendar
quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading
day; (2) during the five business day period immediately after any five consecutive trading day period in which
the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less
than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such
trading day; or (3) upon the occurrence of specified corporate events. On or after July 15, 2019 until the close of
business on the second scheduled trading day immediately preceding the maturity date, holders may convert their
Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu of
receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount of
Notes, equal to the settlement amount, determined in the manner set forth in the Indenture.

The initial conversion rate will be 24.5277 shares of our common stock per $1,000 principal amount of

make-whole premium by increasing the conversion rate for a holder who elects to convert its Notes in connection

with such a corporate event in certain circumstances. We may not redeem the Notes prior to the maturity date,

and no sinking fund is provided for the Notes.

If we undergo a fundamental change (as defined in the indenture to the Notes), holders may require us to

repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the

Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase

date. The indenture provides for customary events of default, including cross acceleration to certain other

indebtedness of ours, and our significant subsidiaries.

The Notes will be senior unsecured obligations of the Company and will rank senior in right of payment to

any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment

to any of our unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of

our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally

junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

Cash Convertible Note Hedge and Warrant Transactions

In connection with the pricing of the Notes, on February 11, 2013, we entered into cash convertible note

hedge transactions and warrant transactions relating to a notional number of shares of our common stock

underlying the Notes to be issued by us (without regard to the initial purchasers’ $100 million over-allotment

option) with two counterparties, JPMorgan Chase Bank, National Association, London Branch and Bank of

America, N.A. (the “Option Counterparties”). The cash convertible note hedge transactions are intended to offset

cash payments due upon any conversion of the Notes. However, the warrant transactions could separately have a

dilutive effect to the extent that the market value per share of our common stock (as measured under the terms of

the warrant transactions) exceeds the applicable strike price of the warrants. The strike price of the warrants will

initially be $53.8475 per share, which is 75% above the last reported sale price of our common stock on

February 11, 2013.

In connection with the exercise in full by the initial purchasers of their over-allotment option in respect of

the Notes, on February 13, 2013, we and the Option Counterparties amended the cash convertible note hedge

transactions entered into on February 11, 2013 to upsize such transactions by a notional number of shares of our

common stock corresponding to the number of shares underlying the Notes purchased pursuant to the exercise of

such over-allotment option. On February 13, 2013, we also entered into additional warrant transactions with the

Option Counterparties relating to a number of shares of our common stock corresponding to the number of shares

underlying the Notes purchased pursuant to the exercise of such over-allotment option. Each of the amendments

to the cash convertible note hedge transactions and the additional warrant transactions were on substantially

similar terms to the corresponding transactions entered into on February 11, 2013. Pursuant to these warrant

transactions, we issued 13,490,236 warrants with a strike price of $53.8475 per share. The number of warrants

and the strike price are subject to adjustment under certain circumstances.

We used approximately $74.3 million of the net proceeds from the offering to pay the cost of the cash

convertible note hedge transactions (after such cost was partially offset by the proceeds to us from the sale of

warrants in the warrant transactions and the additional warrant transactions).

Aside from the initial payment of a premium to the Option Counterparties of approximately $149.3 million,

we will not be required to make any cash payments to the Option Counterparties under the cash convertible note

hedge transactions and will be entitled to receive from the Option Counterparties an amount of cash, generally

equal to the amount by which the market price per share of common stock exceeds the strike price of the cash

convertible note hedge transactions during the relevant valuation period. The strike price under the cash

convertible note hedge transactions is initially equal to the conversion price of the Notes. Additionally, if the

market value per share of our common stock exceeds the strike price of the warrants on any trading day during

the 160 trading day measurement period under the warrant transactions and the additional warrant transactions,

must comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net

assets in these subsidiaries (after inter-company eliminations) which may not be transferable to us in the form of

loans, advances, or cash dividends was $549.7 million at December 31, 2012, and $492.4 million at

December 31, 2011. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net

assets to us, the amount of retained earnings readily available to pay dividends to our stockholders are generally

limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such

cash, cash equivalents and investments amounted to $46.9 million and $23.6 million as of December 31, 2012,

and 2011, respectively. This increase was primarily due to increased dividends received from our subsidiaries

during 2012.

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, 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, 2012, our health plans had aggregate statutory capital and surplus of approximately

$557.9 million compared with the required minimum aggregate statutory capital and surplus of approximately

$345.7 million. All of our health plans were in compliance with the minimum capital requirements at

December 31, 2012. 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.

Future Sources and Uses of Liquidity

1.125% Cash Convertible Senior Notes due 2020

On February 15, 2013, we issued $550 million aggregate principal amount of 1.125% Cash Convertible

Senior Notes due 2020, or the Notes. The Notes bear interest at a rate of 1.125% per year, payable semiannually

in arrears on January 15 and July 15 of each year, beginning on July 15, 2013. The Notes will mature on

January 15, 2020.

The Notes are not convertible into our common stock or any other securities under any circumstances.

Holders may convert their Notes solely into cash at their option at any time prior to the close of business on the

business day immediately preceding July 15, 2019 only under the following circumstances: (1) during any

calendar quarter commencing after the calendar quarter ending on June 30, 2013 (and only during such calendar

quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not

consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately

preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading

day; (2) during the five business day period immediately after any five consecutive trading day period in which

the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less

than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such

trading day; or (3) upon the occurrence of specified corporate events. On or after July 15, 2019 until the close of

business on the second scheduled trading day immediately preceding the maturity date, holders may convert their

Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu of

receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount of

Notes, equal to the settlement amount, determined in the manner set forth in the Indenture.

The initial conversion rate will be 24.5277 shares of our common stock per $1,000 principal amount of

Notes (equivalent to an initial conversion price of approximately $40.77 per share of common stock). The

conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid

interest. In addition, following certain corporate events that occur prior to the maturity date, we will pay a cash

make-whole premium by increasing the conversion rate for a holder who elects to convert its Notes in connection
with such a corporate event in certain circumstances. We may not redeem the Notes prior to the maturity date,
and no sinking fund is provided for the Notes.

If we undergo a fundamental change (as defined in the indenture to the Notes), holders may require us to
repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the
Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase
date. The indenture provides for customary events of default, including cross acceleration to certain other
indebtedness of ours, and our significant subsidiaries.

The Notes will be senior unsecured obligations of the Company and will rank senior in right of payment to

any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment
to any of our unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of
our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally
junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

Cash Convertible Note Hedge and Warrant Transactions

In connection with the pricing of the Notes, on February 11, 2013, we entered into cash convertible note

hedge transactions and warrant transactions relating to a notional number of shares of our common stock
underlying the Notes to be issued by us (without regard to the initial purchasers’ $100 million over-allotment
option) with two counterparties, JPMorgan Chase Bank, National Association, London Branch and Bank of
America, N.A. (the “Option Counterparties”). The cash convertible note hedge transactions are intended to offset
cash payments due upon any conversion of the Notes. However, the warrant transactions could separately have a
dilutive effect to the extent that the market value per share of our common stock (as measured under the terms of
the warrant transactions) exceeds the applicable strike price of the warrants. The strike price of the warrants will
initially be $53.8475 per share, which is 75% above the last reported sale price of our common stock on
February 11, 2013.

In connection with the exercise in full by the initial purchasers of their over-allotment option in respect of

the Notes, on February 13, 2013, we and the Option Counterparties amended the cash convertible note hedge
transactions entered into on February 11, 2013 to upsize such transactions by a notional number of shares of our
common stock corresponding to the number of shares underlying the Notes purchased pursuant to the exercise of
such over-allotment option. On February 13, 2013, we also entered into additional warrant transactions with the
Option Counterparties relating to a number of shares of our common stock corresponding to the number of shares
underlying the Notes purchased pursuant to the exercise of such over-allotment option. Each of the amendments
to the cash convertible note hedge transactions and the additional warrant transactions were on substantially
similar terms to the corresponding transactions entered into on February 11, 2013. Pursuant to these warrant
transactions, we issued 13,490,236 warrants with a strike price of $53.8475 per share. The number of warrants
and the strike price are subject to adjustment under certain circumstances.

