Molina Healthcare Annual Report 2014

FY2014 Annual Report · Molina Healthcare

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Annual Report

2014Company Profile

Membership Profile

Molina Healthcare, Inc., a FORTUNE 500 company,
provides managed health care services under the
Medicaid and Medicare programs and through the
state insurance marketplaces. Molina currently serves
approximately 2.8 million members through our locally
operated health plans in 11 states across the nation.
We were awarded a manged care contract in the
Commonwealth of Puerto Rico that is expected to
enroll approximately 350,000 new members on April
1, 2015. Dr. C. David Molina founded our company in
1980 as a provider organization serving low-income
families in Southern California. Today, we continue
his mission of providing high quality and cost-effective
health care to those who need it most. For more
information about Molina Healthcare, please visit our
website at www.MolinaHealthcare.com.

Historical Highlights

Mothers, Children
& Families (TANF
& CHIP)

Membership
(Thousands)

Premium Revenue (exludes premium tax)
($ Millions)

EBITDA1
($ Millions)

Diluted Net Income per Share,
from Continuing Operations

1 EBITDA is a non-GAAP financial measure

(Amounts in thousands, except per-share data)
Revenue:

Premium revenue
Service revenue
Premium tax revenue
Health insurer fee revenue (1)
Investment income
Other revenue

Total revenue
Operating expenses:
Medical care costs
Cost of service revenue
General and administrative expenses
Premium tax expenses
Health insurer fee expenses(1)

Depreciation and amortization
Total operating expenses

Operating income
Other expenses, net:
Interest expense
Other expense, net

Total other expenses, net

Income from continuing operations before income tax expense
Income tax expense
Income from continuing operations
(Loss) income from discontinued operations
Net income

Diluted net income per share:
Income from continuing operations
(Loss) income from discontinued operations
Diluted net income per share

Year Ended December 31,
2013
2014

$9,022,511
210,051
294,388
119,484
8,093
12,074
9,666,601

8,076,331
156,764
764,693
294,388
88,591

92,917
9,473,684
192,917

56,811
802
57,613
135,304
72,726
62,578
(355)
$ 62,223

$6,179,170
204,535
172,017
—
6,890
26,322
6,588,934

5,380,124
161,494
665,996
172,017
—

72,743
6,452,374
136,560

52,071
3,343
55,414
81,146
36,316
44,830
8,099
$ 52,929

$ 1.30

(0.01)

$ 1.29

$ 0.96
0.17
$ 1.13

Diluted weighted average shares outstanding

48,340

46,862

Operating Statistics, Continuing Operations:
Medical care ratio(2)
Service revenue ratio(3)
General and administrative expense ratio(4)
Premium tax ratio(2)
Effective tax rate

89.5%
74.6%
7.9%
3.2%
53.8%

87.1%
79.0%
10.1%
2.7%
44.8%

(1) Health insurer fee expenses represent insurer fees levied by the federal government under the Affordable Care Act, which are not tax deductible. Associated

revenues represent state and federal reimbursement of such fees (including the related income tax effect) for Medicaid and Medicare insurers.

(2) Medical care ratio represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium tax expenses as a percentage

of premium revenue plus premium tax revenue. Medical care costs include costs incurred for providing long term services and supports (LTSS).

(3) Service revenue ratio represents cost of service revenue as a percentage of service revenue.
(4) Computed as a percentage of total revenue.

Molina Healthcare | Annual Report 2014

To Our Shareholders

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

At the beginning of 2014, our leadership team identified
three measures that would be critical to our success: the provision
of high-quality, cost-effective care; and improvements in our
administrative efficiency. I am pleased to report to you that our
company performed well in all three of these areas. As a result,
Molina Healthcare enjoyed what we believe was an exceptional
year.

We experienced some of the strongest enrollment increases in
the history of our organization along with tremendous revenue
growth across the majority of our health plans. We continue to
diversify, both in terms of our intersecting lines of business and
our geographical footprint. We continue to win new contracts and
enter new states. As a result, we are enrolling an ever-growing
percentage of health plan members that have chronic health
conditions and those with ongoing needs for integrated managed
health care services. We continue to align our resources and skills
as a company to gain greater administrative leverage – an effort
that paid dividends last year in terms of steady improvements in
our efficiency and reducing our administrative cost ratio. Most
importantly, we continue to uphold our high standards for quality,
as reflected in the ratings of our various state plans, while striving
to lower costs as prudent stewards of government funds.

Our operating results were strong. Total revenues grew to $9.7
billion, a 47% increase from 2013. Net income per diluted share
from continuing operations, rose to $1.30, up 35% from $0.96 in
the preceding year. Finally, cash flow from operations rose to more
than $1 billion last year from $190 million in 2013.

As in recent years, we achieved these results despite the resistance
of some significant headwinds. Obtaining reimbursement rates
that fairly reflect the cost of providing our services is an ongoing
challenge. In some of our states, we still await reimbursement for
fees paid by our company last year for the Affordable Care Act
health insurer fee. Our 2014 performance also reflects the higher
initial health care costs associated with launching new plans and
enrolling new beneficiaries who have not previously been part of a
managed care plan. We strongly believe that these are short-term
pains that pave the way for robust, long-term gains, as we draw on
from our extensive experience in coordinating care to bring about
better outcomes at reduced costs.

First and foremost, 2014 was a year of
unparalleled growth.
After beginning the year with 1.9 million health plan members, we
ended with more than 2.6 million. To put this dramatic increase
into perspective: It took 23 years for Molina Healthcare to reach
500,000 members. We added nearly that number in just the first
three quarters of last year, and we expect to add that many more
by mid-2015.

The lion’s share of our enrollment increases stemmed from the
expansion of Medicaid, most notably in California, Ohio and
Washington, a wave that has not yet dissipated. In several large
states where we operate health plans, officials reported large
backlogs in processing applications for the Medicaid program. As
these states work through the buildup, our Medicaid enrollment
should continue to grow. Moreover, because we receive higher
reimbursement for lives covered under Medicaid expansion than
for our traditional members, these new enrollees have an additional
positive impact on our top line financial performance. Altogether,
we expect the new members that were enrolled throughout 2014 to
generate approximately $1 billion in annualized revenue.

While smaller in volume, the initiatives that accounted for the
remainder of our membership increase last year – the expansion
of our geographic footprint and the addition of new programs for
the chronically ill – may be even more significant to our long-term
growth.

We gained a presence in two new state’s: South Carolina, where
we began serving members under the states new full-risk Medicaid
managed care program, and Illinois, where we are part of a fully
integrated pilot program for dual-eligible beneficiaries- people who

Molina Healthcare | Annual Report 2014

qualify for benifits under both Medicaid and Medicare. Meanwhile, in
Florida, we were awarded a contract under the state’s new Managed
Medicaid Assistance (MMA) program, and we completed two
acquisitions that increased our plan membership by approximately
70,000. In December, we won a contract to administer Puerto Rico’s
Medicaid program in two regions; after we begin operations in the
second quarter of 2015, we expect to enroll roughly 350,000 new
members in this new territory. In nine of our states, we began selling
Marketplace products to individuals seeking to purchase insurance
under the Affordable Care Act. Additionally, and in a relatively
small but important segment of our portfolio, we are cementing
Molina’s position as a trusted health plan operator for dual-eligible
beneficiaries. Last year, along with renewing long-term contracts in
two states to serve these beneficiaries, many of whom are elderly
and disabled, we implemented new dual-eligible contracts in three
additional states.

With our growth, we are witnessing a subtle
shift in the demographic profile of our
membership that has important – and exciting
– implications for our company.
Traditionally, the vast majority of our members have been covered
under the TANF program (Temporary Assistance for Needy

Families). Most TANF beneficiaries are under 18 years of age and
their medical needs are generally episodic in nature – pregnancies
and treatment for illnesses, for example. In addition, their eligibility
for the program, as its name suggests, tends to be temporary
based on changes in income or employment status.

By contrast, the average age of a member who joins one of our
health plans under Medicaid expansion is 40. Like the dual-
eligibles, care for these members tends to include services that
involve chronic illnesses, such as diabetes. Unlike the TANF
beneficiaries, Medicaid expansion members are unlikely to lose
their eligibility as other circumstances change.

While dual-eligibles and enrollees under Medicaid expansion still
represent less than 20% of our overall membership, the dramatic
enrollment growth we are experiencing with these members means
that Molina is shifting from an acute care company into one that
is focusing more resources on chronic care. We are managing the
care of more individuals with complex needs including behavioral
health care than ever before. Meeting the needs of these
individuals requires a different service model than the one that
applies to the traditional TANF beneficiary. For example, older and
dual-eligible members are more likely to need long-term services

Molina Healthcare | Annual Report 2014

delivered in their homes, such as assistance with dressing and
medications. They are also more likely to need support services
that directly impact their day-to-day health and well-being, such as
shopping, nutrition, or with filling prescriptions. While we are not
direct providers of such services today, part of our responsibility to
these beneficiaries involves assessing each individuals needs and
then serving as the vital point of contact to coordinate the array
of community-based providers and agencies on each member’s
behalf.

Not all companies are willing to accept the challenges that come
with serving the chronically-ill population, but our history and
experience make us exceptionally qualified for the job. In fact,
our track record in fulfilling our mission of providing quality
health care to people receiving government assistance is Molinas
foremost competitive strength. For the past eight years, we
have been strategically building on this core competency as we
recognized early on that long term services and support (LTSS)
would become an area of increased focus. Our experience
operating Dual Eligible Special Needs Plans helped us foresee the
day when a demonstrated ability to manage more beneficiaries
with chronic conditions and complex needs would be critical to
our success. We also knew that, while these individuals consume
a disproportionately large share of total health care expenditures

nationally, they also provide a significant opportunity. This
opportunity comes in the form of improved health outcomes to
individuals whose care has been managed in the past, along with
long-term membership and higher reimbursement levels for the
organization that brings efficiencies and demonstrates improved
outcomes. We are that organization, and we intend to make the
most of this opportunity.

At the same time, we continue to build on our business portfolio
in ways that leverage the risk that comes with managed health
care. For example, even as we have established a strong presence
in four of the five most populous states, we have diversified our
geographic exposure across the country. We now compete in
the Health Insurance Exchange Marketplace, which enables us to
provide affordable continuity of care for individuals who have lost
their Medicaid eligibility. Through Molina Medicaid Solutions, we
provide states with an integrated, seamless solution to manage
their Medicaid beneficiaries and the enormous flow of related
information. Finally, through our clinics in six states, we continue
to provide health care services directly to our members, which we
believe will become increasingly important in a more integrated
health care marketplace.

Molina Healthcare | Annual Report 2014

Managing rapid growth can be a challenge for any
company. We’ve proven ourselves to be up to the
task.
Collectively, the coordination of these new programs, combined
with the dramatic expansion in Medicaid members, represents
the largest and fastest programmatic integration and member
assimilation in the history of our company. Our success in
handling this integration is a reflection of Molina’s longstanding
expertise in this area, and a dividend from the recent investments
we have made in systems, infrastructure and especially in the
exceptional efforts made by our people.

Essential to fulfilling and ensuring quality as we take
on more beneficiaries with chronic medical conditions
is another imperative: making our administrative
operations exceptionally efficient.
On this front, we made steady improvement throughout the past
year. In fact, our general and administrative expense ratio of 7.9%
was 220 basis points lower than the previous year, and our ratio
for the third quarter of 2014 was the lowest in five years. These
improvements contributed directly to the 67% increase in pre-tax
income we enjoyed over 2013 and are an important and sustaining
return on the investments that we have made in our infrastructure.

We anticipated the large membership increases we experienced in
2014 and planned accordingly. For example, we hired over 4,500
new employees in 2013 to help us handle not only the expansion
of Medicaid, but also enrollment increases in all of our product
lines. In addition, we invested in new information technology to
better coordinate member information and to standardize our
operations, facilitating faster and smoother startups. Last year,
those investments paid valuable dividends. Our successful growth
over the past year gives us an even more solid foundation as we
seek to make the most of the abundant opportunities in today’s
marketplace.

Because we began as direct providers of care, quality
for us has always been both a bedrock value and a
strategic imperative.
A commitment to quality – while simultaneously improving

cost-efficiency – has always been part of Molina’s DNA. For this
reason, we consider it a great achievement that nine of our eleven
Medicaid managed care plans have been accredited by the National
Committee for Quality Assurance (NCQA). We are especially
proud that three of our Medicaid plans, in New Mexico, Utah and
Washington, were the highest ranked in their respective states. In
keeping with our commitment to earn NCQA accreditation for all of
our Medicaid plans, we are also pleased that our Wisconsin health
plan achieved that standard last year. Even as we grow and serve
a more diverse population, especially through dual demonstration
projects and health insurance marketplaces, our commitment to
quality will not change.

Efficiency, of course, is a moving target; we are never satisfied to
remain where we are because we believe in always doing better.
Our expectation remains that, as we implement and integrate new
programs and record their associated revenues on the books, we
will continue to reduce our administrative expense ratios.

While we prepared ourselves for growth, we also
readied ourselves to address the headwinds that
invariably come with being part of our industry.
Under a new law that went into effect last year, we paid $111 million
in non-tax-deductible annual fees on the health insurance industry
in Medicaid. While five states have been slow to reimburse those
fees, we did make significant progress toward the end of 2014
in recouping most of the outstanding balance. During the fourth
quarter of 2014, New Mexico and Texas agreed to fully reimburse
us, adding $30 million to revenues for that quarter. In the third
quarter of 2014, Michigan and Utah committed to reimburse
$11 million of the amount owed to Molina, but only informally
have indicated their willingness to compensate us also for the tax
effects of those fees. California also has informally acknowledged
responsibility for reimbursing the fee, but has not yet covered
it. Together these delays affected our earnings before taxes by
approximately $20 million last year; however, we remain confident
that we will be able to recoup all remaining fees from 2014 in 2015.

Similarly, programmatic delays affected our performance in Texas,
where we expect to receive $30 million in revenues for achieving
quality standards. However, because the state has been slow in
providing clear direction about how some of its quality measures

Molina Healthcare | Annual Report 2014

will be calculated, we were able to record only $10 million of that
revenue in 2014. Again, we remain confident that we will be able to
collect a significant portion of these revenues in 2015.

Additionally, we continued to deal with the familiar challenge of
state premium rates that have not kept pace with medical cost
trends and with the lack of coordination in the design of profit
caps and medical cost floors in some states such as Washington
and New Mexico. In the latter case, these states prevent us from
offsetting medical cost losses under one contract with profits we
achieved under another.

We also encountered higher-than-usual medical cost ratios.
This development was understandable given the number of new
members, particularly those with multiple chronic conditions, we
absorbed into our health plans. Fortunately, we have significant
experience with addressing the higher short-term costs associated
with migrating large numbers of individuals from fee-for-service to
managed health care. Because we have demonstrated the ability,
through our medical management initiatives, to stabilize and then
reduce medical costs as the care for these new members becomes
more coordinated, we strongly believe that we will improve our
medical margins over time.