We used approximately $74.3 million of the net proceeds from the offering to pay the cost of the cash

convertible note hedge transactions (after such cost was partially offset by the proceeds to us from the sale of
warrants in the warrant transactions and the additional warrant transactions).

we will be obligated to issue to the Option Counterparties a number of shares equal in value to the product of the
amount by which such market value exceeds such strike price and 1/160th of the aggregate number of shares of
our common stock underlying the warrant transactions and the additional warrant transactions, subject to a share
delivery cap. The Company will not receive any additional proceeds if warrants are exercised.

Repurchase in Connection with Offering of 1.125% Cash Convertible Senior Notes Due 2020

We used a portion of the net proceeds in this offering to repurchase $50 million of our common stock in

negotiated transactions with institutional investors in the offering, concurrently with the pricing of the offering.
On February 12, 2013, we repurchased a total of 1,624,959 shares at $30.77 per share, which was our closing
stock price on that date.

Credit Facility

On February 15, 2013, we used approximately $40.0 million of the net proceeds from the offering of the

Notes to repay all of the outstanding indebtedness under our $170 million revolving credit facility, or the Credit
Facility, with various lenders and U.S. Bank National Association, as Line of Credit Issuer, Swing Line Lender,
and Administrative Agent. As of December 31, 2012, there was $40.0 million outstanding under the Credit
Facility.

We terminated the Credit Facility in connection with the closing of the offering and sale of the Notes. Two

letters of credit in the aggregate principal amount of $10.3 million that reduced the amount available for
borrowing under the Credit Facility as of December 31, 2012, were transferred to direct issue letters of credit
with another financial institution. The Credit Facility had a term of five years under which all amounts
outstanding would have been due and payable on September 9, 2016.

Borrowings under the Credit Facility accrued 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 were 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 applicable margins ranged 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 were 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
included 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 required us to maintain as of the end of any fiscal quarter
(calculated for each four consecutive fiscal quarter period) a ratio of total consolidated debt to total consolidated
EBITDA, as defined in the Credit Facility, of not more than 2.75 to 1.00, and a fixed charge coverage ratio of not
less than 1.75 to 1.00. At December 31, 2012, we were in compliance with all financial covenants under the
Credit Facility.

3.75% Convertible Senior Notes due 2014

As of December 31, 2012, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior

Notes due 2014, or the 3.75% Notes, remain outstanding. The 3.75% Notes rank equally in right of payment with

our existing and future senior indebtedness. The 3.75% 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 one thousand dollar principal amount of the 3.75% 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 Molina Center, located in Long Beach, California.

The outstanding principal amount under the Term Loan Agreement bears interest 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%. “Interest Period” means the period commencing on the

first day of each calendar month and ending on the last day of each calendar month. The loan matures on

November 30, 2018, and is subject to a 25-year amortization schedule that commenced 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. 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.

Interest Rate Swap

In May 2012, we entered into a $42.5 million notional amount interest rate swap agreement, or Swap

Agreement, with an effective date of March 1, 2013. While not designated as a hedge during the year ended

December 31, 2012, the Swap Agreement is intended to reduce our exposure to fluctuations in the contractual

variable interest rates under our Term Loan Agreement, and expires on the maturity date of the Term Loan

Agreement, which is November 30, 2018. Under the Swap Agreement, we will receive a variable rate of the one-

month LIBOR plus 3.25%, and pay a fixed rate of 5.34%. The Swap Agreement is measured and reported at fair

value on a recurring basis, within Level 2 of the fair value hierarchy. Gains and losses relating to changes in fair

value are reported in earnings in the current period. For the year ended December 31, 2012, we have recorded

losses of $1.3 million to general and administrative expense. As of December 31, 2012 the fair value of the Swap

Agreement is a liability of $1.3 million, recorded to other noncurrent liabilities. We do not use derivatives for

trading or speculative purposes. We believe that we are not exposed to more than a nominal amount of credit risk

relating to the Swap Agreement because the counterparty is an established and well-capitalized financial

institution.

we will be obligated to issue to the Option Counterparties a number of shares equal in value to the product of the

amount by which such market value exceeds such strike price and 1/160th of the aggregate number of shares of

our common stock underlying the warrant transactions and the additional warrant transactions, subject to a share

delivery cap. The Company will not receive any additional proceeds if warrants are exercised.

Repurchase in Connection with Offering of 1.125% Cash Convertible Senior Notes Due 2020

We used a portion of the net proceeds in this offering to repurchase $50 million of our common stock in

negotiated transactions with institutional investors in the offering, concurrently with the pricing of the offering.

On February 12, 2013, we repurchased a total of 1,624,959 shares at $30.77 per share, which was our closing

stock price on that date.

Credit Facility

On February 15, 2013, we used approximately $40.0 million of the net proceeds from the offering of the

Notes to repay all of the outstanding indebtedness under our $170 million revolving credit facility, or the Credit

Facility, with various lenders and U.S. Bank National Association, as Line of Credit Issuer, Swing Line Lender,

and Administrative Agent. As of December 31, 2012, there was $40.0 million outstanding under the Credit

Facility.

We terminated the Credit Facility in connection with the closing of the offering and sale of the Notes. Two

letters of credit in the aggregate principal amount of $10.3 million that reduced the amount available for

borrowing under the Credit Facility as of December 31, 2012, were transferred to direct issue letters of credit

with another financial institution. The Credit Facility had a term of five years under which all amounts

outstanding would have been due and payable on September 9, 2016.

Borrowings under the Credit Facility accrued 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 were 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 applicable margins ranged 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 were 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

included 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 required us to maintain as of the end of any fiscal quarter

(calculated for each four consecutive fiscal quarter period) a ratio of total consolidated debt to total consolidated

EBITDA, as defined in the Credit Facility, of not more than 2.75 to 1.00, and a fixed charge coverage ratio of not

less than 1.75 to 1.00. At December 31, 2012, we were in compliance with all financial covenants under the

Credit Facility.

3.75% Convertible Senior Notes due 2014

As of December 31, 2012, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior
Notes due 2014, or the 3.75% Notes, remain outstanding. The 3.75% Notes rank equally in right of payment with
our existing and future senior indebtedness. The 3.75% 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 one thousand dollar principal amount of the 3.75% 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 Molina Center, located in Long Beach, California.

The outstanding principal amount under the Term Loan Agreement bears interest 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%. “Interest Period” means the period commencing on the
first day of each calendar month and ending on the last day of each calendar month. The loan matures on
November 30, 2018, and is subject to a 25-year amortization schedule that commenced 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. 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.

Interest Rate Swap

In May 2012, we entered into a $42.5 million notional amount interest rate swap agreement, or Swap

Agreement, with an effective date of March 1, 2013. While not designated as a hedge during the year ended
December 31, 2012, the Swap Agreement is intended to reduce our exposure to fluctuations in the contractual
variable interest rates under our Term Loan Agreement, and expires on the maturity date of the Term Loan
Agreement, which is November 30, 2018. Under the Swap Agreement, we will receive a variable rate of the one-
month LIBOR plus 3.25%, and pay a fixed rate of 5.34%. The Swap Agreement is measured and reported at fair
value on a recurring basis, within Level 2 of the fair value hierarchy. Gains and losses relating to changes in fair
value are reported in earnings in the current period. For the year ended December 31, 2012, we have recorded
losses of $1.3 million to general and administrative expense. As of December 31, 2012 the fair value of the Swap
Agreement is a liability of $1.3 million, recorded to other noncurrent liabilities. We do not use derivatives for
trading or speculative purposes. We believe that we are not exposed to more than a nominal amount of credit risk
relating to the Swap Agreement because the counterparty is an established and well-capitalized financial
institution.