Going forward, we are excited about both Molina’s
current position and our future.
Over the next decade, Medicaid spending is projected to double.
And three-fourths of all Medicaid spending remains in the fee-for-
service sector. That translates into a $315 billion opportunity for
companies like ours. We believe Molina is well-situated to make
the most of it.

We continue to improve the quality, coordination and cost-
efficiency of care for the members who need us most — and
whose complex needs have become a top priority for financially
strapped states seeking to control their Medicaid costs. We have a
strong balance sheet, a diverse yet interconnected service mix, and
a history of delivering quality and earnings growth. We have built
our company with a prospective view of the opportunities that are
now in front of us. As we pursue them, we remain deeply grateful
for your support and your investment.

J. Mario Molina, MD
President and Chief Executive Officer

Molina Healthcare | Annual Report 2014

Corporate Information
1.

10.

11.

Board of Directors

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

Steven J. Orlando, CPA
Founder, Orlando
Consulting
(7)

Senior Leadership

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

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

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

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

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

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

Garrey E. Carruthers,
Ph.D.
President, New Mexico
State University
(8)

Daniel Cooperman
Of Counsel DLA
Piper LLP
(9)

Steven G. James
Retired Audit Partner
Ernst & Young LLP
(10)

Dale B. Wolf
President and CEO
DBW Healthcare, Inc.
(11)

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
Chief Legal Officer
and Secretary

Richard A. Hopfer, Jr.
Chief Information Officer

Juan José Orellana, MBA
Senior 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 6th, 2015, at 10:00 a.m. local time, at: Molina Event Center,
200 Oceangate, 15th Floor, 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, 2014

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 periodic reports and filings 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 to conform the
statement to actual results or changes in our expectations that
occur after the date of the statement.

Molina Healthcare | Annual Report 2014

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, 2014
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

Name of Each Exchange on Which Registered

Common Stock, $0.001 Par Value

New York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È 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 ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes È 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

Accelerated filer

‘

Non-accelerated filer ‘ (Do not check if a smaller reporting company)
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 ‘ No È
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2014, the last business day of
our most recently completed second fiscal quarter, was approximately $1,338.4 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, 2014).
As of February 20, 2015, approximately 49,873,000 shares of the registrant’s Common Stock, $0.001 par value per share, were
outstanding.

Portions of the registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders to be held on May 6, 2015, are
incorporated by reference into Part III of this Form 10-K.

DOCUMENTS INCORPORATED BY REFERENCE

Molina Healthcare, Inc.
Form 10-K
For the Year Ended December 31, 2014
TABLE OF CONTENTS

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 I

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

124

126

127

128

This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Many of the forward-
looking statements are located under the headings “Business,” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of
future events based on certain assumptions and include any statement that does not directly relate to any
historical or current fact. Forward-looking statements can also be identified by words such as “future,”
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,”
“can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the
Company’s actual results may differ significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this
Form 10-K under the heading “Risk Factors.” Each of the terms “Company,” “Molina Healthcare,” “we,”
“our,” and “us,” as used herein refers collectively to Molina Healthcare, Inc. and its wholly owned subsidiaries,
unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements
for any reason, except as required by law.

PART I

Item 1: Business

OVERVIEW

As of December 31, 2014, our health plans served over 2.6 million members eligible for Medicaid, Medicare,
and other government-sponsored health care programs for low-income families and individuals. Dr. C. David
Molina founded our company in 1980 as a provider organization serving the Medicaid population in Southern
California. Today, we remain a provider-focused company led by his son, Dr. J. Mario Molina.

Significant Accomplishments in 2014

Our mission is to provide quality health care to those receiving government assistance. Our goal is to achieve this
mission while improving our financial strength. Our significant operational, financial and strategic
accomplishments supporting this goal during 2014 included:

• Expanding existing markets. Our Health Plans segment enrollment has grown approximately 36% since

December 31, 2013, primarily a result of:

• Our 2014 growth initiatives associated with the Affordable Care Act (ACA). Since the inception
of these programs in January 2014 through the end of fiscal 2014, we have added approximately
385,000 Medicaid expansion members, 18,000 integrated Medicare-Medicaid Plan (MMP)
members, and 15,000 Marketplace members;

• The inception and growth of operations at our newer health plans in South Carolina and Illinois,

adding over 200,000 members in the aggregate in fiscal 2014; and

• Acquisition of two Medicaid contracts in Florida, which added approximately 73,000 new

members in fiscal 2014.

• Entering new strategic markets. In 2014, we were awarded a managed care contract in the

Commonwealth of Puerto Rico that is expected to enroll its first members April 1, 2015. Total
enrollment is expected to be approximately 350,000 new members, with anticipated annualized
revenue of $750 million.

• Funding future growth. Debt financing transactions generated net cash of approximately $123 million;
such transactions both extended the maturity date and lowered the rate of our convertible senior notes
previously due in 2014.

Our Structure

We report our financial performance based on two reportable segments: the Health Plans segment and the Molina
Medicaid Solutions segment. We derive our revenues primarily from health insurance premiums and service
revenues. Refer to Part II, Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note 2,
“Significant Accounting Policies,” and Note 21, “Segment Information,” for revenue information by state health
plan, and segment revenue, profit and total asset information, respectively.

The Health Plans segment consists of operational health plans in 11 states and our direct delivery business. The
health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as
a health maintenance organization (HMO). Our direct delivery business consists primarily of the management of
a hospital in southern California under a management services agreement, and the operation of primary care
clinics in several states in which we operate health plans. Our Health Plans segment operates in a highly
regulated environment, with stringent minimum capitalization requirements that limit the ability of our health
plan subsidiaries to pay dividends to us.

Our Molina Medicaid Solutions segment provides design, development, implementation (DDI), and business
process outsourcing (BPO) solutions to state governments for their Medicaid management information systems
(MMIS). MMIS is a core tool used to support the administration of state Medicaid and other health care
entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of Idaho,
Louisiana, Maine, New Jersey, and West Virginia; the U.S. Virgin Islands; and a contract to provide pharmacy
rebate administration services for the Florida Medicaid program. We added the Molina Medicaid Solutions
segment to our business in 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.

Our reliance on operations in a limited number of states could cause our revenue and profitability to change
suddenly and unexpectedly. Additionally, our inability to continue to operate in any of the states in which we
currently operate, or a significant change in the nature of our existing operations, could adversely affect our
business, financial condition, cash flows, or results of operations.

Health Care Reform

The ACA has made broad-based changes to the U.S. health care system that have significantly affected the U.S.
economy and our business. We expect the ACA to continue to significantly impact our business operations and
financial results, including our medical care ratios.

Key components of the legislation will continue to be phased in over the next several years, with the most
significant changes having occurred at the start of 2014, including the implementation of the Medicaid expansion
(in electing states) and Marketplace programs, Medicare and Marketplace minimum medical loss ratios
(MLRs), and new industry-wide fees, assessments, and taxes. We have dedicated material resources and have
incurred material expenses in implementing and complying with the ACA, and we will continue to do so. As a
result of the novelty and extremely broad scale of all of the programmatic changes effected by the ACA, many of
the business and market impacts of the ACA will not be known for several years. Further, given the inherent
difficulty of foreseeing how individuals will respond to the choices afforded to them by the ACA, we cannot
predict the full effect the ACA will have on us.

Our Strategic Growth Initiatives

Our mission is to provide quality health care to those receiving government assistance. This mission drives our
strategic growth and growth-related initiatives as follows:

Enter New Programs Within Existing Markets

• Medicaid Expansion. In the states that have elected to participate, the ACA provides for the expansion
of the Medicaid program to offer eligibility to nearly all low-income people under age 65 with incomes
at or below 138% of the federal poverty line. Medicaid expansion membership phased in beginning
January 1, 2014. Since that date, our health plans in California, Illinois, Michigan, New Mexico, Ohio,
and Washington have begun participating in Medicaid expansion. At December 31, 2014, our
membership included approximately 385,000 Medicaid expansion members, or 15% of total
membership.

• Health Insurance Marketplace. The ACA authorized the creation of Marketplace insurance exchanges,

allowing individuals and small groups to purchase health insurance that is federally subsidized,
effective January 1, 2014. We participate in the Marketplace in all of the states in which we operate,
except Illinois and South Carolina. At December 31, 2014, we had approximately 15,000 Marketplace
members.

• Medicare-Medicaid Plans. Policymakers at the federal and state levels are increasingly focused on the
design and implementation of programs that improve the coordination of care for those who qualify to
receive both Medicare and Medicaid services (the “dual eligible”), and to deliver services to the dual
eligible in a more financially efficient manner. As a result of these efforts, 15 states have undertaken
demonstration programs to integrate Medicare and Medicaid services for dual-eligible individuals. The
health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (MMPs).
Our MMPs in California, Illinois, and Ohio offered coverage beginning in 2014, and we expect to
begin offering MMP coverage in South Carolina and Texas in the first quarter of 2015, and in
Michigan in the second quarter of 2015.

• Direct Delivery. Growth and aging of the U.S. population 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 financially
vulnerable 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. We operate primary care clinics in the states of California, Florida, New
Mexico, Utah, Virginia and Washington. In addition, we perform certain medical and administrative
management services for a hospital in Long Beach, California, including the assumption of financial
benefit and risk for a number of acute care beds at the hospital. We believe that this arrangement
improves hospital access for our members in the Long Beach, California area, and enhances our overall
direct delivery strategy. We may incur losses while we seek to modify various business operations and
patient behaviors under the management services agreement.

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. As
described above, in December 2014 we entered into a Medicaid contract with the Puerto Rico Health Insurance
Administration. The operational start date for the program is expected to be April 1, 2015.

Deliver Administrative Value to Medicaid Agencies

As Medicaid expenditures increase, we believe that an increasing number of states’ and other Medicaid agencies
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 and other 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.

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. For example, our general and administrative
expenses as a percentage of revenue (the general and administrative expense ratio) declined to 7.9% for the year
ended December 31, 2014, compared with 10.1% for the year ended December 31, 2013.

OUR INDUSTRY

Medicaid

Medicaid was established in 1965 under the U.S. Social Security Act to provide health care and long-term care
services and support to low-income Americans. Although jointly funded by federal and state governments,
Medicaid is a state-operated and state-implemented program. 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. As a result, there are 56 separate Medicaid programs — one for each U.S. state, each U.S.
territory, and the District of Columbia.

The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each
state’s federal medical assistance percentage (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%,
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
(TANF), which covers primarily low-income mothers and children. In states that have elected to participate, Medicaid
expansion provides eligibility to nearly all low-income people under age 65 with incomes at or below 138% of the
federal poverty line. Another common state-administered Medicaid program is for aged, blind or disabled (ABD)
Medicaid beneficiaries, which covers low-income persons with chronic physical disabilities or behavioral health
impairments. ABD beneficiaries represent a growing portion of all Medicaid recipients, and typically use more
services because of their critical health issues. Additionally, the Children’s Health Insurance Program (CHIP) is a joint
federal and state matching program that provides health care coverage to children whose families earn too much to
qualify for Medicaid coverage. States have the option of administering CHIP through their Medicaid programs. As of
December 31, 2014, approximately 70% of our members were TANF beneficiaries, 15% were Medicaid expansion
beneficiaries, 12% were ABD beneficiaries, 2% were Medicare beneficiaries, and 1% were integrated MMP and
Marketplace beneficiaries combined. For the year ended December 31, 2014, approximately 54% of our premium
revenue was from TANF and Medicaid expansion membership combined; 36% was from ABD membership, 7% was
from Medicare membership, 2% was from MMP integrated membership, and 1% was from Marketplace membership.

Every state Medicaid program must balance many potentially competing demands, including the need for quality
care, adequate provider access, and cost-effectiveness. 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.

Medicare

Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons a variety
of hospital, medical insurance, and prescription drug benefits. Medicare is funded by Congress, and administered
by the Centers for Medicare and Medicaid Services (CMS). Medicare beneficiaries may enroll in a Medicare
Advantage plan, under which managed care plans contract with CMS to provide benefits that are comparable to

original Medicare. Such benefits are provided in exchange for a fixed per-member per-month (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.

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.

Medicaid Management Information Systems

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. 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 actively participate in this market.

Competition

The Medicaid managed care industry is fragmented, and the competitive landscape is subject to ongoing changes
as a result of health care reform, 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,
quality of provider network, quality of service, and reputation. Our primary competitors in the Medicaid
managed care industry include Centene Corporation, WellCare Health Plans, Inc., UnitedHealth Group
Incorporated, Anthem, Inc., and Aetna Inc. 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, and CNSI.

BUSINESS OPERATIONS

Our Strengths

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 to provide quality health services to financially vulnerable families and
individuals covered by government programs. 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, 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. 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.

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. We believe that our Molina
Medicaid Solutions platform, which is based on commercial off-the-shelf technology, 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
Plans segment through the acquisition of health plans, the start-up development of new operations, and the
transition of members from other health plans. The initial acquisitions of our New Mexico, South Carolina and
Wisconsin health plans have demonstrated our ability to expand into new states. The establishment of our health
plans in Florida, Illinois, Ohio, Texas and Utah reflects our ability to replicate our business model on a start-up
basis in new states, while significant contract acquisitions in California, Michigan, New Mexico and Washington
have demonstrated our ability to expand our operations within states in which we were already operating.

Administrative Efficiency. 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
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 and
standardization of 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 (NCQA) has accredited nine of
our 11 Medicaid managed care plans. 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
2.6 million members as of December 31, 2014, expanded our Health Plans segment to 11 states, and added our
Molina Medicaid Solutions segment. Our experience over more than 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.

Pricing

Medicaid. Under our Medicaid contracts, state government agencies pay our health plans fixed PMPM rates that
vary by state, line of business and demographics; and we arrange, pay for and manage health care services
provided to Medicaid beneficiaries. Therefore, our health plans are at risk for the medical costs associated with
their members’ health care. The rates we receive are subject to change by each state and, in some instances,
provide for adjustments for health risk factors. CMS requires these rates to be actuarially sound. Payments to us
under each of our Medicaid contracts are subject to the annual appropriation process in the applicable state.

Medicare. Under Medicare Advantage, managed care plans contract with CMS to provide benefits in exchange
for a fixed PMPM premium payment that varies based on the county in which a member resides, and adjusted for
demographic and health risk factors. CMS also considers inflation, changes in utilization patterns and average
per capita fee-for-service Medicare costs in the calculation of the fixed PMPM premium payment.

Amounts payable to us under the Medicare Advantage contracts are subject to annual revision by CMS, and we
elect to participate in each Medicare service area or region on an annual basis. Medicare Advantage premiums
paid to us are subject to federal government reviews and audits which can result, and have resulted, in retroactive
and prospective premium adjustments. Compared with our Medicaid plans, Medicare Advantage contracts
generate higher average PMPM revenues and health care costs.

Marketplace. For our Marketplace plans, we develop premium rates during early spring of any given year to take
effect on January 1st of the following year. We develop our premium rates based on our estimates of projected
member utilization, medical unit costs, and administrative costs, with the intent of realizing a target pretax
percentage profit margin. In setting premium rates for our Marketplace plans, we also take into account the
competitive environment on a region–by–region basis. Our actuaries certify the actuarial soundness of
Marketplace premiums in the rate filings submitted to the various state and federal authorities for approval.

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 proved 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 such as the following:

• 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 Healthy
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
members 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.

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 (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 (DRGs) capitation, and case rates.

Direct Delivery. The clinics we operate 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 we operate, and the clinics
and hospital services we manage, assist us in developing and implementing community education, disease
management, and other programs. Direct clinic management experience also enables us to better understand the
needs of our contracted providers.

Reinsurance

Our health plans currently have reinsurance agreements with an unaffiliated insurer to cover certain claims. We
enter into these contracts to reduce the risk of catastrophic losses which in turn reduce our capital and surplus
requirements. We frequently evaluate reinsurance opportunities and review our reinsurance and risk management
strategies on a regular basis.

Management Information Systems

All of our health plan information technology 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 federal health care privacy regulations, 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 (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.

Claims Processing. All of our health plans operate on a single managed care platform for claims processing (the
QNXT 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 (HHS). 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.

CONTRACTING AND REGULATORY COMPLIANCE

Government Contracts

Medicaid. In all the states in which we operate health plans, we enter into a contract with the state’s Medicaid
agency to offer managed care benefits to Medicaid-eligible individuals. Some states award contracts to any
applicant demonstrating that it meets the state’s requirements, while 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.

To operate a health plan in a given state, we must apply for and obtain a certificate of authority or license from
that state. We are regulated by the state 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. For example, we must demonstrate that:

• Our provider network is adequate;

• Our quality and utilization management processes comply with state requirements;

• We have adequate procedures in place for responding to member and provider complaints and

grievances;

• We can meet requirements for the timely processing of provider claims;

• We can collect and analyze the information needed to manage our quality improvement activities;

• We have the financial resources necessary to pay our anticipated medical care expenses and the

infrastructure needed to account for our costs;

• 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; and

• We have the financial resources needed to protect the state, our providers, and our members against the

insolvency of one of our health plans.

Our state contracts 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 dis-enrollment 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.

The contractual relationship with the state is generally for a period of three to four years and is renewable on an
annual or biennial 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 (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, in early
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 in that year.

Medicare. Under annually renewable contracts with CMS, our state health plans offer Medicare Advantage
special needs plans which include a mandatory Part D prescription drug benefit. Molina Medicare Options Plus,
our trade name for these plans, serves beneficiaries who are dually eligible for both Medicare and Medicaid, such
as low-income seniors and people with disabilities. We believe offering these Medicare plans is consistent with
our historical mission of serving low-income and medically under-served families and individuals. We employ
sales personnel, and engage independent brokers, agents and consultants to enroll new Molina Medicare Options
Plus members. 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, 2014 was approximately 49,000
members. For the year ended December 31, 2014, Medicare premium revenues in the aggregate represented
approximately 7% of our total premium revenues.

Federal regulations 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.
Additionally, there are certain restrictions on agent and broker compensation.

Molina Medicaid Solutions. We continually monitor the status of various states’ legacy MMIS capabilities and
contracts to determine whether Molina Medicaid Solutions’ value proposition and core strengths will address a
state’s MMIS goals. Once an RFP with a Medicaid agency is won, our Molina Medicaid Solutions contracts may
extend over a number of years, particularly in circumstances where we deliver extensive and complex DDI services,
such as the initial design, development and implementation of a complete MMIS. For example, the initial 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. 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.

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 a certified MMIS. Federal
certification increases the share of the claims processing costs the federal government will pay for monthly
operations. With an uncertified system, the federal government contributes approximately 50% of claims
processing costs, with the state paying the other half. With a certified system, the federal government pays 75%
of costs, reducing the state’s share.

Regulatory Compliance

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
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 organizations, including those operating in the Medicaid and Medicare
programs.

Health Insurer Fee (HIF). One notable provision of the ACA is an excise tax or annual fee that applies to most
health plans, including commercial health plans and Medicaid 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 higher commercial insurance premiums.

However, because Medicaid is a government funded program, Medicaid health plans have no alternative but to
look to their respective state partners for payment to offset the impact of this tax. Additionally, when states
reimburse us for the amount of the HIF, that reimbursement is itself subject to income tax, the HIF, and
applicable state premium taxes. Because the HIF is not deductible for income tax purposes, our net income is
reduced by the full amount of the assessment. We expect our 2015 HIF assessment related to our Medicaid
business to be approximately $143 million, with an expected tax effect from the reimbursement of the assessment
of approximately $88 million. Therefore, the total reimbursement needed as a result of the Medicaid-related HIF
is approximately $231 million.

For further discussion of the risks and uncertainties relating to this excise tax, refer to Part II, Item 7 of this Form
10-K, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the
subheading “Liquidity and Capital Resources — Financial Condition.”

States’ Risk-Based Capital Requirements. 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 (RBC) requirements. The RBC requirements are based on guidelines established by the National
Association of Insurance Commissioners (NAIC) and are administered by the states. All of our state health plans
are subject to RBC requirements, except California and Florida. 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. For further information regarding RBC requirements, refer to Part II, Item 8 of this Form
10-K, Notes to Consolidated Financial Statements, in Note 20, “Commitments and Contingencies.”

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.

HIPAA. In 1996, Congress enacted the Health Insurance Portability and Accountability Act (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.

Health care reform 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.

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. As required by ARRA, the Secretary of HHS
has promulgated regulations implementing various provisions of the HITECH Act. The Final Omnibus Rule
promulgated by HHS in January 2013, included the Final Breach Notification Rule as well as provisions that
apply the HIPAA regulatory scheme to business associates. We anticipate that HHS will promulgate additional
rules under the HITECH Act to implement provisions of the statute which were not addressed in the Final
Omnibus Rule. The various requirements of the HITECH Act and the Final Omnibus Rule have different
compliance dates, and in some cases, the applicable compliance date may depend on the publication of additional
rules or guidance by HHS. With respect to those requirements whose compliance dates have passed, we believe
that we are in compliance with such provisions. With respect to additional requirements that may be issued in the
future by HHS, it is our intention to implement any such 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 Act of
2005 (DRA) encourages states to enact state-versions of the federal False Claims Act that establish liability to the
state for false and fraudulent Medicaid claims and that provide for, among other things, claims to be filed by qui
tam relators.

Companies involved in public health care programs such as Medicaid are often the subject of fraud and abuse
investigations. The regulations and contractual requirements applicable to participants in these public sector
programs are complex and subject to change. Violations of certain fraud and abuse laws applicable to us could
result in civil monetary penalties, criminal fines and imprisonment, and/or exclusion from participation in
Medicaid, Medicare, other federal health care programs and federally funded state health programs.

Federal and state governments have made investigating and prosecuting health care fraud and abuse a priority.
Although we believe that our compliance efforts are adequate, we will continue to devote significant resources to
support our compliance efforts.

OTHER INFORMATION

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.

Employees

As of December 31, 2014, we had approximately 10,500 employees. Our employee base is multicultural and
reflects the diverse membership we serve. We believe we have good relations with our employees. None of our
employees is represented by a union.

Available Information

We are organized as a C corporation under Delaware law. Our principal executive offices are located at 200
Oceangate, Suite 100, Long Beach, California 90802, and our telephone number is (562) 435-3666.

You can access our website at www.molinahealthcare.com to learn more about our Company. From that site, you
can download and print copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and
Current Reports on Form 8-K, along with amendments to those reports. You can also download our Corporate
Governance Guidelines, Board of Directors committee charters, and Code of Business Conduct and Ethics. We
make periodic reports and amendments available, free of charge, as soon as reasonably practicable after we file
or furnish these reports to the SEC. We will also provide a copy of any of our corporate governance policies
published on our website free of charge, upon request. To request a copy of any of these documents, please
submit your request to: Molina Healthcare, Inc., 200 Oceangate, Suite 100, Long Beach, California 90802, Attn:
Investor Relations. Information on or linked to our website is neither part of nor incorporated by reference into
this Annual Report on Form 10-K or any other SEC filings.

Executive Officers of the Registrant

The following sets forth certain information regarding our executive officers, including the business experience
of each executive officer during the past five years:

Name

Age

Position

J. Mario Molina, M.D.
John C. Molina, J.D.
Terry P. Bayer
Joseph W. White
Jeff D. Barlow

President and Chief Executive Officer

56
50 Chief Financial Officer
64 Chief Operating Officer
56 Chief Accounting Officer
52 Chief Legal Officer and Corporate Secretary

Dr. Molina 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 of Directors since 1996.
Dr. Molina is the brother of John C. Molina.

Mr. Molina has served as Chief Financial Officer since 1995. He also has served as a member of the Board of
Directors since 1994. Mr. Molina is the brother of Dr. J. Mario Molina.

Ms. Bayer has served as Chief Operating Officer since 2005.

Mr. White has served as Chief Accounting Officer since 2007.

Mr. Barlow has served as Chief Legal Officer and Corporate Secretary since 2010. From 2004 to 2010,
Mr. Barlow served as Vice President, Assistant Secretary, and Assistant General Counsel of Molina Healthcare.

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 Segment

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 (collectively, the Affordable Care Act, or 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 were
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 federal excise tax. One notable provision of the ACA is an excise
tax or annual fee that applies to most health plans, including commercial health plans and Medicaid
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 higher commercial
insurance premiums. However, because Medicaid is a government funded program, Medicaid health
plans have no alternative but to look to their respective state partners for payment to offset the impact
of this tax. Additionally, when states reimburse us for the amount of the HIF, that reimbursement is
itself subject to income tax, the HIF, and applicable state premium taxes. Because the HIF is not
deductible for income tax purposes, our net income is reduced by the full amount of the assessment.
The state of California has not formally committed to reimburse us for either the HIF itself, or the
related tax effects. The states of Michigan and Utah have reimbursed us for the HIF, but have not
formally committed to reimbursement for the related tax effect. The total amount of HIF revenue for
which agreements were not secured (and revenue was not recognized) amounted to approximately $20
million for fiscal 2014. We expect to collect and recognize this revenue related to 2014 in 2015. We
further expect to recognize revenue in 2015 sufficient to reimburse us for the full amount of the HIF we
will pay (along with related tax effects) in September of 2015. We expect our 2015 HIF assessment
related to our Medicaid business to be approximately $143 million, with an expected tax effect from
the reimbursement of the assessment of approximately $88 million. Therefore, the total reimbursement
needed as a result of the Medicaid-related HIF is approximately $231 million. The failure of our state
partners to reimburse us in full for the HIF and its related tax effects could have a material adverse
effect on our business, financial condition, cash flows or results of operations.

• 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 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
support, 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 levels are
increasingly focused on the design and implementation of programs that improve the coordination of
care for those who qualify to receive both Medicare and Medicaid services (the “dual eligible”), and to
deliver services to the dual eligible in a more financially efficient manner. As a result of these efforts,
15 states have undertaken demonstration programs to integrate Medicare and Medicaid services for
dual-eligible individuals. The health plans participating in such demonstrations are referred to as
Medicare-Medicaid Plans (MMPs). Our MMPs in California, Illinois, and Ohio offered coverage
beginning in 2014, and we expect to begin offering MMP coverage in South Carolina and Texas in the
first quarter of 2015, and in Michigan in the second quarter of 2015.

There are numerous risks associated with the initial implementation of a new program, with a health
plan’s expansion into a new service area, and 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 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
present 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 the health plan or plans could adversely affect
our business, financial condition, cash flows, or results of operations.

• Risks associated with Medicaid expansion. In the states that have elected to participate, the ACA

provides for the expansion of the Medicaid program to offer eligibility to nearly all low-income people
under age 65 with incomes at or below 138% of the federal poverty line. Medicaid expansion
membership phased in beginning January 1, 2014. Since that date, our health plans in California,
Illinois, Michigan, New Mexico, Ohio, and Washington have begun participating in Medicaid
expansion. At December 31, 2014, our membership included approximately 385,000 Medicaid
expansion members, or 15% of total membership. The new enrollees in our health plans represent a
population that is different from the population of Medicaid enrollees we have historically managed.
All of the risk factors described above with regard to the duals demonstration programs apply equally
to Medicaid expansion.

• Risks associated with health insurance marketplaces. The ACA authorized the creation of Marketplace

insurance exchanges, allowing individuals and small groups to purchase health insurance that is
federally subsidized, effective January 1, 2014. We participate in the Marketplace in all of the states in
which we operate, except Illinois and South Carolina. At December 31, 2014, we had approximately
15,000 Marketplace members, and that enrollment is expected to grow appreciably in 2015,
particularly at our Florida health plan. All of the risk factors described above with regard to the duals
demonstration programs apply equally to our participation in the insurance marketplaces.

• Risks associated with the King v. Burwell case. There is a case currently pending before the United
States Supreme Court to be argued on March 4, 2015, challenging whether the IRS may permissibly
promulgate regulations to extend tax-credit subsidies to coverage purchased through exchanges
established by the federal government under Section 1321 of the ACA. In the event the Supreme Court
rules against Health and Human Services Secretary Burwell, no federal subsidies would be allowed to
be paid to those individuals purchasing health insurance through the federally facilitated exchanges, of
which there are currently 36. This would undermine the functioning of those exchanges, and cause
major disruption under the entire ACA throughout the nation.

• Risk associated with implementing regulations. There are many parts of the ACA that 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 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, and implementing regulations
could contain provisions that have a material adverse effect on our business, financial condition, cash
flows, or results of operations.

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

Our profitability depends to a significant degree on our ability to accurately predict and effectively manage our
medical care costs. Historically, our medical care cost ratio, meaning our medical care costs as a percentage of
our premium revenue 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 cost ratio can create significant changes in our overall
financial results. For example, if our overall medical care ratio, continuing operations, for the year ended
December 31, 2014 of 89.5% had been one percentage point higher, or 90.5%, our net income from continuing
operations for the year ended December 31, 2014 would have been approximately $0.12 per diluted share rather
than our actual income from continuing operations of $1.30 per diluted share, a decrease of approximately 91%.

Factors that may affect our medical care costs include the level of utilization of health care services, unexpected
patterns in the annual flu season, increases in hospital costs, an increased incidence or acuity of high dollar
claims related to catastrophic illnesses or medical conditions for which we do not have adequate reinsurance
coverage, increased maternity costs, payment rates that are not actuarially sound, changes in state eligibility
certification methodologies, relatively low levels of hospital and specialty provider competition in certain

geographic areas, increases in the cost of pharmaceutical products and services, changes in health care
regulations and practices, epidemics, new medical technologies, and other various external factors. Many of these
factors are beyond our control and could reduce our ability to accurately predict and effectively manage the costs
of providing health care services. The inability to forecast and manage our medical care costs or to establish and
maintain a satisfactory medical care cost ratio, either with respect to a particular state health plan or across the
consolidated entity, could have a material adverse effect on our business, financial condition, cash flows, or
results of operations.

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. The states in which we operate our health plans regularly face 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 or entitlement reform
proposals would fundamentally change the structure and financing of the Medicaid program. 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.