Shelf Registration Statement

In May 2012, we filed an automatic shelf registration statement on Form S-3 with the Securities and
Exchange Commission covering the issuance of an indeterminate number of our securities, including common
stock, warrants, or debt securities. We may publicly offer securities from time to time at prices and terms to be
determined at the time of the offering.

Securities Repurchase Program

Effective as of February 13, 2013, our board of directors authorized the repurchase of $75 million in
aggregate of either our common stock or our convertible senior note due 2014. The repurchase program extends
through December 31, 2014.

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. We recorded a liability under the terms of these contract provisions of
$0.3 million and $1.0 million at December 31, 2012, and December 31, 2011, respectively.

• 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 both December 31, 2012 and 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): Our contract with the state of New Mexico directs that a portion of premiums

received 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. At both

December 31, 2012, and December 31, 2011, we had not recorded any liability under the terms of these

contract provisions.

•

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. 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 accrued an aggregate liability of approximately $3.2 million and $0.7 million pursuant to our

profit-sharing agreement with the state of Texas at December 31, 2012 and December 31, 2011,

respectively.

contractual floor.

• Washington Health Plan Medical Cost Floors (Minimums): A portion of certain premiums received by

our Washington health plan may be returned to the state if certain minimum amounts are not spent on

defined medical care costs. At both December 31, 2012, and December 31, 2011, we had not recorded

any liability under the terms of this contract provision because medical expenses are not less than the

• 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 net receivable of approximately $0.3

million and $5.0 million for anticipated Medicare risk adjustment premiums at December 31, 2012, and

December 31, 2011, respectively.

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.

Shelf Registration Statement

In May 2012, we filed an automatic shelf registration statement on Form S-3 with the Securities and

Exchange Commission covering the issuance of an indeterminate number of our securities, including common

stock, warrants, or debt securities. We may publicly offer securities from time to time at prices and terms to be

Effective as of February 13, 2013, our board of directors authorized the repurchase of $75 million in

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

determined at the time of the offering.

Securities Repurchase Program

through December 31, 2014.

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. We recorded a liability under the terms of these contract provisions of

$0.3 million and $1.0 million at December 31, 2012, and December 31, 2011, respectively.

• 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 both December 31, 2012 and 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): Our contract with the state of New Mexico directs that a portion of premiums
received 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. At both
December 31, 2012, and December 31, 2011, we had not recorded any liability under the terms of these
contract provisions.

•

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. 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 accrued an aggregate liability of approximately $3.2 million and $0.7 million pursuant to our
profit-sharing agreement with the state of Texas at December 31, 2012 and December 31, 2011,
respectively.

• Washington Health Plan Medical Cost Floors (Minimums): A portion of certain premiums received by
our Washington health plan may be returned to the state if certain minimum amounts are not spent on
defined medical care costs. At both December 31, 2012, and December 31, 2011, we had not recorded
any liability under the terms of this contract provision because medical expenses are not less than the
contractual floor.

• 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 net receivable of approximately $0.3
million and $5.0 million for anticipated Medicare risk adjustment premiums at December 31, 2012, and
December 31, 2011, respectively.

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. These
performance measures are generally linked to various quality-of-care measures dictated by the state.

•

Texas Health Plan Quality Incentive Premiums: Effective March 1, 2012, under our contract with the
state of Texas, incremental revenue of up to 5% 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.

• Wisconsin Health Plan Quality Incentive Premiums: Under our contract with the state of Wisconsin,
effective beginning in 2011, up to 3.25% of premium revenue 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, 2012 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, 2012.

New Mexico
Ohio
Texas
Wisconsin

New Mexico
Ohio
Texas

Year Ended December 31, 2012

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

$ 2,244
12,033
58,516
1,771

$74,564

$ 1,889
8,079
52,521
—

$62,489

$ 643
966
—
593

$2,202

$ 2,532
9,045
52,521
593

$64,691

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

$ 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
Recognized

$1,890
1,866
1,771

$5,527

Total Revenue
Recognized

$ 338,770
1,187,422
1,255,722
70,673

$2,852,587

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

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. Our Molina Medicaid Solutions contracts may extend over

a number of years, particularly in circumstances where we are delivering extensive and complex DDI services,

such as the initial design, development and implementation of a complete MMIS. For example, the terms of our

most recently implemented Molina Medicaid Solutions contracts (in Idaho and Maine) were each seven years in

total, consisting of two years allocated for the delivery of DDI services, followed by five years for the

performance of BPO services. We receive progress payments from the state during the performance of DDI

services based upon the attainment of predetermined milestones. We receive a flat monthly payment for BPO

services under our Idaho and Maine contracts. The terms of our other Molina Medicaid Solutions contracts —

which primarily involve the delivery of BPO services with only minimal DDI activity (consisting of system

enhancements) — are shorter in duration than our Idaho and Maine contracts.

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 or

2012. 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)

• 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. These

performance measures are generally linked to various quality-of-care measures dictated by the state.

•

Texas Health Plan Quality Incentive Premiums: Effective March 1, 2012, under our contract with the

state of Texas, incremental revenue of up to 5% 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.

• Wisconsin Health Plan Quality Incentive Premiums: Under our contract with the state of Wisconsin,

effective beginning in 2011, up to 3.25% of premium revenue 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, 2012 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, 2012.

Year Ended December 31, 2012

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

Total Revenue

Recognized

New Mexico

Ohio

Texas

Wisconsin

New Mexico

Ohio

Texas

Wisconsin

New Mexico

Ohio

Texas

$ 2,244

12,033

58,516

1,771

$74,564

$ 2,271

10,212

—

1,705

$14,188

$ 2,581

9,881

1,771

$14,233

Maximum

Available Quality

Incentive

Premium –

Current Year

Amount of

Current Year

Quality Incentive

Premium Revenue

Recognized

Maximum

Available Quality

Incentive

Premium –

Current Year

Amount of

Current Year

Quality Incentive

Premium Revenue

Recognized

$ 1,889

8,079

52,521

—

$62,489

(In thousands)

$ 643

966

—

593

$2,202

$ 2,532

9,045

52,521

593

$64,691

$ 338,770

1,187,422

1,255,722

70,673

$2,852,587

Year Ended December 31, 2011

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

Amount of

Quality Incentive

Premium Revenue

Recognized from

Prior Year

(In thousands)

579

(1,248)

—

$ (669)

Total Quality

Incentive Premium

Revenue

Recognized

Total Revenue

Recognized

$1,890

1,866

1,771

$5,527

$ 366,784

860,324

188,716

$1,415,824

$ 1,558

8,363

—

542

$1,311

3,114

1,771

$6,196

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. Our Molina Medicaid Solutions contracts may extend over
a number of years, particularly in circumstances where we are delivering extensive and complex DDI services,
such as the initial design, development and implementation of a complete MMIS. For example, the terms of our
most recently implemented Molina Medicaid Solutions contracts (in Idaho and Maine) were each seven years in
total, consisting of two years allocated for the delivery of DDI services, followed by five years for the
performance of BPO services. We receive progress payments from the state during the performance of DDI
services based upon the attainment of predetermined milestones. We receive a flat monthly payment for BPO
services under our Idaho and Maine contracts. The terms of our other Molina Medicaid Solutions contracts —
which primarily involve the delivery of BPO services with only minimal DDI activity (consisting of system
enhancements) — are shorter in duration than our Idaho and Maine contracts.