We are unable to determine how any future Congressional spending cuts will affect Medicare and Medicaid
reimbursement. 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 have a material adverse effect on
our business, financial condition, cash flows, or results of operations.

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

Because of the time lag between when medical services are actually rendered by our providers and when we
receive, process, and pay a claim for those medical services, we must continually estimate our medical claims
liability at particular points in time, and establish claims reserves related to such estimates. Our estimated
reserves for such “incurred but not paid” (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.

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 one or more of the states in which we operate a health plan could
significantly increase utilization rates and medical costs.

Our results can be significantly impacted by a severe flu season in the states in which we operated our health
plans. We seek to set our IBNP reserves appropriately to account for seasonal spikes in the incidence of the flu.
However, if the actual utilization rates of our members are higher than we had anticipated, our results in the
relevant periods 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. In the event the responsive bid of one or more of our
health plans is not successful, we will lose our Medicaid contract in the applicable state or states, 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 three to four years, and may be successively extended by
amendment for additional periods if the relevant state agency so elects. Our current contracts expire on various
dates over the next several years. 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 in connection with
an unsuccessful RFP bid. During 2015, our Michigan Medicaid contract will be subject to a new RFP. We expect
the Michigan RFP to be released on May 1, 2015, and for the new contract to become effective on October 1,
2015. If we are unable to renew, successfully re-bid, or compete for any of our government contracts, including
our Michigan contract, or if any of our contracts are terminated or renewed on less favorable terms, our business,
financial condition, cash flows, or results of operations could be adversely affected.

If we sustain a cyberattack or suffer privacy or data security breaches that disrupt our operations or result in
the dissemination of sensitive personal or confidential information, we could suffer increased costs, exposure
to significant liability, reputational harm, loss of business, and other serious negative consequences.

As part of our normal operations, we routinely collect, process, store, and transmit large amounts of data in our
operations, including sensitive personal information as well as proprietary or confidential information relating to
our business or third parties. We may be subject to breaches of the information technology systems we use.
Experienced computer programmers and hackers may be able to penetrate our layered security controls and
misappropriate or compromise sensitive personal information or proprietary or confidential information, create
system disruptions, or cause shutdowns. They also may be able to develop and deploy viruses, worms, and other

malicious software programs that attack our systems or otherwise exploit any security vulnerabilities. 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.
Our facilities may also be vulnerable to security incidents or security attacks; acts of vandalism or theft;
misplaced or lost data; human errors; acts of malicious insiders, or other similar events that could negatively
affect our systems and our and our members’ data. The cost to eliminate or address the foregoing security threats
and vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be
successful and could result in interruptions, delays, or cessation of service, and loss of members, vendors, and
state contracts. In addition, breaches of our security measures and the unauthorized dissemination of sensitive
personal information or proprietary information or confidential information about our members could expose our
members to the risk of financial or medical identity theft, or expose us or other third parties to a risk of loss or
misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise
have a material adverse effect on our business, financial condition, cash flows, or results of operations.

The exorbitant cost of specialty drugs and new generic drugs could have a material adverse effect on the level
of our medical costs and our results of operations.

In 2014, Gilead’s pricing of the hepatitis C drug, Sovaldi, at $84,000 per standard course of therapy received
major attention as a health care policy and public policy matter. Because of the relatively high incidence of
hepatitis C throughout the nation, particularly in the Medicaid population, the pricing of specialty drugs for the
treatment of hepatitis C represents a major public health and public financing problem. In the case of Sovaldi,
because of its advent on the health care market in early 2014, the cost of the drug was generally not factored into
our 2014 capitation rates, thus threatening to undermine the actuarial soundness of those rates. New high priced
specialty drugs and generic drugs are expected to enter the health care market in 2015. In addition, 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, geographic variation in utilization of new and existing
pharmaceuticals, and changes in discounts. We will seek to work with state Medicaid agencies to ensure that we
receive appropriate and actuarially sound reimbursement for all new drug therapies and pharmaceuticals. In the
event we are required to bear the high costs of new specialty drugs or generic drugs without an appropriate rate
adjustment or other reimbursement mechanism, or if new regulations or mandates affect our pharmaceutical
costs, our business, financial condition, cash flows, or results of operations could be adversely affected.

States may not adequately compensate us for the value of drug rebates that were previously earned by us but
that are now collectible by the states.

ACA includes certain provisions that change the way drug rebates are handled for drug claims filled by Medicaid
managed care plans. Retroactive to March 23, 2010, state Medicaid programs are now required to collect federal
rebates on all Medicaid-covered outpatient drugs dispensed or administered to Medicaid managed care enrollees
(excluding certain drugs that are already discounted), and pharmaceutical manufacturers are required to pay
specified rebates directly to the state Medicaid programs for those claims. This has impacted the level of rebates
received by managed care plans from the manufacturers for Medicaid managed care enrollees. Many
manufacturers 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 ACA implementation. There are provisions in the ACA that require rates paid to Medicaid managed care
plans to be actuarially sound in regard to drug rebates. Although we will be pursuing rate increases with state
agencies to make us whole for the rebate amounts lost, there can be no assurances that the premium increases we
may receive, if any, will be adequate to offset the amount of the lost rebates. If such premium increases prove to
be inadequate, our business, financial condition, cash flows, or results of operations could be adversely affected.

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

We currently derive our premium revenues from 11 state health plans, with our Puerto Rico health plan expected
to commence operations in April 2015. If we are unable to continue to operate in any of those 11 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, or results of operations.

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

The state contracts of our California, Illinois, New Mexico, Ohio, Texas, Washington, 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 have a
material adverse effect on our business, financial condition, cash flows or results of operations. In addition, the
state contracts of our California, Florida, Illinois, Michigan, New Mexico, Ohio, Texas, and Washington health
plans contain provisions pertaining to medical cost floors and corridors, administrative cost and profit ceilings,
and profit-sharing arrangements. Our Medicare and Marketplace business is also subject to medical cost floor
requirements enacted by the Federal government. 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 have a material adverse effect on our
business, financial condition, cash flows, or results of operations.

Failure to attain profitability in any new start-up operations, including in our new Puerto Rico health plan,
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. All of these risks will pertain to our new start-up Puerto Rico health
plan, which is expected to commence operations in April 2015. The expenses associated with starting up a health
plan in a new state or commonwealth, or expanding a health plan in an existing state could have a material adverse
effect on our business, financial condition, cash flows, or results of operations.

Receipt of inadequate or significantly delayed premiums could negatively affect our business, financial
condition, cash flows, or results of operations.

Our premium revenues consist of fixed monthly payments per member, and supplemental payments for other
services such as maternity deliveries. These premiums are fixed by contract, and we are obligated during the
contract periods to provide health care services as established by the state governments. We use a large portion of
our revenues to pay the costs of health care services delivered to our members. If premiums do not increase when
expenses related to medical services rise, our medical margins will be compressed, and our earnings will be
negatively affected. A state could increase hospital or other provider rates without making a commensurate
increase in the rates paid to us, or could lower our rates without making a commensurate reduction in the rates
paid to hospitals or other providers. In addition, if the actuarial assumptions made by a state in implementing a
rate or benefit change are incorrect or are at variance with the particular utilization patterns of the members of
one of our health plans, our medical margins could be reduced. Any of these rate adjustments in one or more of
the states in which we operate could have a material adverse effect our business, financial condition, cash flows,
or results of operations.

Furthermore, a state undergoing a budget crisis may significantly delay the premiums paid to one of our health
plans. Any significant delay in the monthly payment of premiums to any of our health plans could have a
material adverse effect on our business, financial condition, cash flows, or results of operations.

Reductions in Medicare payments could reduce our earnings potential for our Medicare Advantage plans and
our duals demonstration programs.

The Sequestration Transparency Act of 2012 included a 2% reduction of payments from CMS to our Medicare
Advantage plans beginning April 1, 2013. Medicare Advantage plans will continue to be affected until Congress
lifts the sequestration mandated under the Sequestration Transparency Act of 2012. The impact of sequestration
cuts on our Medicare Advantage revenues is partially mitigated by reductions in provider reimbursements paid to
those providers with rates indexed to the Medicare fee-for-service reimbursement rates. Such reduction in our
Medicare payments may have an adverse effect on our earnings potential for our Medicare Advantage plans and
our duals demonstration programs. In addition, reductions to provider reimbursement rates associated with
sequestration may adversely impact our relations with the impacted providers.

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 at all, 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, or that we will not complete acquisitions that turn
out to be unfavorable. Further, to the extent we complete an acquisition, we may be unable to realize the
anticipated benefits from such acquisition because of operational factors or difficulty in integrating the
acquisition with our existing business. This may include problems involving the integration of:

•

additional employees who are not familiar with our operations or our corporate culture,

new provider networks which may operate on terms different from our existing networks,

additional members who may decide to transfer to other health care providers or health plans,

•

disparate information, claims processing, and record-keeping systems,

internal controls and accounting policies, including those which require the exercise of judgment and
complex estimation processes, such as estimates of claims incurred but not reported, accounting for
goodwill, intangible assets, stock-based compensation, and income tax matters, and

new regulatory schemes, relationships, practices, and compliance requirements.

Also, we are generally required to obtain regulatory approval from one or more state agencies when making
acquisitions of health plans. In the case of an acquisition of a business located in a state in which we do not
already operate, we would be required to obtain the necessary licenses to operate in that state. In addition,
although we may already operate in a state in which we acquire a new business, we would be required to obtain
regulatory approval if, as a result of the acquisition, we will operate in an area of that state in which we did not
operate previously. Furthermore, we may be required to renegotiate contracts with the network providers of the
acquired business. We may be unable to obtain the necessary governmental approvals, comply with these
regulatory requirements or renegotiate the necessary provider contracts in a timely manner, if at all.

In addition, we may be unable to successfully identify, consummate, and integrate future acquisitions, including
integrating the acquired businesses on our information technology platform, or to implement our operations
strategy in order to operate acquired businesses 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 could suffer a substantial reduction in profitability, and could 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 business, financial condition, cash flows, or
results of operations.

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. We are currently defending two qui tam actions where both the federal
and state governments declined to intervene: (i) USA and State of Florida ex rel Charles Wilhelm v. Molina
Healthcare and Molina Healthcare of Florida; and (ii) USA ex rel Anita Silingo v. Mobile Medical Examination
Service, Molina Healthcare of California, et al. We believe we have meritorious defenses to both matters, and
intend to defend both matters vigorously. In the event we are subject to liability under these or other qui tam
actions, our business, financial condition, cash flows, or results of operations 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 the Health Insurance
Portability and Accountability Act, or 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. These new standardized code sets, known as ICD-10, will require substantial investments from
health care organizations, including us. CMS has now scheduled implementation of ICD-10 by October 1, 2015.
Use of the ICD-10 code sets will require significant administrative changes and may result in errors and
otherwise negatively impact our service levels. In addition, 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 health plans. In those cases, there
is no pre-established understanding between the provider and our health 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 health plan. The uncertainty of the amount to pay and the possibility of
subsequent adjustment of the payment could adversely affect our business, financial condition, results of
operations, and cash flows.

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, or results of operations.

Circumstances may arise where providers to whom we have delegated risk, due to insolvency or other
circumstances, are unable to pay claims they have incurred with third parties in connection with referral services
provided to our members. The inability of delegated providers to pay referral claims presents us with both
immediate financial risk and potential disruption to member care. Depending on states’ laws, we may be held
liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk.
Additionally, competitive pressures may force us to pay such claims even when we have no legal obligation to do
so or we have already paid claims to a delegated provider and payments cannot be recouped 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, or results of operations.

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

Several of our health care competitors have recently been involved in governmental investigations and regulatory
actions which have resulted in significant volatility in the price of their stock. In addition, there has been negative
publicity and proposed programmatic changes regarding Medicare Advantage private fee-for-service plans, a part
of the Medicare Advantage program in which 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 not
participate, intensified scrutiny by regulators, additional regulatory requirements and burdens, increased stock
volatility due to speculative trading, and heightened barriers to new managed care markets and contracts, all of
which could have a material adverse effect on our business, financial condition, cash flows, or results of
operations.

If a state fails to renew its federal waiver application for mandated Medicaid enrollment into managed care or
such application is denied, our membership in that state will likely decrease.

States may only mandate Medicaid enrollment into managed care under federal waivers or demonstrations.
Waivers and programs under demonstrations are approved for two- to five-year periods and can be renewed on
an ongoing basis if the state applies and the waiver request is approved or renewed by CMS. We have no control
over this renewal process. If a state does not renew its mandated program or the federal government denies the
state’s application for renewal, our business would suffer as a result of a likely decrease in membership.

If state regulators do not approve payments of dividends and distributions by our subsidiaries, it may
negatively affect our business strategy.

We are a corporate parent holding company and hold most of our assets at, and conduct most of our operations
through, direct subsidiaries. As a holding company, our results of operations depend on the results of operations
of our subsidiaries. Moreover, we are dependent on dividends or other intercompany transfers of funds from our
subsidiaries to meet our debt service and other obligations. The ability of our subsidiaries to pay dividends or
make other payments or advances to us will depend on their operating results and will be subject to applicable
laws and restrictions contained in agreements governing the debt of such subsidiaries. In addition, our health plan
subsidiaries are subject to laws and regulations that limit the amount of dividends and distributions that they can
pay to us without prior approval of, or notification to, state regulators. In California, our health plan may
dividend, without notice to or approval of the California Department of Managed Health Care, amounts by which
its tangible net equity exceeds 130% of the tangible net equity requirement. Our other health plans must give
thirty days’ advance notice and the opportunity to disapprove “extraordinary” dividends to the respective state
departments of insurance for amounts over the lesser of (a) ten percent of surplus or net worth at the prior year
end or (b) the net income for the prior year. The discretion of the state regulators, if any, in approving or
disapproving a dividend is not clearly defined. Health plans that declare non-extraordinary dividends must
usually provide notice to the regulators ten or fifteen days in advance of the intended distribution date of the non-
extraordinary dividend. For the years ended December 31, 2013 and 2012, we received dividends from our health
plan subsidiaries amounting to $24.4 million and $101.8 million, respectively. We did not receive any dividends
from our health plan subsidiaries during the year ended December 31, 2014. The aggregate additional amounts
our health plan subsidiaries could have paid us at December 31, 2014, 2013 and 2012, without approval of the
regulatory authorities, were approximately $96 million, $54 million, and $24 million, respectively. If the
regulators were to deny or significantly restrict our subsidiaries’ requests to pay dividends to us, the funds
available to our company as a whole would be limited, which could harm our ability to implement our business
strategy. For example, we could be hindered in our ability to make debt service payments under our convertible
senior notes or any credit facility.

Risks Related to the Operation of Our Molina Medicaid Solutions Segment

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

If we fail to comply with our state government contracts or government contracting regulations, our business
could 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 a material adverse effect on our business,
financial condition, cash flows, or results of operations.

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

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 or retain existing 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 revenues
and profitability.