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 or
2012. 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 all revenue (both the DDI and BPO elements) associated with such contracts on
a straight-line basis over the period during which BPO, hosting, and support and maintenance services are
delivered. As noted above, the period of performance of BPO services under our Idaho and Maine contracts is
five years. Therefore, absent any contingencies as discussed in the following paragraph, we would recognize all
revenue associated with those contracts over a period of five years. In cases where there is no DDI element
associated with our contracts, BPO revenue is recognized on a monthly basis as specified in the applicable
contract or contract extension.

Provisions specific to each contract may, however, lead us to modify this general principle. In those

circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to
compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right
of the state to refuse acceptance) has been removed. In those circumstances we defer recognition of any
contingent revenue (whether DDI, BPO services, hosting, and support and maintenance services) until the
contingency has been removed. These types of contingency features are present in our Maine and Idaho
contracts. In those states, we deferred recognition of revenue until the contingencies were removed.

Costs associated with our Molina Medicaid Solutions contracts include software related costs and other

costs. With respect to software related costs, we apply the guidance for internal-use software and capitalize
external direct costs of materials and services consumed in developing or obtaining the software, and payroll and
payroll-related costs associated with employees who are directly associated with and who devote time to the
computer software project. With respect to all other direct costs, such costs are expensed as incurred, unless
corresponding revenue is being deferred. If revenue is being deferred, direct costs relating to delivered service
elements are deferred as well and are recognized on a straight-line basis over the period of revenue recognition,
in a manner consistent with our recognition of revenue that has been deferred. Such direct costs can include:

• Transaction processing costs.

• Employee costs incurred in performing transaction services.

• Vendor costs incurred in performing transaction services.

• Costs incurred in performing required monitoring of and reporting on contract performance.

• 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.

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)

$377,614

$301,020

$275,259

Capitation payable

Pharmacy

Other

2012

2011

2010

December 31,

(In thousands)

49,066

38,992

28,858

53,532

26,178

21,746

49,598

14,649

14,850

$494,530

$402,476

$354,356

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 $377.6 million of our total medical claims and benefits payable of $494.5

million as of December 31, 2012. 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, 2012, was $371.4 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.

Because we have determined the services provided under our Molina Medicaid Solutions contracts represent

a single unit of accounting, and because we are unable to determine a pattern of performance of services during

the contract period, we recognize all revenue (both the DDI and BPO elements) associated with such contracts on

a straight-line basis over the period during which BPO, hosting, and support and maintenance services are

delivered. As noted above, the period of performance of BPO services under our Idaho and Maine contracts is

five years. Therefore, absent any contingencies as discussed in the following paragraph, we would recognize all

revenue associated with those contracts over a period of five years. In cases where there is no DDI element

associated with our contracts, BPO revenue is recognized on a monthly basis as specified in the applicable

contract or contract extension.

Provisions specific to each contract may, however, lead us to modify this general principle. In those

circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to

compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right

of the state to refuse acceptance) has been removed. In those circumstances we defer recognition of any

contingent revenue (whether DDI, BPO services, hosting, and support and maintenance services) until the

contingency has been removed. These types of contingency features are present in our Maine and Idaho

contracts. In those states, we deferred recognition of revenue until the contingencies were removed.

Costs associated with our Molina Medicaid Solutions contracts include software related costs and other

costs. With respect to software related costs, we apply the guidance for internal-use software and capitalize

external direct costs of materials and services consumed in developing or obtaining the software, and payroll and

payroll-related costs associated with employees who are directly associated with and who devote time to the

computer software project. With respect to all other direct costs, such costs are expensed as incurred, unless

corresponding revenue is being deferred. If revenue is being deferred, direct costs relating to delivered service

elements are deferred as well and are recognized on a straight-line basis over the period of revenue recognition,

in a manner consistent with our recognition of revenue that has been deferred. Such direct costs can include:

• Transaction processing costs.

• Employee costs incurred in performing transaction services.

• Vendor costs incurred in performing transaction services.

• Costs incurred in performing required monitoring of and reporting on contract performance.

• 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.

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

2012

$377,614
49,066
38,992
28,858

December 31,

2011
(In thousands)
$301,020
53,532
26,178
21,746

2010

$275,259
49,598
14,649
14,850

$494,530

$402,476

$354,356

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 $377.6 million of our total medical claims and benefits payable of $494.5
million as of December 31, 2012. 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, 2012, was $371.4 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, 2012 that
would have resulted had we changed our completion factors for the fifth through the twelfth months preceding
December 31, 2012, 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

$ 152,598
101,732
50,866
(50,866)
(101,732)
(152,598)

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, 2012 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

$(75,312)
(50,208)
(25,104)
25,104
50,208
75,312

The following per-share amounts are based on a combined federal and state statutory tax rate of 37.5%, and

$47.0 million diluted shares outstanding for the year ended December 31, 2012. Assuming a hypothetical 1%
change in completion factors from those used in our calculation of IBNP at December 31, 2012, net income for
the year ended December 31, 2012 would increase or decrease by approximately $15.9 million, or $0.34 per
diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of
IBNP at December 31, 2012, net income for the year ended December 31, 2012 would increase or decrease by
approximately $7.8 million, or $0.17 per diluted share. The corresponding figures for a 5% change in completion
factors and PMPM cost estimates would be $79.5 million, or $1.69 per diluted share, and $39.2 million, or $0.83
per diluted share, respectively.

It is important to note that any change in the estimate of either completion factors or trended PMPM costs

would usually be accompanied by a change in the estimate of the other component, and that a change in one
component would almost always compound rather than offset the resulting distortion to net income. When
completion factors are overestimated, trended PMPM costs tend to be underestimated. Both circumstances will
create an overstatement of net income. Likewise, when completion factors are underestimated, trended PMPM
costs tend to be overestimated, creating an understatement of net income. In other words, errors in estimates
involving both completion factors and trended PMPM costs will usually act to drive estimates of claims liabilities
and medical care costs in the same direction. If completion factors were overestimated by 1%, resulting in an
overstatement of net income by approximately $15.9 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 our initial estimate of IBNP is accurate, we believe that amounts ultimately paid out would

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. Because the amount of our initial liability is merely an estimate (and therefore never perfectly accurate),

we will always experience variability in that estimate as new information becomes available with the passage of

time. Therefore, there can be no assurance that amounts ultimately paid out will not be higher or lower than this

8% to 10% range. For example, for the years ended December 31, 2011 and 2010, the amounts ultimately paid

out were less than the amount of the reserves we had established as of December 31, 2010 and 2009, by 14.6%

and 15.7%, respectively. Furthermore, because the initial estimate of IBNP is derived from many factors, some

of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the

reasons for a change in estimate — we only know when the circumstances for any one or more of those factors

are out of the ordinary.

As shown in greater detail in the table below, the amounts ultimately paid out on our liabilities in fiscal

years 2012, 2011, and 2010 were less than what we had expected when we established our reserves. While many

related factors working in conjunction with one another determine the accuracy of our estimates, we are seldom

The following table reflects the change in our estimate of claims liability as of December 31, 2012 that

would have resulted had we changed our completion factors for the fifth through the twelfth months preceding

December 31, 2012, 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

$ 152,598

101,732

50,866

(50,866)

(101,732)

(152,598)

Increase (Decrease) in

Medical Claims and

Benefits Payable

$(75,312)

(50,208)

(25,104)

25,104

50,208

75,312

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, 2012 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

$47.0 million diluted shares outstanding for the year ended December 31, 2012. Assuming a hypothetical 1%

change in completion factors from those used in our calculation of IBNP at December 31, 2012, net income for

the year ended December 31, 2012 would increase or decrease by approximately $15.9 million, or $0.34 per

diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of

IBNP at December 31, 2012, net income for the year ended December 31, 2012 would increase or decrease by

approximately $7.8 million, or $0.17 per diluted share. The corresponding figures for a 5% change in completion

factors and PMPM cost estimates would be $79.5 million, or $1.69 per diluted share, and $39.2 million, or $0.83

per diluted share, respectively.

It is important to note that any change in the estimate of either completion factors or trended PMPM costs

would usually be accompanied by a change in the estimate of the other component, and that a change in one

component would almost always compound rather than offset the resulting distortion to net income. When

completion factors are overestimated, trended PMPM costs tend to be underestimated. Both circumstances will

create an overstatement of net income. Likewise, when completion factors are underestimated, trended PMPM

costs tend to be overestimated, creating an understatement of net income. In other words, errors in estimates

involving both completion factors and trended PMPM costs will usually act to drive estimates of claims liabilities

and medical care costs in the same direction. If completion factors were overestimated by 1%, resulting in an

overstatement of net income by approximately $15.9 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 our initial estimate of IBNP is accurate, we believe that amounts ultimately paid out would

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. Because the amount of our initial liability is merely an estimate (and therefore never perfectly accurate),
we will always experience variability in that estimate as new information becomes available with the passage of
time. Therefore, there can be no assurance that amounts ultimately paid out will not be higher or lower than this
8% to 10% range. For example, for the years ended December 31, 2011 and 2010, the amounts ultimately paid
out were less than the amount of the reserves we had established as of December 31, 2010 and 2009, by 14.6%
and 15.7%, respectively. Furthermore, because the initial estimate of IBNP is derived from many factors, some
of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the
reasons for a change in estimate — we only know when the circumstances for any one or more of those factors
are out of the ordinary.

As shown in greater detail in the table below, the amounts ultimately paid out on our liabilities in fiscal
years 2012, 2011, and 2010 were less than what we had expected when we established our reserves. While many
related factors working in conjunction with one another determine the accuracy of our estimates, we are seldom

able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability
inherent in the reserving process, we will only be able to identify specific factors if they represent a significant
departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual
factors on changes in estimate.

We recognized a benefit from prior period claims development in the amount of $39.3 million for the year
ended December 31, 2012. This amount represents our estimate as of December 31, 2012, of the extent to which
our initial estimate of medical claims and benefits payable at December 31, 2011 was more than the amount that
will ultimately be paid out in satisfaction of that liability. We believe that the overestimation of our claims
liability at December 31, 2011 was due primarily to the following factors:

• At our Washington health plan, we underestimated the amount of recoveries we would collect for

certain high-cost newborn claims, resulting in an overestimation of reserves at year end.

• At our Texas health plan, we overestimated the cost of new members in STAR+PLUS (the name of our

ABD program in Texas), in the Dallas region.

•

In early 2011, the state of Michigan was delayed in the enrollment of newborns in managed care plans;
the delay was resolved by mid-2011. This caused a large number of claims with older dates of service
to be paid during late 2011, resulting in an artificial increase in the lag time for claims payment at our
Michigan health plan. We adjusted reserves downward for this issue at December 31, 2011, but the
adjustment did not capture all of the claims overestimation.

• The overestimation of our liability for medical claims and benefits payable was partially offset by an
underestimation of that liability at our Missouri health plan, as a result of the costs associated with an
unusually large number of premature infants during the fourth quarter of 2011.

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 was more than the amount that
will ultimately be paid out in satisfaction of that liability. We believe that the overestimation of our claims
liability at December 31, 2010 was due primarily to the following factors:

• At our Ohio health plan, we overestimated the impact of a buildup in claims inventory.

• At our California health plan, we overestimated the impact of the settlement of disputed provider

claims.

• At our New Mexico health plan, we underestimated the impact of a reduction in the outpatient facility

fee schedule.

We recognized a benefit from prior period claims development in the amount of $49.4 million for the year
ended December 31, 2010. This amount represents our estimate as of December 31, 2010, of the extent to which
our initial estimate of medical claims and benefits payable at December 31, 2009 was more than the amount that
will ultimately be paid out in satisfaction of that liability. We believe that the overestimation of our claims
liability at December 31, 2009 was due primarily to the following factors:

• At our New Mexico health plan, we underestimated the degree to which cuts to the Medicaid fees

schedule would reduce our liability as of December 31, 2009.

• At our California health plan, 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, 2012, we adjusted our base calculation to take account of

the numerous factors that we believe will likely change our final claims liability amount. We believe that the

most significant among those factors are:

• Our Texas health plan membership nearly doubled effective March 1, 2012. In addition, effective

March 1, 2012, we assumed inpatient medical liability for ABD members for which we were not

previously responsible. Reserves for new coverage and new regions are now based on the newly

developing claims lag patterns. While the lag patterns are now beginning to stabilize for the new

membership and coverage, the true reserve liability continues to be more uncertain than usual.

• Data published by the Centers for Disease Control, or CDC, indicated a significant increase in the

percentage of office visits for influenza-like illnesses, or ILI, during December 2012. This indicated

that the annual flu season was starting earlier than it had in most recent years. This was most noticeable

in the southeast region of the country, but impacted other areas as well. Our leading indicators,

including inpatient authorizations and overall pharmacy utilization, did not show as great an increase as

we had expected based on the severity of the CDC’s flu-related indices. However, we did see a

significant increase in the use of prescription flu medication, especially in our Texas health plan.

Therefore, we increased our reserves to account for expected additional utilization due to the early

onset of the flu season.

• Our California health plan has enrolled approximately 20,000 new ABD members since September 30,

2011, as a result of the mandatory assignment of ABD members to managed care plans effective July 1,

2011. These new members converted from a fee-for-service environment. Due to the relatively recent

transition of these members to managed care, their utilization of medical services is less predictable

than it is for many of our other members.

•

Prior to July 2012, it was the state of Washington’s practice to disenroll certain sick newborns from the

Healthy Options Medicaid managed care program and cover them under the Supplemental Security

Income program, or SSI, instead. When this occurred, the health plan would reimburse the premiums

received for that member back to the state and the state in turn reimbursed the health plan for the cost

of care, usually retroactively to the date of birth. Effective July 1, 2012, the health plans now retain

these members and cover them under a new ABD program entitled Healthy Options Blind and

Disabled, or HOBD. The premium we receive from the state for the HOBD members is very high to

cover the substantial cost of care. By December, we had enrolled approximately 26,000 members under

HOBD. Because the program is relatively new, there is still some uncertainty as to the level of claims

to be expected from these high-cost members.

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

2012, 2011 and 2010, the absence of adverse development of the liability for claims and medical benefits payable

at the close of the previous period resulted in the recognition of substantial favorable prior period development.

In these 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.

able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability

inherent in the reserving process, we will only be able to identify specific factors if they represent a significant

departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual

factors on changes in estimate.

We recognized a benefit from prior period claims development in the amount of $39.3 million for the year

ended December 31, 2012. This amount represents our estimate as of December 31, 2012, of the extent to which

our initial estimate of medical claims and benefits payable at December 31, 2011 was more than the amount that

will ultimately be paid out in satisfaction of that liability. We believe that the overestimation of our claims

liability at December 31, 2011 was due primarily to the following factors:

• At our Washington health plan, we underestimated the amount of recoveries we would collect for

certain high-cost newborn claims, resulting in an overestimation of reserves at year end.

• At our Texas health plan, we overestimated the cost of new members in STAR+PLUS (the name of our

ABD program in Texas), in the Dallas region.