Risks Related to our General Business Operations

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

We expect to continue to grow our membership and to expand into other markets through acquisitions and other
opportunities. Continued rapid growth could place a significant strain on our management and on our other
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, or 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 our clinics or caused by one of our
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 business, financial condition, cash flows, or results of operations.

We cannot predict the outcome of any lawsuit with certainty. While we currently have insurance coverage for
some of the potential liabilities relating to litigation, other such liabilities may not be covered by insurance, the
insurers could dispute coverage, or the amount of insurance could be insufficient to cover the damages awarded.
In addition, insurance coverage for all or certain types of liability may become unavailable or prohibitively
expensive in the future or the deductible on any such insurance coverage could be set at a level which would
result in us effectively self-insuring cases against us.

Although we establish reserves for litigation as we believe appropriate, we cannot assure you that our recorded
reserves will be adequate to cover such costs. Therefore, the litigation to which we are subject could have a
material adverse effect on our business, financial condition, results of operations, and cash flows, and could
prompt us to change our operating procedures.

We are subject to competition which negatively impacts our ability to increase penetration in the markets we
serve.

We operate in a highly competitive environment and in an industry that is subject to ongoing changes from
business consolidations, new strategic alliances, and aggressive marketing practices by other managed care
organizations. We compete for members principally on the basis of size, location, and quality of provider
network, benefits supplied, quality of service, and reputation. A number of these competitive elements are
partially dependent upon and can be positively affected by the financial resources available to a health plan.
Many other organizations with which we compete, including large commercial plans, have substantially greater
financial and other resources than we do. For these reasons, we may be unable to grow our membership, or may
lose members to other health plans.

Failure to maintain effective internal controls over financial reporting could have a material adverse effect on
our business, operating results, and stock price.

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over
financial reporting. In particular, we must perform system and process evaluation and testing of our internal
controls over financial reporting to allow management to report on, and our independent registered public
accounting firm to attest to, our internal controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002. Our future testing, or the subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be
material weaknesses. Our compliance with Section 404 will continue to require that we incur substantial
accounting expense and expend significant management time and effort. Moreover, if we are not able to continue
to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public
accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be
material weaknesses, the market price of our stock could decline and we could be subject to sanctions or
investigations by the NYSE, SEC, or other regulatory authorities which would require additional financial and
management resources.

Changes in accounting may affect our results of operations.

U.S. generally accepted accounting principles (GAAP) and related implementation guidelines and interpretations
can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, or the
adoption of new pronouncements could significantly affect our stated results of operations.

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

Our investments consist solely of investment-grade debt securities. The unrestricted portion of this portfolio is
designated as available-for-sale. Our non-current restricted investments are designated as held-to-maturity.
Available-for-sale investments are carried at fair value, and the unrealized gains or losses are included in
accumulated other comprehensive income or loss as a separate component of stockholders’ equity, unless the
decline in value is deemed to be other-than-temporary and we do not have the intent and ability to hold such
securities until their full cost can be recovered. For our available-for-sale investments and held-to-maturity
investments, if a decline in value is deemed to be other-than-temporary and we do not have the intent and ability
to hold such security until its full cost can be recovered, the security is deemed to be other-than-temporarily
impaired and it is written down to fair value and the loss is recorded as an expense.

In accordance with applicable accounting standards, we review our investment securities to determine if declines
in fair value below cost are other-than-temporary. This review is subjective and requires a high degree of
judgment. We conduct this review on a quarterly basis, using both quantitative and qualitative factors, to
determine whether a decline in value is other-than-temporary. Such factors considered include the length of time

and the extent to which market value has been less than cost, the financial condition and near term prospects of
the issuer, recommendations of investment advisors, and forecasts of economic, market or industry trends. This
review process also entails an evaluation of our ability and intent to hold individual securities until they mature
or full cost can be recovered.

The current economic environment and recent volatility of the securities markets increase the difficulty of
assessing investment impairment and the same influences tend to increase the risk of potential impairment of
these assets. Over time, the economic and market environment may provide additional insight regarding the fair
value of certain securities, which could change our judgment regarding impairment. This could result in realized
losses relating to other-than-temporary declines to be recorded as an expense. Given the current market
conditions and the significant judgments involved, there is continuing risk that declines in fair value may occur
and material other-than-temporary impairments may result in realized losses in future periods which could have a
material adverse effect on our business, financial condition, cash flows, or results of operations.

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

We are subject to income taxes in the United States. Our effective tax rate could be adversely affected by
changes in the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax
assets and liabilities, changes in U.S. tax laws and regulations, and changes in our interpretations of tax laws,
including pending tax law changes, such as the health care federal 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 a material adverse effect on our provision for income taxes, estimated income tax liabilities, or results of
operations.

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

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

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

We contract with independent third party vendors and service providers who provide services to us and our
subsidiaries or to whom we delegate selected functions. Our arrangements with third party vendors and service
providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us,
including their obligations to maintain and protect the security and confidentiality of our information and data. In
addition, we may have disagreements with third party vendors and service providers regarding relative
responsibilities for any such failures under applicable business associate agreements or other applicable
outsourcing agreements. Further, we may not be adequately indemnified against all possible losses through the
terms and conditions of our contracts with third party vendors and service providers. Our outsourcing

arrangements could be adversely impacted by changes in 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, or 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, cash flows, or results of operations.

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

As of December 31, 2014, the balance of goodwill was $272.0 million, and the balance of intangible assets, net,
was $89.3 million. Intangible assets are amortized generally on a straight-line basis over their estimated useful
lives.

Goodwill represents the amount of the purchase price in excess of the fair values assigned to the underlying
identifiable net assets of acquired businesses. Goodwill is not amortized, but is subject to an annual impairment
test. Tests are performed more frequently if events occur or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying amount. Our intangible assets are subject to
impairment tests when events or circumstances indicate that a finite-lived intangible asset’s (or asset group’s)
carrying value may not be recoverable.

The determination of the value of goodwill, and intangible assets, net, requires us to make estimates and
assumptions about estimated asset lives, future business trends, and growth. Such evaluation is significantly
impacted by estimates and assumptions of future revenues, costs and expenses, and other factors. If an event or
events occur that would cause us to revise our estimates and assumptions used in analyzing the value of our
goodwill, and intangible assets, net, such revision could result in a non-cash impairment charge that could have a
material impact on our financial results.

We are subject to the risks of owning and leasing real property.

We are a tenant under numerous leases in multiple states, including a 25-year lease of an approximately 460,000
square foot office building housing our principal executive offices in Long Beach, California. We also own a
186,000 square-foot office building in Troy, Michigan, a 26,700 square-foot data center in Albuquerque, New
Mexico, and a 24,000 square-foot community clinic in Pomona, California. Accordingly, we are subject to all of
the risks generally associated with leasing and 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; 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 us on commercially acceptable terms or at all; and possible disputes with
neighboring owners or other individuals and entities.

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 a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to
the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing
stockholders. In addition, our board of directors or a committee thereof has the power, without stockholder
approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The
ability of our board of directors or a committee thereof to create and issue a new series of preferred stock and
certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger,
takeover or other business combination involving us or discourage a potential acquirer from making a tender
offer for our common stock, which, under certain circumstances, could reduce the market price of our common
stock and the value of our convertible senior notes.

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 owned or were entitled to receive upon certain events approximately 32% of our capital stock as of
December 31, 2014. 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 our company. A significant concentration of
share ownership can also adversely affect the trading price for our common stock because investors often
discount the value of stock in companies that have controlling stockholders. Furthermore, the concentration of
share ownership in the Molina family could delay or prevent a merger or consolidation, takeover, or other
business combination that could be favorable to our stockholders. Finally, the interests and objectives of the
Molina family may be different from those of our company or our other stockholders, and they may vote their
common stock in a manner that is contrary to the vote of our other stockholders.

Future sales of our common stock or equity-linked securities in the public market could adversely affect the
trading price of our common stock and our ability to raise funds in new stock offerings.

We may issue equity securities in the future, 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 150,000,000 shares of
common stock and 20,000,000 shares of preferred stock. As of December 31, 2014, approximately 49,727,000
shares of common stock and no shares of preferred or other capital stock were issued and outstanding.

It may be difficult for a third party to acquire us, which could inhibit stockholders from realizing a premium
on their stock price.

We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These provisions may prohibit
stockholders owning 15% or more of our outstanding voting stock from merging or combining with us. In
addition, any change in control of our state health plans would require the approval of the applicable insurance
regulator in each state in which we operate.

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

•

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

prohibition of stockholder action by written consent, and

advance notice requirements for the submission by stockholders of nominations for election to the
board of directors and for proposing matters that can be acted upon by stockholders at a meeting.

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

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

As of December 31, 2014, the Health Plans segment leases a total of 70 facilities and the Molina Medicaid
Solutions segment leases a total of 12 facilities. We own a 186,000 square-foot office building in Troy,
Michigan, a 26,700 square-foot data center in Albuquerque, New Mexico, and a 24,000 square-foot mixed use
(office and clinic) facility in Pomona, California under our Health Plans segment. 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 and business process outsourcing industries are subject to numerous laws and regulations of
federal, state, and local governments. Compliance with these laws and regulations can be subject to government
review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated
with violations of these laws and regulations include significant fines and penalties, exclusion from participating
in publicly funded programs, and the repayment of previously billed and collected revenues.

We are involved in legal actions in the ordinary course of business, some of which seek monetary damages,
including claims for punitive damages, which are not covered by insurance. We have accrued liabilities for
certain matters for which we deem the loss to be both probable and estimable. Although we believe that our
estimates of such losses are reasonable, these estimates could change as a result of further developments of these
matters. The outcome of legal actions is inherently uncertain and such pending matters for which accruals have
not been established have not progressed sufficiently through discovery and/or development of important factual
information and legal issues to enable us to estimate a range of possible loss, if any. While it is not possible to

accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of
these pending matters could have a material adverse effect on our consolidated financial position, results of
operations, or cash flows.

State of Louisiana v. Molina Medicaid Solutions et al. On June 26, 2014, the state of Louisiana filed a Petition
for Damages against Molina Medicaid Solutions, Molina Healthcare, Inc., Unisys Corporation, and Paramax
Systems Corporation, a subsidiary of Unisys, in the Parish of Baton Rouge, 19th Judicial District, versus number
631612. The Petition alleges that between 1989 and 2012, the defendants utilized an incorrect reimbursement
formula for the payment of pharmaceutical claims. The petitioner seeks actual damages to be proved at trial, plus
interest. We believe we have several meritorious defenses to the claims of the state, and any liability for the
alleged claims is not currently probable or reasonably estimable.

USA and State of Florida ex rel. Charles Wilhelm v Molina Healthcare of Florida et al. On July 24, 2014,
Molina Healthcare, Inc. and Molina Healthcare of Florida, Inc. were served with a Complaint filed under seal on
December 5, 2012 in District Court for the Southern District of Florida by relator, Charles C. Wilhelm, M.D.,
Case No. 12-24298. The Complaint alleges that, in late 2008 and early 2009, in connection with the acquisition
of Florida NetPass by which Molina Healthcare entered into the state of Florida, the defendants failed to
adequately staff the plan and provide other services, resulting in a disproportionate number of sicker beneficiaries
of Florida NetPass moving back into the Florida fee-for-service Medicaid program. This alleged conduct
purportedly resulted in a violation of the federal False Claims Act. The relator seeks treble damages in the
alleged amount of $62.3 million, plus interest and penalties. Both the United States of America and the state of
Florida have declined to intervene. We believe we have several meritorious defenses to the claims of the relator,
and any liability for the alleged claims is not currently probable or reasonably estimable.

United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc., et al. On or around
October 14, 2014, Molina Healthcare of California, Molina Healthcare of California Partner Plan, Inc., Mobile
Medical Examination Services, Inc. (MedXM), and other health plan defendants were served with a Complaint
previously filed under seal in the Central District Court of California by relator, Anita Silingo, Case No.
SACV13-1348-FMO(SHx). The Complaint alleges that MedXM improperly modified medical records and
otherwise took inappropriate steps to increase members’ risk adjustment scores, and that the defendants,
including Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc., purportedly
turned a “blind eye” to these unlawful practices. The relator seeks treble damages in the amount of $3 billion,
plus interest and penalties. The Department of Justice has declined to intervene. We believe that we have several
meritorious defenses to the claims of the relator, and any liability for the alleged claims is not currently probable
or reasonably estimable.

Item 4: Mine Safety Disclosures

None.

PART II

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

Our common stock is listed on the New York Stock Exchange under the trading symbol “MOH.” As of
February 20, 2015, there were approximately 120 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

2014

2013

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$39.21
$46.17
$48.03
$54.57

$33.85
$38.74
$40.90
$37.39

$32.41
$32.86
$39.23
$40.79

$25.70
$30.26
$33.31
$31.10

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 of this Form 10-
K, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in “Liquidity and
Capital Resources,” under the subheading “Regulatory Capital and Dividend Restrictions.”

Unregistered Issuances of Equity Securities

None.

Stock Repurchase Programs

Securities Repurchases and Repurchase Programs. Effective as of February 25, 2015, our board of directors
authorized the repurchase of up to $50 million in aggregate of our common stock. Stock repurchases under this
program may be made through open-market and/or privately negotiated transactions at times and in such
amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on
a variety of factors including price, corporate and regulatory requirements and market conditions. This newly
authorized repurchase program extends through December 31, 2015.

Purchases of common stock made by or on behalf of the Company during the quarter ended December 31, 2014,
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 Number
of Shares
Purchased (1)

Average Price
Paid per Share (1)

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)

Approximate
Dollar Value of Shares
That May Yet Be
Purchased Under the
Plans or Programs (2)

1,052
1,781
1,523

4,356

$41.66
$48.64
$49.96

$47.42

—
—
—

—

$47,338,505
$47,338,505
$47,338,505

(1) During the quarter we withheld 4,356 shares of common stock under our 2002 Equity Incentive Plan and

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

(2) Effective as of September 30, 2013, our board of directors authorized the repurchase of up to $50 million in

aggregate of our common stock. This repurchase program expired December 31, 2014.

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 (S&P 500) and a
peer group index for the five-year period from December 31, 2009 to December 31, 2014. The comparison
assumes $100 was invested on December 31, 2009, 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
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).

The new peer group index consists of Brookdale Senior Living, Inc. (BKD), Catamaran Corporation (CTRX),
Centene Corporation (CNC), Community Health Systems, Inc. (CYH), DaVita HealthCare Partners, Inc. (DVA),
Health Net, Inc. (HNT), Kindred Healthcare, Inc. (KND), Laboratory Corporation of America Holdings (LH),
Life Point Hospitals, Inc. (LPNT), Magellan Health, Inc. (MGLN), Omnicare, Inc. (OCR), Quest Diagnostics,
Inc. (DGX), Select Medical Holdings Corporation (SEM), Team Health Holdings, Inc. (TMH), Tenet Healthcare
Corporation (THC), Universal American Corporation (UAM), Universal Health Services, Inc. (UHS) 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

$400

$350

$300

$250

$200

$150

$100

$50

12/09

12/10

12/11

12/12

12/13

12/14

Molina Healthcare, Inc.

Old Peer Group

S&P 500

New Peer Group

December 31,

Name

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

2009

2010

2011

2012

2013

2014

$100.00
100.00
100.00
100.00

$121.78
115.06
112.08
111.51

$146.46
117.49
135.26
124.46

$177.48
136.30
142.21
147.53

$227.92
180.44
177.30
178.64

$351.09
205.14
236.56
225.58

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, Continuing Operations”) for the five years ended December 31, 2014 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 dollar amounts are presented in thousands, except per-
share data. The data under the caption “Operating Statistics, Continuing Operations” has not been audited.

Year Ended December 31,

2014

2013

2012

2011

2010 (1)

Statements of Income Data:
Revenue:

Premium revenue
Service revenue (1)
Premium tax revenue
Health insurer fee revenue
Investment income
Other revenue

Total revenue

Operating expenses:

Medical care costs
Cost of service revenue (1)
General and administrative expenses
Premium tax expenses
Health insurer fee expenses
Depreciation and amortization
Total operating expenses

Operating income

Other expenses, net:
Interest expense
Other expense, net

Total other expenses, net

Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
(Loss) income from discontinued operations, net of tax

(benefit) expense (2)

Net income

Basic net income per share:

Income from continuing operations
(Loss) income from discontinued operations

Basic net income per share

Diluted net income per share:

Income from continuing operations
(Loss) income from discontinued operations

Diluted net income per share

Weighted average shares outstanding:

$ 9,022,511 $ 6,179,170 $ 5,544,121 $ 4,211,493 $ 3,632,142
89,809
139,775
—
6,198
7,140
3,875,064

204,535
172,017
—
6,890
26,322
6,588,934

160,447
154,589
—
5,446
8,288
4,540,263

187,710
158,991
—
5,075
18,312
5,914,209

210,051
294,388
119,484
8,093
12,074
9,666,601

8,076,331
156,764
764,693
294,388
88,591
92,917
9,473,684

5,380,124
161,494
665,996
172,017
—
72,743
6,452,374

4,991,188
141,208
518,615
158,991
—
63,114
5,873,116

3,664,161
143,987
393,452
154,589
—
48,253
4,404,442

3,190,566
78,647
326,193
139,775
—
43,246
3,778,427

192,917

136,560

41,093

135,821

96,637

56,811
802
57,613

135,304
72,726
62,578

52,071
3,343
55,414

81,146
36,316
44,830

16,769
945
17,714

23,379
10,513
12,866

15,519
—
15,519

120,302
42,914
77,388

(355)
62,223 $

8,099
52,929 $

(3,076)
9,790 $

(56,570)
20,818 $

1.34 $
(0.01)
1.33 $

1.30 $
(0.01)
1.29 $

0.98 $
0.18
1.16 $

0.96 $
0.17
1.13 $

0.28 $
(0.07)
0.21 $

0.27 $
(0.06)
0.21 $

1.69 $
(1.24)
0.45 $

1.67 $
(1.22)
0.45 $

15,509
—
15,509

81,128
30,511
50,617

4,353
54,970

1.23
0.11
1.34

1.22
0.10
1.32

Basic

Diluted

46,935,000

45,717,000

46,380,000

45,756,000

41,174,000

48,340,000

46,862,000

46,999,000

46,425,000

41,631,000

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

89.5%
7.9%
3.2%

87.1%
10.1%
2.7%

90.0%
8.8%
2.8%

87.0%
8.7%
3.5%

87.8%
8.4%
3.7%

2,623,000

1,931,000

1,797,000

1,618,000

1,532,000

Balance Sheet Data:
Cash and cash equivalents
Total assets
Long-term debt, including current maturities (7)
Total liabilities
Stockholders’ equity

Year Ended December 31,

2014

2013

2012

2011

2010

$1,539,063
4,477,215
905,389
3,466,773
1,010,442

$ 935,895
3,002,937
784,862
2,110,000
892,937

$ 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

(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) As previously reported, in February 2012 the Division of Purchasing of the Missouri Office of Administration notified

our Missouri health plan that it was not awarded a contract under the Missouri HealthNet Managed Care Request for
Proposal; therefore, the Missouri health plan’s existing contract with the state expired without renewal on June 30, 2012.
In connection with this notification, the Missouri health plan recorded a non-cash impairment charge of $64.6 million in
the fourth quarter of 2011. Results relating to the Missouri health plan have been reported as discontinued operations for
all periods presented. (Loss) income from discontinued operations is presented net of income tax (benefit) expense of
$(203), $(9,912), $(1,238), $922, and $4,011, respectively.

(3) Medical care ratio represents medical care costs as a percentage of premium revenue. The medical care ratio is a key

operating indicator used to measure our performance in delivering efficient and cost effective health care services.
Changes in the medical care ratio from period to period result from changes in Medicaid funding by the states, 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 in this Form 10-K, “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 plus premium tax revenue.
(6) Number of members at end of period.
(7)

Includes convertible senior notes, lease financing obligations, and other long-term debt.

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
Items 6 and 8 of this Form 10-K, Selected Financial Data, and Financial Statements and Supplementary Data,
respectively. This discussion contains forward-looking statements that involve known and unknown risks and
uncertainties, including those set forth in Part I, Item 1A of this Form 10-K, Risk Factors.

Overview

Molina Healthcare, Inc. provides quality health care to those receiving government assistance. We offer 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: the Health Plans segment and the Molina Medicaid Solutions segment.

Our Health Plans segment consists of health plans in 11 states, and includes our direct delivery business. As of
December 31, 2014, these health plans served over 2.6 million members eligible for Medicaid, Medicare, and
other government-sponsored health care programs for low-income families and individuals. Additionally, we
serve a small number of Health Insurance Marketplace members, many of whom are eligible for government
premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states,
each of which is licensed as a health maintenance organization (HMO). Our direct delivery business consists
primarily of the management of a hospital in southern California under a management services agreement, and
the operation of primary care clinics in several states in which we operate.

Our Molina Medicaid Solutions segment provides business processing and information technology development
and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the
U.S. Virgin Islands, and drug rebate administration services in Florida.

Fiscal Year 2014 Financial Highlights

• Net income from continuing operations increased to $62.6 million in 2014, from $44.8 million in 2013
due to increases in enrollment and revenue, and improved administrative cost efficiency; which offset
higher medical costs and higher tax rates.

•

Strong enrollment growth across all of our programs combined with an 18% increase in premium
revenue per member, generated almost $3 billion, or 46%, more premium revenue in 2014 compared
with 2013.

• General and administrative expenses as a percentage of revenue declined to 7.9% in 2014, versus

10.1% in 2013.

• Medical care costs as a percentage of premium revenue increased to 89.5% in 2014, from 87.1% in

2013.

• Debt financing transactions generated net cash of $122.6 million; such transactions both extended the

maturity date and lowered the rate of our convertible senior notes previously due in 2014.

Health Care Reform

We believe that the government-sponsored initiatives, including the Affordable Care Act (ACA), will continue to
provide us with significant opportunities for membership growth in our existing markets and in new programs in
the future as follows:

• Medicaid Expansion. In the states that have elected to participate, the ACA provides for the expansion
of the Medicaid program to offer eligibility to nearly all low-income people under age 65 with incomes
at or below 138% of the federal poverty line. Medicaid expansion membership phased in beginning
January 1, 2014. Since that date, our health plans in California, Illinois, Michigan, New Mexico, Ohio,
and Washington have begun participating in Medicaid expansion. At December 31, 2014 our
membership included approximately 385,000 Medicaid expansion members, or 15% of total
membership.

• Marketplace. The ACA authorized the creation of Marketplace insurance exchanges, allowing
individuals and small groups to purchase health insurance that is federally subsidized, effective
January 1, 2014. We participate in the Marketplace in all of the states in which we operate, except
Illinois and South Carolina. At December 31, 2014, we had approximately 15,000 Marketplace
members, and that enrollment is expected to grow appreciably in 2015, particularly at our Florida
health plan.

Health Insurer Fee. The ACA imposes an annual fee, or excise tax, on health insurers for each calendar year
beginning on or after January 1, 2014. A health insurer’s liability for the payment of the fee (the health insurer
fee, or HIF) is established upon first writing business in 2014 or any subsequent year. In other words, an active
health insurer becomes liable for the fee on January 1st of any given year. The amount of the HIF for the insurer
is based upon the insurer’s share of the industry’s net premiums written during the preceding calendar year. The
HIF must be paid by the insurer by September 30th of the year in which the insurer becomes liable for the HIF.
During the third quarter of 2014 we paid our 2014 HIF assessment, which amounted to $88.6 million. This
expense was recognized on a straight-line basis in 2014; and is non-deductible for income tax purposes.

We believe that state Medicaid agencies are required to reimburse us for the HIF imposed on our Medicaid
premiums, as well as for the negative financial impact associated with the absence of tax deductibility for the
HIF. Although all of our state Medicaid partners have agreed informally to reimbursement of the HIF and the
costs of its related tax effects, we have not secured binding commitments to that effect from California, Michigan
and Utah. Our 2014 results were adversely affected by our inability to recognize as revenue reimbursement
(including reimbursement for tax effects) for the full impact of the HIF from those states. The state of California
has not formally committed to reimburse us for either the HIF itself, or the related tax effects. The states of
Michigan and Utah have reimbursed us for the HIF, but have not formally committed to reimbursement for the
related tax effect. The total amount of HIF revenue for which agreements were not secured (and revenue was not
recognized) amounted to approximately $20 million for fiscal 2014. We expect to collect and recognize this
revenue related to 2014 in 2015. We further expect to recognize revenue in 2015 sufficient to reimburse us for
the full amount of the HIF we will pay (along with related tax effects) in September of 2015. We expect our 2015
HIF assessment related to our Medicaid business to be approximately $143 million, with an expected tax effect
from the reimbursement of the assessment of approximately $88 million. Therefore, the total reimbursement
needed as a result of the Medicaid-related HIF is approximately $231 million.

For further discussion of the risks and uncertainties relating to the HIF, refer to the subheading below, “Liquidity
and Capital Resources — Financial Condition.”

Market Updates — Health Plans Segment

Florida. During 2014, our Florida health plan acquired two Medicaid contracts, adding approximately 73,000
members.

Puerto Rico. In 2014, we were awarded a managed care contract in the Commonwealth of Puerto Rico that is
expected to enroll its first members April 1, 2015. Total enrollment is expected to be approximately 350,000 new
members, with anticipated annualized revenue of $750 million.

South Carolina. Our South Carolina health plan began serving members under the state of South Carolina’s new
full-risk Medicaid managed care program effective January 1, 2014.

Market Update — Molina Medicaid Solutions Segment

In 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state intended to award
the contract for a replacement Medicaid management information system (MMIS) to a different vendor, CNSI.
However, in March 2013, the state of Louisiana canceled its contract award to CNSI. The state had informed us
that we will continue to perform under our current contract until a successor is named. On December 18, 2014,
Molina Medicaid Solutions received notice from the state of Louisiana that they have extended our contract
through December 31, 2015. We recognized approximately $41 million of service revenue under this contract in
2014.

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; and, to a lesser degree, from Medicare contracts entered into with the
Centers for Medicare and Medicaid Services (CMS), a federal government agency.

Our health plans’ state Medicaid contracts generally have terms of three to four years. These contracts typically
contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to
terminate the contract with or without cause. Our health plan subsidiaries have generally been successful in
retaining their contracts, but such contracts are subject to risk of loss when a state issues a new request for
proposals (RFP) open 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. The state Medicaid programs and
the federal Medicare program periodically adjust premium rates.

In addition to contract renewal, our state Medicaid contracts may be periodically amended 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 (ABD); and regions or service areas.

Premium revenue is fixed in advance of the periods covered and, except as described in Item 8 of this Form
10-K, Notes to Consolidated Financial Statements, Note 2 “Significant Accounting Policies,” is not generally
subject to significant accounting estimates. For the year ended December 31, 2014, we received more than 95%
of our premium revenue as a fixed amount per member per month (PMPM), pursuant to our Medicaid, Medicare
and Marketplace contracts, including agreements 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. Revenue not received on a fixed PMPM basis is recognized as earned.

The amount of the premiums paid to us may vary substantially between states and among various government
programs. The following table sets forth the ranges of premiums paid to our state health plans by program, on a
per-member per-month basis for the year ended December 31, 2014. The “Consolidated” column represents the
weighted-average amounts for our total membership by program.

Ending

PMPM Premiums

Membership

Low

High

Consolidated

Temporary Assistance for Needy Families (TANF), CHIP (1)
Medicaid Expansion
Aged, Blind or Disabled (ABD)
Medicare Special Needs Plans (Medicare)
Medicare-Medicaid Plan (MMP) — Integrated (2)
Marketplace

1,831,000
385,000
325,000
49,000
18,000
15,000

$ 130.00
340.00
320.00
970.00
1,510.00
190.00

$ 280.00
520.00
1,580.00
1,480.00
3,240.00
560.00

$ 180.00
420.00
900.00
1,180.00
1,970.00
320.00

(1) CHIP stands for Children’s Health Insurance Program.
(2) MMP members who receive both Medicaid and Medicare coverage from Molina Healthcare.

The following tables set forth our Health Plans segment membership as of the dates indicated:

Ending Membership by Health Plan:
California
Florida
Illinois
Michigan
New Mexico
Ohio
South Carolina (1)
Texas
Utah
Washington
Wisconsin

Ending Membership by Program:
TANF/CHIP
Medicaid Expansion (2)
ABD
Medicare
MMP — Integrated
Marketplace (2)

As of December 31,
2013

2012

2014

531,000
164,000
100,000
242,000
212,000
347,000
118,000
245,000
83,000
497,000
84,000

368,000
89,000
4,000
213,000
168,000
255,000
—
252,000
86,000
403,000
93,000

336,000
73,000
—
220,000
91,000
244,000
—
282,000
87,000
418,000
46,000

2,623,000

1,931,000

1,797,000

1,831,000
385,000
325,000
49,000
18,000
15,000

1,624,000

1,517,000

—
268,000
39,000
—
—

—
244,000
36,000
—
—

2,623,000

1,931,000

1,797,000

(1) Our South Carolina health plan began serving members under the state of South Carolina’s new full-risk

Medicaid managed care program effective January 1, 2014.

(2) Medicaid expansion membership phased in, and the Marketplace became available for consumers to access

coverage, beginning January 1, 2014.

Molina Medicaid Solutions Segment

Medicaid management information system (MMIS). An additional service, following completion of DDI, is the
operation of the MMIS under a business process outsourcing (BPO) arrangement. When 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 contract term during which BPO, hosting, and support and maintenance
services are delivered. There may be certain contractual provisions containing contingencies, however that
require us to delay recognition of all or part of our service revenue until such contingencies have been removed.
For further information regarding revenue recognition for the Molina Medicaid Solutions segment, refer to
Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 2, “Significant Accounting
Policies.”