•

In early 2011, the state of Michigan was delayed in the enrollment of newborns in managed care plans;

the delay was resolved by mid-2011. This caused a large number of claims with older dates of service

to be paid during late 2011, resulting in an artificial increase in the lag time for claims payment at our

Michigan health plan. We adjusted reserves downward for this issue at December 31, 2011, but the

adjustment did not capture all of the claims overestimation.

• The overestimation of our liability for medical claims and benefits payable was partially offset by an

underestimation of that liability at our Missouri health plan, as a result of the costs associated with an

unusually large number of premature infants during the fourth quarter of 2011.

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 was more than the amount that

will ultimately be paid out in satisfaction of that liability. We believe that the overestimation of our claims

liability at December 31, 2010 was due primarily to the following factors:

• At our Ohio health plan, we overestimated the impact of a buildup in claims inventory.

• At our California health plan, we overestimated the impact of the settlement of disputed provider

• At our New Mexico health plan, we underestimated the impact of a reduction in the outpatient facility

claims.

fee schedule.

We recognized a benefit from prior period claims development in the amount of $49.4 million for the year

ended December 31, 2010. This amount represents our estimate as of December 31, 2010, of the extent to which

our initial estimate of medical claims and benefits payable at December 31, 2009 was more than the amount that

will ultimately be paid out in satisfaction of that liability. We believe that the overestimation of our claims

liability at December 31, 2009 was due primarily to the following factors:

• At our New Mexico health plan, we underestimated the degree to which cuts to the Medicaid fees

schedule would reduce our liability as of December 31, 2009.

• At our California health plan, 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, 2012, we adjusted our base calculation to take account of

the numerous factors that we believe will likely change our final claims liability amount. We believe that the
most significant among those factors are:

• Our Texas health plan membership nearly doubled effective March 1, 2012. In addition, effective
March 1, 2012, we assumed inpatient medical liability for ABD members for which we were not
previously responsible. Reserves for new coverage and new regions are now based on the newly
developing claims lag patterns. While the lag patterns are now beginning to stabilize for the new
membership and coverage, the true reserve liability continues to be more uncertain than usual.

• Data published by the Centers for Disease Control, or CDC, indicated a significant increase in the

percentage of office visits for influenza-like illnesses, or ILI, during December 2012. This indicated
that the annual flu season was starting earlier than it had in most recent years. This was most noticeable
in the southeast region of the country, but impacted other areas as well. Our leading indicators,
including inpatient authorizations and overall pharmacy utilization, did not show as great an increase as
we had expected based on the severity of the CDC’s flu-related indices. However, we did see a
significant increase in the use of prescription flu medication, especially in our Texas health plan.
Therefore, we increased our reserves to account for expected additional utilization due to the early
onset of the flu season.

• Our California health plan has enrolled approximately 20,000 new ABD members since September 30,
2011, as a result of the mandatory assignment of ABD members to managed care plans effective July 1,
2011. These new members converted from a fee-for-service environment. Due to the relatively recent
transition of these members to managed care, their utilization of medical services is less predictable
than it is for many of our other members.

•

Prior to July 2012, it was the state of Washington’s practice to disenroll certain sick newborns from the
Healthy Options Medicaid managed care program and cover them under the Supplemental Security
Income program, or SSI, instead. When this occurred, the health plan would reimburse the premiums
received for that member back to the state and the state in turn reimbursed the health plan for the cost
of care, usually retroactively to the date of birth. Effective July 1, 2012, the health plans now retain
these members and cover them under a new ABD program entitled Healthy Options Blind and
Disabled, or HOBD. The premium we receive from the state for the HOBD members is very high to
cover the substantial cost of care. By December, we had enrolled approximately 26,000 members under
HOBD. Because the program is relatively new, there is still some uncertainty as to the level of claims
to be expected from these high-cost members.

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
2012, 2011 and 2010, the absence of adverse development of the liability for claims and medical benefits payable
at the close of the previous period resulted in the recognition of substantial favorable prior period development.
In these 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 was more than 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
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

Commitments and Contingencies

Year ended December 31,

2012

2011

2010

(Dollars in thousands, except
per-member amounts)

402,476
—

354,356
—

315,316
3,228

5,136,055
(39,295)

3,911,803
(51,809)

3,420,235
(49,378)

5,096,760

3,859,994

3,370,857

4,649,363
355,343

5,004,706

3,516,994
294,880

3,811,874

3,085,388
249,657

3,335,045

494,530

402,476

354,356

9.8%
0.7%
0.8%

14.6%
1.1%
1.3%

15.7%
1.2%
1.5%

40
1,797,000
122,700
255,200
0.07
142.01
20,842,400
$19,429,300

40
1,697,000
111,100
207,600
0.07
122.33
17,207,500
$14,306,500

42
1,613,000
143,600
218,900
0.09
135.71
14,554,800
$11,686,100

We are not an obligor to or guarantor of any indebtedness of any other party, except for our obligation to
pay benefits under policies in-force relating to an insurance subsidiary we sold in the first quarter of 2012, in the
event such benefits are not paid by the reinsurer or current owner. This transaction is more fully described in
Note 19 to the accompanying audited consolidated financial statements for the year ended December 31, 2012.

We are not a party to off-balance sheet financing arrangements except for operating leases which are

disclosed in Note 19 to the accompanying audited consolidated financial statements for the year ended
December 31, 2012.

Contractual Obligations

In the table below, we present our contractual obligations as of December 31, 2012. 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

2013

2014-2015

2016-2017

2018 and Beyond

$494,530 $494,530

$ — $ —

$ —

274,471

86,276

23,465

37,537

1,155

26,866

9,035

19,367

189,465

36,228

9,150

17,645

42,681

15,411

3,675

525

41,170

7,771

1,605

—

Total contractual obligations

$916,279 $550,953

$252,488

$62,292

$50,546

(1) Represents the principal amount due on our 3.75% Convertible Senior Notes due 2014, our term loan due

2018, and the Credit Facility due 2016.

As of December 31, 2012, we have recorded approximately $10.6 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, 2012 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 are also exposed to interest rate risk relating to contractual variable interest rates under our Term Loan

Agreement which matures on November 30, 2018. The outstanding principal amount under the Term Loan

Agreement bears interest at the Eurodollar rate for each Interest Period commencing January 1, 2012. We

manage this floating rate debt using an Interest Rate Swap Agreement that is intended to reduce our exposure to

the impact of changing interest rates to our consolidated results of operations and future outflows for interest

expense. Under the Swap Agreement, we will receive a variable rate of one-month LIBOR plus 3.25%, and pay a

fixed rate of 5.34%. At December 31, 2012, a hypothetical 1% increase in the Eurodollar rate would result in a

$1.6 million favorable change in the fair value of our Interest Rate Swap Agreement. This favorable change

would reduce our exposure to a hypothetical 1% increase in the Eurodollar rate on the outstanding borrowings of

our Term Loan, that would result in additional interest expense of only $0.5 million. See Note 12 of the

accompanying audited consolidated financial statements for the year ended December 31, 2012 for more

information on the Term Loan Agreement and Interest Rate Swap Agreement.

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 was more than 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:

Payments for 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

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

Commitments and Contingencies

Year ended December 31,

2012

2011

2010

(Dollars in thousands, except

per-member amounts)

402,476

354,356

315,316

—

3,228

5,136,055

(39,295)

3,911,803

(51,809)

3,420,235

(49,378)

5,096,760

3,859,994

3,370,857

4,649,363

355,343

5,004,706

3,516,994

294,880

3,811,874

3,085,388

249,657

3,335,045

494,530

402,476

354,356

9.8%

0.7%

0.8%

14.6%

1.1%

1.3%

15.7%

1.2%

1.5%

1,797,000

1,697,000

1,613,000

122,700

255,200

0.07

142.01

111,100

207,600

0.07

122.33

143,600

218,900

0.09

135.71

20,842,400

$19,429,300

17,207,500

$14,306,500

14,554,800

$11,686,100

We are not an obligor to or guarantor of any indebtedness of any other party, except for our obligation to

pay benefits under policies in-force relating to an insurance subsidiary we sold in the first quarter of 2012, in the

event such benefits are not paid by the reinsurer or current owner. This transaction is more fully described in

Note 19 to the accompanying audited consolidated financial statements for the year ended December 31, 2012.