Composition of Expenses

Health Plans Segment

Operating expenses for the Health Plans segment include expenses related to the provision of medical care
services (including long-term services and supports, or LTSS), general and administrative expenses, premium tax
and health insurer fee 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 categories:

• Fee-for-service expenses: Nearly all hospital services and the majority of our primary care and

physician specialist services and LTSS costs are paid on a fee-for-service basis. Under fee-for-service
arrangements, we retain the financial responsibility for medical care provided and incur costs based on
actual utilization of services. Such expenses 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.

• Pharmacy expenses: All drug, injectibles, and immunization costs paid through our pharmacy benefit
manager are classified as pharmacy expenses. 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.

• Capitation expenses: Many of our primary care physicians and a small portion of our specialists and
hospitals are paid on a capitated basis. Under capitation arrangements, we pay a fixed amount PMPM
to the provider without regard to the frequency, extent, or nature of the medical services actually
furnished. Under capitated arrangements, we remain liable for the provision of certain health care
services. 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.

• Direct delivery expenses: All costs associated with our direct delivery of medical care are separately

identified.

• Other medical expenses: All medically related administrative costs, certain provider incentive costs,
reinsurance costs and other health care expenses are classified as other medical expenses. Medically
related administrative costs include, for example, expenses relating to health education, quality
assurance, case management, care coordination, 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,
2014, 2013, and 2012, medically related administrative costs were $262.6 million, $153.0 million, and
$125.2 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

Estimates” below, and Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 11,
“Medical Claims and Benefits Payable,” for further information on how we estimate such liabilities.

Molina Medicaid Solutions Segment

Cost of service revenue consists primarily of the costs incurred to provide BPO 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 contract term, consistent
with the revenue recognition period.

Financial Performance Summary, Continuing Operations

The following table and narrative briefly summarize our financial and operating performance from continuing
operations for the years ended December 31, 2014, 2013, and 2012. All ratios, with the exception of the medical
care ratio and the premium tax ratio, are computed as a percentage of total revenue. The medical care ratio is
computed as a percentage of premium revenue, and the premium tax ratio is computed as a percentage of
premium revenue plus premium tax revenue, because direct relationships exist between premium revenue earned,
and the cost of health care and premium taxes.

Net income per diluted share
Adjusted net income per diluted share
Premium revenue
Service revenue
Operating income
Net income

Year Ended December 31,

2014

2013

2012

(Dollar amounts in thousands, except per-share data)
0.27
1.30
$
$
1.72
3.43
$
$
$5,544,121
$9,022,511
$ 187,710
$ 210,051
41,093
$
$ 192,917
12,866
$
62,578
$

0.96
$
3.13
$
$6,179,170
$ 204,535
$ 136,560
44,830
$

Total ending membership

2,623,000

1,931,000

1,797,000

Premium revenue
Service revenue
Premium tax revenue
Health insurer fee revenue
Investment income
Other revenue

Total revenue

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

93.3%
2.2
3.1
1.2
0.1
0.1

93.8%
3.1
2.6
—
0.1
0.4

93.7%
3.2
2.7
—
0.1
0.3

100.0%

89.5%
7.9%
3.2%
2.0%
0.6%
53.8%

87.1%
10.1%
2.7%
2.1%
0.7%
44.8%

90.0%
8.8%
2.8%
0.7%
0.2%
45.0%

Non-GAAP Financial Measures

We use the following non-GAAP financial measures as supplemental metrics in evaluating our financial
performance, making financing and business decisions, and forecasting and planning for future periods. For these
reasons, management believes such measures are useful supplemental measures to investors in comparing our

performance and the performance of other companies in the health care industry. These non-GAAP financial
measures should be considered as supplements to, and not substitutes for or superior to, GAAP measures (GAAP
stands for U.S. generally accepted accounting principles).

The first of these non-GAAP measures is earnings before interest, taxes, depreciation and amortization, or
EBITDA. The following table reconciles net income, which we believe to be the most comparable GAAP
measure, to EBITDA.

Net income
Adjustments:

Depreciation, and amortization of intangible assets and capitalized

software

Interest expense
Income tax expense

EBITDA

Year Ended December 31,

2014

2013

2012

$ 62,223

(In thousands)
$ 52,929

9,790

113,715
56,811
72,523

93,866
52,071
26,404

78,764
16,769
9,275

$305,272

$225,270

$114,598

The second of these non-GAAP measures is adjusted net income and adjusted net income per diluted share,
continuing operations. The following tables reconcile net income and net income per diluted share from
continuing operations, which we believe to be the most comparable GAAP measures, to adjusted net income and
adjusted net income per diluted share, continuing operations.

Year Ended December 31,

2014

2013

2012

Net income, continuing operations
Adjustments, net of tax:

Depreciation, and amortization of capitalized

(In thousands, except diluted per-share amounts)
$12,866

$ 44,830

$1.30

$0.96

$ 62,578

$0.27

software

58,770

1.21

46,018

0.98

35,267

0.75

Amortization of convertible senior notes and

lease financing obligations

Share-based compensation
Amortization of intangible assets
Change in fair value of derivatives

Adjusted net income per diluted share, continuing

17,249
14,288
12,870

0.36
0.29
0.27
(10) —

14,377
24,501
13,117
3,580

0.31
0.52
0.28
0.08

3,714
14,556
13,592
817

0.08
0.31
0.29
0.02

operations

$165,745

$3.43

$146,423

$3.13

$80,812

$1.72

Results of Operations, Continuing Operations

Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013

Health Plans Segment

Premium Revenue

A 28% increase in membership and an 18% increase in revenue PMPM in 2014 resulted in an increase in
premium revenue of 46%, or over $2.8 billion, when compared with 2013. Medicare premium revenue was
approximately $627 million in the year ended December 31, 2014, compared with approximately $526 million in
the year ended December 31, 2013.

Enrollment growth was primarily due to Medicaid expansion program membership added as a result of the
Affordable Care Act, and membership added at our South Carolina and Illinois health plans. Higher PMPM
premium revenue was primarily the result of the inclusion of long-term services and supports (LTSS) benefits in
various Medicaid managed care programs in California, Florida, Illinois, New Mexico, and Ohio.

Medical Care Costs

Although medical margin (defined as the excess of premium revenue over medical care costs) increased nearly
20% in 2014 over 2013; our consolidated medical care ratio (defined as medical care costs as a percentage of
premium revenue) increased to 89.5% in 2014 from 87.1% in 2013.

The medical care ratio increased substantially in 2014 as a result of three developments:

• Much of our revenue growth has come from participation in Medicaid programs covering LTSS.

Percentage profit margins for LTSS benefits are generally lower than percentage profit margins for
acute medical benefits.

•

Increases to our base premiums in recent years have not kept pace with medical cost trends.

• Lack of coordination in the design of profit caps and medical cost floors in some of our state Medicaid
contracts is resulting in counterproductive outcomes. In some instances, givebacks due to profitable
performance in one product cannot be offset against losses in other products.

Medical care ratios by program for 2014 were as follows: TANF and CHIP - 89.3%; Medicaid expansion -
79.4%; ABD - 92.3%; Medicare - 95.8%; MMP integrated - 92.1%; and Marketplace - 83.7%.

The following table provides the details of consolidated medical care costs for the periods indicated (dollars in
thousands except PMPM amounts):

Fee for service
Pharmacy
Capitation
Direct delivery
Other

Year Ended December 31,

2014

2013

Amount

PMPM

$5,672,483
1,273,329
748,388
96,196
285,935

$202.87
45.54
26.77
3.44
10.22

% of
Total

Amount

PMPM

70.2% $3,611,529
935,204
15.8
603,938
9.3
48,288
1.2
181,165
3.5

$160.43
41.54
26.83
2.14
8.05

% of
Total

67.1%
17.4
11.2
0.9
3.4

$8,076,331

$288.84

100.0% $5,380,124

$238.99

100.0%

Individual Health Plan Analysis

California. The medical care ratio for the California health plan decreased significantly to 83.3% in 2014, from
88.9% in 2013. Additionally, medical margin improved $171.0 million when compared with 2013. This
improvement was the result of higher enrollment, primarily due to the addition of approximately 107,000
Medicaid expansion members; and premium increases effective October 1, 2013 (2.5%), and July 1, 2014
(5.5%). During 2014, the California health plan benefited from the recognition of approximately $23 million in
premium revenue that related to 2013 as a result of certain programmatic changes implemented by the state of
California. In 2013, the California health plan recognized approximately $32 million of premium revenue related
to 2012 and earlier years as a result of retroactive rate increases from the state of California. The California
health plan served its first MMP members in 2014.

Florida. Due to the re-procurement undertaken by the Florida Agency for Health Care Administration as part of
its Managed Medical Assistance program starting in 2014, the Florida health plan transitioned many of its
members to other health plans in the second quarter of 2014, and then added approximately 105,000 members in
the second half of 2014, both from the addition of new service areas and through acquisitions. Although revenue
increased approximately 66% at the Florida health plan for the year ended December 31, 2014, when compared
with 2013, profitability fell in 2014. Medical margin declined $14.1 million, and the medical care ratio increased
to 95.5% from 87.3% in 2013. The higher medical care costs were the result of 1) the assumption of risk for
LTSS benefits for certain members effective December 2013 (as noted above percentage profit margins for LTSS
benefits are generally less than those for other benefits); and 2) our inability to recognize revenue related to a rate
increase effective September 1, 2014, as a result of those rates not being finalized prior to year end.

Illinois. The medical care ratio for the Illinois health plan decreased to 91.7% in 2014, from 96.9% in 2013. The
plan experienced significant growth in 2014; enrollment increased approximately 96,000 members overall, with
78,000 members added in the fourth quarter alone. This growth occurred primarily within the traditional TANF
program, and to a lesser degree within the Medicaid expansion program. The Illinois health plan served its first
MMP members in 2014.

Michigan. The medical care ratio of the Michigan health plan was consistent year over year, at 84.6% in 2014,
compared with 84.4% in 2013.

New Mexico. Premium revenue at the New Mexico health plan increased 141% for 2014 compared with 2013,
primarily as a result of the addition of Medicaid behavioral health and LTSS benefits effective January 1, 2014,
and the addition of approximately 54,000 Medicaid expansion members during the course of 2014. The medical
care ratio of the New Mexico health plan increased to 92.6% in 2014, from 86.1% in 2013. The higher medical
care ratio was the result of 1) the assumption of risk for LTSS benefits effective January 1, 2014; and 2) premium
rates effective January 1, 2014 that did not keep pace with the increase in medical costs in 2014. The New
Mexico health plan received a blended rate increase of approximately 3% effective January 1, 2015. For the
portion of New Mexico health plan’s membership that is eligible for LTSS benefits, the rate increase effective
January 1, 2015 was 8%.

Ohio. The medical care ratio of the Ohio health plan increased to 86.0% in 2014, from 84.2% in 2013, primarily
due to the increase in Medicaid expansion enrollment (which is incurring a medical care ratio slightly in excess
of the plan’s traditional experience), and the initiation of the Ohio MMP.

South Carolina. Our South Carolina health plan commenced operations effective January 1, 2014 and finished
the year with a medical care ratio of 84.7%.

Texas. Financial performance at the Texas health plan declined in 2014, when compared with 2013. The medical
care ratio of the Texas health plan increased to 90.8% in 2014, from 86.4% in 2013. Our inability to recognize a
portion of the Texas health plan’s quality revenue reduced income before taxes by approximately $26 million, or

$0.33 per diluted share, for the year ended December 31, 2014. Approximately $20 million of this amount is
related to measures for which we lack sufficient information to calculate our compliance. Should such
information become available in the future, we may be able to recognize all or a portion of such revenue.
Removing quality revenue and profit-sharing adjustments would have resulted in a medical care ratio at the
Texas health plan of approximately 88% in 2014 and 86% in 2013.

Utah. The medical care ratio of the Utah health plan increased to 92.2% in 2014, from 83.4% in 2013, due to
deteriorating margins for both Medicaid and Medicare products.

Washington. Financial performance at the Washington health plan declined in 2014, when compared with 2013.
The medical care ratio of the Washington health plan increased to 93.4% in 2014, compared with 88.0% in 2013,
primarily due to the high cost of medical services relative to revenue for members served under the state’s
program for ABD members; and to the $11.2 million net settlement with the Washington Health Care Authority,
as described in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 20,
“Commitments and Contingencies.” The Washington health plan added approximately 102,000 Medicaid
expansion members in 2014. The Washington health plan received a blended rate increase of approximately 3%
effective January 1, 2015. For the Washington health plan’s ABD membership, the rate increase effective
January 1, 2015 was 11%.

Wisconsin. The medical care ratio of the Wisconsin health plan increased to 86.8% in 2014, compared with
79.7% in 2013.

Operating Data

The following tables summarize member months, premium revenue, medical care costs, medical care ratio, and
medical margin by health plan for the periods indicated (PMPM amounts are in whole dollars; member months
and other dollar amounts are in thousands):

California
Florida
Illinois
Michigan
New Mexico
Ohio
South Carolina
Texas
Utah
Washington
Wisconsin
Other (3)

Member
Months(1)

Year Ended December 31, 2014

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

MCR(2)

Medical
Margin

5,630
1,104
307
2,802
2,471
3,650
1,463
2,980
996
5,522
1,036
—

$1,523,084
439,107
153,271
780,896
1,075,330
1,552,949
381,317
1,318,192
309,411
1,304,605
156,229
28,120

$270.51
397.79
498.48
278.68
435.17
425.47
260.72
442.32
310.64
236.27
150.87
—

$1,268,937
419,422
140,480
660,790
995,626
1,335,436
323,061
1,197,465
285,303
1,218,886
135,557
95,368

$225.37
379.95
456.88
235.81
402.92
365.87
220.89
401.81
286.43
220.75
130.91
—

83.3% $254,147
19,685
95.5
12,791
91.7
120,106
84.6
79,704
92.6
217,513
86.0
58,256
84.7
120,727
90.8
24,108
92.2
85,719
93.4
20,672
86.8
(67,248)
—

27,961

$9,022,511

$322.68

$8,076,331

$288.84

89.5% $946,180

California
Florida
Illinois
Michigan
New Mexico
Ohio
South Carolina
Texas
Utah
Washington
Wisconsin
Other (3)

Member
Months(1)

Year Ended December 31, 2013

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

MCR(2)

Medical
Margin

4,233
973
7
2,581
1,492
3,007
—
3,178
1,040
4,941
1,060
—

$ 749,755
264,998
8,121
676,000
446,758
1,098,795
—
1,291,001
310,895
1,168,405
143,465
20,977

$ 177.10
272.23
1,201.34
261.91
299.36
365.44
—
406.27
299.05
236.47
135.40
—

$ 666,592
231,261
7,869
570,644
384,466
924,675
—
1,114,852
259,397
1,028,210
114,340
77,818

$ 157.46
237.57
1,164.10
221.09
257.62
307.53
—
350.84
249.51
208.10
107.91
—

88.9% $ 83,163
33,737
87.3
252
96.9
105,356
84.4
62,292
86.1
174,120
84.2
—
—
176,149
86.4
51,498
83.4
140,195
88.0
29,125
79.7
(56,841)
—

22,512

$6,179,170

$ 274.48

$5,380,124

$ 238.99

87.1% $799,046

(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2) “MCR” represents medical costs as a percentage of premium revenue.
(3) “Other” medical care costs include primarily medically related administrative costs of the parent company,

and direct delivery costs.