We are not a party to off-balance sheet financing arrangements except for operating leases which are

disclosed in Note 19 to the accompanying audited consolidated financial statements for the year ended

December 31, 2012.

Contractual Obligations

In the table below, we present our contractual obligations as of December 31, 2012. 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

2013

2014-2015

2016-2017

2018 and Beyond

Medical claims and benefits payable
Principal amount of long-term debt (1)
Operating leases
Interest on long-term debt
Purchase commitments

$494,530 $494,530 $ — $ —
42,681
274,471
15,411
86,276
3,675
23,465
525
37,537

189,465
36,228
9,150
17,645

1,155
26,866
9,035
19,367

Total contractual obligations

$916,279 $550,953 $252,488

$62,292

$ —
41,170
7,771
1,605
—

$50,546

(1) Represents the principal amount due on our 3.75% Convertible Senior Notes due 2014, our term loan due

2018, and the Credit Facility due 2016.

As of December 31, 2012, we have recorded approximately $10.6 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, 2012 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 are also exposed to interest rate risk relating to contractual variable interest rates under our Term Loan

Agreement which matures on November 30, 2018. The outstanding principal amount under the Term Loan
Agreement bears interest at the Eurodollar rate for each Interest Period commencing January 1, 2012. We
manage this floating rate debt using an Interest Rate Swap Agreement that is intended to reduce our exposure to
the impact of changing interest rates to our consolidated results of operations and future outflows for interest
expense. Under the Swap Agreement, we will receive a variable rate of one-month LIBOR plus 3.25%, and pay a
fixed rate of 5.34%. At December 31, 2012, a hypothetical 1% increase in the Eurodollar rate would result in a
$1.6 million favorable change in the fair value of our Interest Rate Swap Agreement. This favorable change
would reduce our exposure to a hypothetical 1% increase in the Eurodollar rate on the outstanding borrowings of
our Term Loan, that would result in additional interest expense of only $0.5 million. See Note 12 of the
accompanying audited consolidated financial statements for the year ended December 31, 2012 for more
information on the Term Loan Agreement and Interest Rate Swap Agreement.

Inflation

Item 8. Financial Statements and Supplementary Data

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.

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

Inflation

Item 8. Financial Statements and Supplementary Data

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.

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

80
81
82
86
84
87

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, 2012 and 2011, and the related consolidated statements of income and comprehensive
income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2012.
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, 2012 and 2011, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, 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, 2012,
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 28, 2013 expressed an
unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 28, 2013

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

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

Long-term debt

Deferred income taxes

Liability for ceded life and annuity contracts

Other long-term liabilities

Total liabilities

Stockholders’ equity:

LIABILITIES AND STOCKHOLDERS’ EQUITY

Common stock, $0.001 par value; 80,000 shares authorized; outstanding:

46,762 shares at December 31, 2012 and 45,815 shares at December 31, 2011

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

outstanding

Additional paid-in capital

Accumulated other comprehensive loss

Treasury stock, at cost; 111 shares at December 31, 2012

Retained earnings

Total stockholders’ equity

December 31,

2012

2011

(Amounts in thousands,

except per-share data)

$ 795,770

$ 493,827

$1,934,822

$1,652,146

$ 494,530

$ 402,476

342,845

149,682

—

32,443

28,386

1,349,126

221,443

58,313

77,711

151,088

13,419

44,101

—

19,621

184,034

141,798

6,520

1,155

828,037

261,784

37,900

—

24,787

1,152,508

—

285,524

(457)

(3,000)

500,200

782,314

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

147,214

50,947

—

1,197

601,834

216,929

33,127

23,401

21,782

897,073

266,022

(1,405)

—

490,410

755,073

$1,934,822

$1,652,146

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, 2012 and 2011, and the related consolidated statements of income and comprehensive

income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2012.

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, 2012 and 2011, and the consolidated

results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, 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, 2012,

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 28, 2013 expressed an

unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California

February 28, 2013

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:

Common stock, $0.001 par value; 80,000 shares authorized; outstanding:

46,762 shares at December 31, 2012 and 45,815 shares at December 31, 2011
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and

outstanding

Additional paid-in capital
Accumulated other comprehensive loss
Treasury stock, at cost; 111 shares at December 31, 2012
Retained earnings

Total stockholders’ equity

December 31,

2012

2011

(Amounts in thousands,
except per-share data)

$ 795,770 $ 493,827
336,916
167,898
11,679
18,327
19,435

342,845
149,682
—
32,443
28,386

1,349,126
221,443
58,313
77,711
151,088
13,419
44,101
—
19,621

1,048,082
190,934
54,582
101,796
153,954
16,134
46,164
23,401
17,099

$1,934,822 $1,652,146

$ 494,530 $ 402,476
147,214
50,947
—
1,197

184,034
141,798
6,520
1,155

828,037
261,784
37,900
—
24,787

1,152,508

—
285,524
(457)
(3,000)
500,200

601,834
216,929
33,127
23,401
21,782

897,073

—

266,022
(1,405)
—

490,410

782,314

755,073

$1,934,822 $1,652,146

See accompanying notes.

Net income

Other comprehensive income (loss), before tax:

Unrealized gain (loss) on investments

Total other comprehensive income (loss), before tax

Income tax expense (benefit) related to items of other comprehensive income

Total other comprehensive income (loss), net of tax

Comprehensive income

Year Ended December 31,

2012

2011

2010

(In thousands)

$ 9,790

$20,818

$54,970

1,529

581

948

1,167

380

787

(613)

(233)

(380)

$10,738

$21,605

$54,590

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

2012

2011

2010

(In thousands, except per-share data)

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 expenses

Impairment of goodwill and intangible assets

Operating income

Other expenses (income):
Interest expense
Other income

Total other expenses (income)

Income before income taxes
Provision for income taxes

Net income

Net income per share:

Basic

Diluted

Weighted average shares outstanding:

Basic

Diluted

See accompanying notes.

$5,826,491 $4,603,407 $3,989,909
89,809
6,259
—

160,447
5,539
547

187,710
5,188
9,374

6,028,763

4,769,940

4,085,977

5,096,760
141,208
532,627
158,991
63,704

5,993,290

—

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

4,625,192
(64,575)

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

3,980,976

—

35,473

80,173

105,001

16,769
(361)

16,408

19,065
9,275

15,519
—

15,519

64,654
43,836

15,509
—

15,509

89,492
34,522

9,790 $

20,818 $

54,970

0.21 $

0.45 $

0.21

0.45

1.34

1.32

46,380

46,999

45,756

46,425

41,174

41,631

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Net income
Other comprehensive income (loss), before tax:
Unrealized gain (loss) on investments

Total other comprehensive income (loss), before tax
Income tax expense (benefit) related to items of other comprehensive income

Total other comprehensive income (loss), net of tax

Comprehensive income

Year Ended December 31,

2012

2011

2010

(In thousands)
$ 9,790 $20,818 $54,970

1,529

1,529
581

948

1,167

1,167
380

787

(613)

(613)
(233)

(380)

$10,738 $21,605 $54,590

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 expenses

Impairment of goodwill and intangible assets

Operating income

Other expenses (income):

Interest expense

Other income

Income before income taxes

Provision for income taxes

Net income

Net income per share:

Total other expenses (income)

Weighted average shares outstanding:

Basic

Diluted

Basic

Diluted

See accompanying notes.

Year Ended December 31,

2012

2011

2010

(In thousands, except per-share data)

$5,826,491

$4,603,407

$3,989,909

187,710

160,447

5,188

9,374

5,539

547

89,809

6,259

—

6,028,763

4,769,940

4,085,977

5,096,760

3,859,994

3,370,857

141,208

532,627

158,991

63,704

143,987

415,932

154,589

50,690

78,647

345,993

139,775

45,704

5,993,290

4,625,192

3,980,976

—

(64,575)

—

35,473

80,173

105,001

16,769

(361)

16,408

19,065

9,275

9,790

0.21

15,519

—

15,519

64,654

43,836

20,818

0.45

15,509

—

15,509

89,492

34,522

54,970

1.34

1.32

46,380

46,999

45,756

46,425

41,174

41,631

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)

Retirement of common stock used for stock-based compensation

$(11,862) $ (3,926) $

(2,316)

Supplemental cash flow information:

Cash (received) paid during the period for:

Income taxes

Interest

Schedule of non-cash investing and financing activities:

Retirement of treasury stock

Details of sale of subsidiary

Decrease in carrying value of assets

Decrease in carrying value of liabilities

Gain on sale

Proceeds from sale of subsidiary, net of cash surrendered

Details of business combinations:

Increase in fair value of assets acquired

(Decrease) increase in fair value of liabilities assumed

(Decrease) increase in payable to seller

Net cash paid in business combinations

See accompanying notes.

Year Ended December 31,

2012

2011

2010

(In thousands)

$ (4,634) $ 54,663

$ 18,299

$ 10,099

$ 11,399

$ 10,951

$ — $ 7,000

—

30,942

(23,527)

1,747

9,162

—

$ — $(81,256) $(159,916)

—

(1,045)

(1,952)

24,450

4,723

$ — $(84,253) $(130,743)

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
Change in fair value of interest rate swap
Amortization of premium/discount on investments
Amortization of deferred financing costs
Gain on sale of subsidiary
Loss on disposal of property and equipment
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
Proceeds from sale of subsidiary, net of cash surrendered
Increase in deferred contract costs
Increase 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
Credit facility fees paid
Principal payments on term loan
Proceeds from employee stock plans
Excess tax benefits from employee stock compensation

Net cash provided by 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,

2012

2011

2010

(In thousands)

9,790

$ 20,818

$ 54,970

78,764
(9,887)
20,018
5,942
—
1,307
6,746
1,089
(1,747)
2,608
—
—
—
(526)

18,216
(8,958)
92,054
23,345
90,851
18,172

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)

60,765
(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

347,784

225,395

161,397

(78,145)
(306,437)
298,006
—
9,162
(11,610)
(2,647)
(1,913)

(60,581)
(345,968)
302,667
(84,253)
—
(42,830)
(4,064)
(1,898)

(48,538)
(302,842)
223,077
(130,743)

—
(29,319)
(5,566)
5,108

(93,584)

(236,927)

(288,823)

—
60,000
—
(20,000)
(3,000)
—
(1,129)
8,205
3,667

47,743

301,943
493,827

48,600
—
—
—
(7,000)
(1,125)
—
7,347
1,651

49,473

37,941
455,886

—
105,000
111,131
(105,000)

—
(1,671)
—
4,056
295

113,811

(13,615)
469,501

$ 795,770

$ 493,827

$ 455,886

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 (received) paid during the period for:

Income taxes

Interest

Schedule of non-cash investing and financing activities:
Retirement of treasury stock

Year Ended December 31,

2012

2011

2010

(In thousands)

$ (4,634) $ 54,663 $ 18,299

$ 10,099 $ 11,399 $ 10,951

$ — $ 7,000 $

—

Retirement of common stock used for stock-based compensation

$(11,862) $ (3,926) $ (2,316)

(526)

(714)

Proceeds from sale of subsidiary, net of cash surrendered

Details of sale of subsidiary

Decrease in carrying value of assets
Decrease in carrying value of liabilities
Gain on sale

Details of business combinations:

Increase in fair value of assets acquired
(Decrease) increase in fair value of liabilities assumed
(Decrease) increase in payable to seller

Net cash paid in business combinations

See accompanying notes.

30,942
(23,527)
1,747

9,162

—
—
—

—

—
—
—

—

$ — $(81,256) $(159,916)
24,450
(1,045)
4,723
(1,952)

—
—

$ — $(84,253) $(130,743)

Adjustments to reconcile net income to net cash provided by operating activities:

Operating activities:

Net income

Depreciation and amortization

Deferred income taxes

Stock-based compensation

Non-cash interest on convertible senior notes

Impairment of goodwill and intangible assets

Change in fair value of interest rate swap

Amortization of premium/discount on investments

Amortization of deferred financing costs

Gain on sale of subsidiary

Loss on disposal of property and equipment

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

Proceeds from sale of subsidiary, net of cash surrendered

Increase in deferred contract costs

Increase 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

Credit facility fees paid

Principal payments on term loan

Proceeds from employee stock plans

Excess tax benefits from employee stock compensation

Net cash provided by 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,

2012

2011

2010

(In thousands)

9,790

$ 20,818

$ 54,970

78,764

(9,887)

20,018

5,942

—

1,307

6,746

1,089

(1,747)

2,608

—

18,216

(8,958)

92,054

23,345

90,851

18,172

(78,145)

(306,437)

298,006

—

9,162

(11,610)

(2,647)

(1,913)

(93,584)

60,000

—

(20,000)

(3,000)

—

(1,129)

8,205

3,667

47,743

301,943

493,827

74,383

13,836

17,052

5,512

64,575

—

7,242

2,818

(1,676)

—

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

(236,927)

(288,823)

$ 795,770

$ 493,827

$ 455,886

Net cash provided by operating activities

347,784

225,395

161,397

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common Stock

Outstanding Amount

Additional
Paid-in
Capital

Balance at January 1, 2010

38,410

$ 38

$129,890

Net income
Other comprehensive loss, net of tax
Common stock issued, net of issuance costs
Employee stock grants and employee stock

purchase plans

Tax deficiency from employee stock

compensation

—
—
6,525

528

—

—
—
7

—

—
—
111,124

11,271

(673)

Accumulated
Other
Comprehensive
Loss

(In thousands)
$(1,812)

—
(380)
—

—

Retained
Earnings

Treasury
Stock

Total

$414,622 $ — $542,738

54,970
—
—

—
54,970
(380)
—
— 111,131

—

11,271

(673)

Balance at December 31, 2010

45,463

251,612

(2,192)

469,592

— 719,057

Net income
Other comprehensive income, net of tax
Purchase of treasury stock
Retirement of treasury stock
Employee stock grants and employee stock

plan purchases

Tax benefit from employee stock

compensation

—
—
—
(400)

752

—

—
—
—
—

—
—
—
(7,000)

20,473

—

937

—
787
—
—

—

—
—

20,818
—
— (7,000)
7,000
—

—

20,818
787
(7,000)
—

20,474

937

Balance at December 31, 2011

45,815

266,022

(1,405)

490,410

— 755,073

Net income
Other comprehensive income, net of tax
Purchase of treasury stock
Employee stock grants and employee stock

plan purchases

Tax benefit from employee stock

compensation

—
—
(111)

—
—
—

1,058

16,361

—

3,141

—
948
—

—

9,790
—
— (3,000)

—
—

9,790
948
(3,000)

—

16,362

3,141

Balance at December 31, 2012

46,762

$ 47

$285,524

$ (457)

$500,200 $(3,000) $782,314

See accompanying notes.

2012.

1. Basis of Presentation

Organization and Operations