Molina Medicaid Solutions Segment

Performance of the Molina Medicaid Solutions segment was as follows:

Year Ended December 31,

2014

2013

(In thousands)

Service revenue before amortization
Amortization recorded as reduction of service revenue

$212,965
(2,914)

$207,449
(2,914)

Service revenue
Cost of service revenue
General and administrative costs
Amortization of customer relationship intangibles

Operating income

210,051
156,764
7,105
3,355

204,535
161,494
5,285
5,127

$ 42,827

$ 32,629

Operating income for our Molina Medicaid Solutions segment improved $10.2 million for the year ended
December 31, 2014, compared with 2013. This improvement was primarily the result of increased revenues due
to higher Medicaid transaction volumes and lower cost of services overall, as existing contract operations gained
efficiencies.

Consolidated Expenses

General and Administrative Expenses

General and administrative expenses decreased to 7.9% of revenue in 2014, from 10.1% in 2013. The significant
decline in the ratio of general and administrative expenses relative to total revenue was primarily the result of
improved leverage of fixed administrative expenses over higher total revenue.

Premium Tax Expense

Premium tax expense was 3.2% in 2014, compared with 2.7% in 2013. In June 2014, the state of Michigan
instituted a 6% use tax on medical premiums. That state has agreed to fund this tax through rate increases; as a
result, we recorded approximately $30 million in additional premium revenue in 2014, as well as corresponding
premium tax expense.

Health Insurer Fee Revenue and Expenses

Refer to “Liquidity and Capital Resources — Financial Condition” below for a comprehensive discussion of the
HIF.

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 revenue, or as
cost of service revenue.

Depreciation, and amortization of capitalized software, continuing

operations

Amortization of intangible assets, continuing operations

Depreciation and amortization, continuing operations

Depreciation and amortization, discontinued operations
Amortization recorded as reduction of service revenue
Amortization of capitalized software recorded as cost of service

Year Ended December 31,

2014

2013

Amount

% of Total
Revenue

Amount

% of Total
Revenue

(Dollar amounts in thousands)

$ 75,402
17,515

0.8% $54,837
17,906
0.2

92,917
—
2,914

1.0
—
—

72,743
2
2,914

0.8%
0.3

1.1
—
—

revenue

38,573

0.4

18,207

0.3

Depreciation and amortization reported in statement of cash

flows

Interest Expense

$134,404

1.4% $93,866

1.4%

Interest expense increased to $56.8 million for the year ended December 31, 2014, compared with $52.1 million
for the year ended December 31, 2013. The increase was due primarily to our 3.75% Notes exchange transaction
and related issuance of 1.625% Notes in the third quarter of 2014, and lease financing transactions executed in
2013. For further details regarding these transactions, please refer to Item 8 of this Form 10-K, Notes to
Consolidated Financial Statements, in Note 12, “Long-Term Debt.”

Interest expense includes non-cash interest expense relating to the amortization of the discount on our long-term
debt obligations, which amounted to $27.4 million and $22.8 million for the years ended December 31, 2014 and
2013, respectively.

Other Expenses, Net

Other expenses, net decreased to $0.8 million for the year ended December 31, 2014, from $3.3 million for the
year ended December 31, 2013. Other expenses, net include primarily gains or losses associated with changes in
the fair value of our derivative financial instruments. In the second quarter of 2013 we recorded a one-time

non-cash charge of $3.9 million related to the change in fair value of warrants issued in connection with the
1.125% Notes, with no comparable activity in 2014.

Income Taxes

The provision for income taxes in continuing operations is recorded at an effective rate of 53.8% for the year
ended December 31, 2014, compared with 44.8% for the year ended December 31, 2013. The increase is
primarily due to the nondeductible health insurer fee in 2014 that did not exist in 2013.

Results of Operations, Continuing Operations

Year Ended December 31, 2013 Compared with the Year Ended December 31, 2012

Premium Revenue

Premium revenue in 2013 increased 11% over 2012, due to a 6% increase in member months, and a 5% increase
in revenue PMPM. Medicare premium revenue was $526 million for the year ended December 31, 2013,
compared with $468 million for the year ended December 31, 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
Pharmacy
Capitation
Direct delivery
Other

Year Ended December 31,

2013

2012

Amount

PMPM

$3,611,529
935,204
603,938
48,288
181,165

$160.43
41.54
26.83
2.14
8.05

% of
Total

Amount

PMPM

67.1% $3,423,751
835,830
17.4
552,136
11.2
33,920
0.9
145,551
3.4

$161.67
39.47
26.07
1.60
6.87

% of
Total

68.6%
16.7
11.1
0.7
2.9

$5,380,124

$238.99

100.0% $4,991,188

$235.68

100.0%

Excluding our Illinois health plan, which was not operational until 2013, eight of our nine health plans reported
higher medical margins in 2013 than in 2012. The consolidated medical margin increased by approximately 45%
year over year. Our consolidated medical care ratio decreased to 87.1% for the year ended December 31, 2013,
compared with 90.0% for the year ended December 31, 2012.

Individual Health Plan Analysis

California. Financial performance improved at the California health plan in 2013, when compared with 2012,
primarily due to the receipt of premium rate increases for both TANF and ABD membership; and lower inpatient
facility costs for the TANF membership. Approximately $32 million of premium revenue received and
recognized in 2013 related to 2012 and earlier years. The medical care ratio at the California health plan
decreased to 88.9% in 2013 from 91.1% in 2012.

Florida. The medical care ratio of the Florida health plan increased to 87.3% in 2013, from 85.3% in 2012, due
to higher fee-for-service costs that more than offset lower pharmacy costs.

Illinois. The medical care ratio for the Illinois health plan was 96.9% in 2013. The Illinois health plan served its
first member effective September 2013.

Michigan. Financial performance improved at the Michigan health plan in 2013, when compared with 2012. The
medical care ratio of the Michigan health plan decreased to 84.4% in 2013, from 88.3% in 2012, primarily due to
lower fee-for-service and pharmacy costs for both the ABD and the TANF membership.

New Mexico. Financial performance improved at the New Mexico health plan in 2013, when compared with
2012. The medical care ratio of the New Mexico health plan decreased to 86.1% in 2013, from 87.0% in 2012,
primarily as a result of higher Medicaid premium rates PMPM effective January 1, 2013, and stable medical
costs PMPM. The New Mexico health plan added approximately 80,000 new members in 2013, as a result of its
acquisition of Lovelace Community Health Plan’s contract for the New Mexico Medicaid Salud! Program
effective August 1, 2013.

Ohio. Financial performance improved at the Ohio health plan in 2013, when compared with 2012. The medical
care ratio of the Ohio health plan decreased to 84.2% in 2013, from 88.6% in 2012, primarily due to lower fee-
for-service and pharmacy costs for both the ABD and the TANF membership. Financial performance deteriorated
in the second half of 2013 due to both premium decreases, and increases to fee schedules effective July 1, 2013,
that combined to reduce medical margin approximately 3% for the second half of 2013. We also experienced an
additional 1.5% decrease in premium rates in Ohio effective July 1, 2013, due to a re-basing of revenue risk
adjusters.

Texas. Financial performance improved at the Texas health plan in 2013, when compared with 2012. The
medical care ratio of the Texas health plan decreased to 86.4% in 2013, from 93.7% in 2012, primarily due to
rate increases received on September 1, 2013 and 2012, respectively.

Utah. Financial performance deteriorated at the Utah health plan in 2013, when compared with 2012. Reductions
to the medical portion of the Medicaid premium, and the addition of the pharmacy benefit to our Medicaid
premium, both effective January 1, 2013, more than offset stable medical costs. The medical care ratio of the
Utah health plan increased to 83.4% in 2013, from 82.3% in 2012.

Washington. The medical care ratio of the Washington health plan increased to 88.0% in 2013, compared with
86.8% in 2012, due to the addition of ABD members effective July 1, 2012 and lower TANF premium rates. The
higher premium revenue PMPM associated with the ABD membership, however, offset the increased medical
care ratio, so that medical margin increased to $140.2 million in 2013, from $129.0 million in 2012.

Wisconsin. Financial performance improved at the Wisconsin health plan in 2013, when compared with 2012.
The medical care ratio of the Wisconsin health plan decreased to 79.7% in 2013, compared with 96.2% in 2012,
due to both higher revenue PMPM and lower fee-for-service physician, specialty and outpatient costs PMPM.
Additionally, the health plan gained approximately 50,000 members in the first half of 2013 due to another health
plan’s exit from the market.

Health Plans Segment Operating Data

The following table summarizes member months, premium revenue, medical care costs, medical care ratio, and
medical margin by health plan for the periods indicated (PMPM amounts are in whole dollars; member months
and other dollar amounts are in thousands):

California
Florida
Illinois
Michigan
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin
Other (4)

Member
Months(2)

Year Ended December 31, 2013

Premium Revenue(1)

Medical Care Costs(1)

Total

PMPM

Total

PMPM

MCR(3) Medical Margin

4,233
973
7
2,581
1,492
3,007
3,178
1,040
4,941
1,060
—

$ 749,755
264,998
8,121
676,000
446,758
1,098,795
1,291,001
310,895
1,168,405
143,465
20,977

$ 177.10
272.23
1,201.34
261.91
299.36
365.44
406.27
299.05
236.47
135.40
—

$ 666,592
231,261
7,869
570,644
384,466
924,675
1,114,852
259,397
1,028,210
114,340
77,818

$ 157.46
237.57
1,164.10
221.09
257.62
307.53
350.84
249.51
208.10
107.91
—

88.9% $ 83,163
33,737
87.3
96.9
252
105,356
84.4
62,292
86.1
174,120
84.2
176,149
86.4
51,498
83.4
140,195
88.0
29,125
79.7
(56,841)
—

22,512

$6,179,170

$ 274.48

$5,380,124

$ 238.99

87.1% $799,046

Member
Months(2)

Year Ended December 31, 2012

Premium Revenue(1)

Medical Care Costs(1)

Total

PMPM

Total

PMPM

MCR(3) Medical Margin

4,177
850
—
2,639
1,069
3,065
3,245
1,026
4,600
508
—

$ 665,600
228,832
—
646,551
321,853
1,095,137
1,233,621
298,392
974,712
70,678
8,745

$159.36
269.36
—
244.97
301.08
357.36
380.18
290.78
211.91
139.25
—

$ 606,494
195,226
—
570,636
280,108
970,504
1,155,433
245,671
845,733
67,968
53,415

$145.20
229.80
—
216.20
262.03
316.69
356.08
239.41
183.87
133.91
—

91.1% $ 59,106
33,606
85.3
—
—
75,915
88.3
41,745
87.0
124,633
88.6
78,188
93.7
52,721
82.3
128,979
86.8
96.2
2,710
(44,670)
—

21,179

$5,544,121

$261.79

$4,991,188

$235.68

90.0% $552,933

(1) Premium revenue for our former Missouri health plan was $0.2 million and $114.4 million for the years
ended December 31, 2013 and 2012, respectively. Medical care costs for the plan were $1.5 million and
$105.6 million for the years ended December 31, 2013 and 2012, respectively. These amounts are excluded
from the tables above because the results of this health plan are classified as discontinued operations.
(2) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(3) “MCR” represents medical costs as a percentage of premium revenue.
(4) “Other” medical care costs include primarily medically related administrative costs of the parent company,

and direct delivery costs.

Molina Medicaid Solutions Segment

Performance of the Molina Medicaid Solutions segment was as follows:

Year Ended December 31,

2013

2012

(In thousands)

Service revenue before amortization
Amortization recorded as reduction of service revenue

$207,449
(2,914)

$189,281
(1,571)

Service revenue
Cost of service revenue
General and administrative costs
Amortization of customer relationship intangibles

Operating income

204,535
161,494
5,285
5,127

187,710
141,208
17,648
5,127

$ 32,629

$ 23,727

Operating income for our Molina Medicaid Solutions segment increased $8.9 million for the year ended
December 31, 2013, compared with 2012. The increase in operating income was primarily the result of additional
sales in existing markets, and the favorable resolution of certain contingencies related to the Maine contract.

Consolidated Expenses

General and Administrative Expenses

General and administrative expenses increased to 10.1% of revenue in 2013, from 8.8% in 2012, primarily due to
higher costs incurred as we prepared for significant membership growth anticipated in 2014. Increased
administrative expenses related to anticipated membership growth represented approximately 2% of premium
revenue, or $135 million during 2013.

Premium Tax Expense

Premium tax expense was consistent year over year.

Depreciation and Amortization

Depreciation, and amortization of capitalized software, continuing

operations

Amortization of intangible assets, continuing operations

Depreciation and amortization, continuing operations
Depreciation and amortization, discontinued operations
Amortization recorded as reduction of service revenue
Amortization of capitalized software recorded as cost of service

revenue

Year Ended December 31,

2013

2012

Amount

% of Total
Revenue

Amount

% of Total
Revenue

(Dollar amounts in thousands)

$54,837
17,906

72,743
2
2,914

18,207

0.8% $42,938
20,176
0.3

1.1
—
—

0.3

63,114
590
1,571

13,489

$93,866

1.4% $78,764

0.7%
0.3

1.0
—
—

0.2

1.2%

Interest Expense

Interest expense was $52.1 million for the year ended December 31, 2013, compared with $16.8 million for the
year ended December 31, 2012. Interest expense includes non-cash interest expense relating to the amortization
of the discount on our long-term debt obligations, which amounted to $22.8 million and $5.9 million for the
years ended December 31, 2013 and 2012, respectively. The increase in interest expense for the year ended
December 31, 2013, was primarily due to our issuance of $550.0 million aggregate principal amount 1.125%
cash convertible senior notes due 2020 (the 1.125% Notes) in the first quarter of 2013. Interest expense in 2013
also included the immediate recognition of approximately $6 million in debt issuance costs associated with this
transaction. The remaining fees associated with that issuance, amounting to approximately $12 million, are being
amortized over the life of the 1.125% Notes. For the year ended December 31, 2013, interest expense also
includes amounts relating to lease financing transactions executed in the second quarter of 2013.

Other Expenses, Net

Other expenses, net increased to $3.3 million for the year ended December 31, 2013, from $0.9 million for the
year ended December 31, 2012. Other expenses, net include primarily gains or losses associated with changes in
the fair value of our derivative financial instruments. In the second quarter of 2013 we recorded a one-time non-
cash charge of $3.9 million related to the change in fair value of warrants issued in connection with the 1.125%
Notes. We settled the interest rate swap in the second quarter of 2013, which resulted in a gain of $0.4 million,
partially offsetting the $3.9 million charge described above. Other expenses, net was $0.9 million for the year
ended December 31, 2012, primarily due to the change in fair value of the interest rate swap.

Income Taxes

The provision for income taxes in continuing operations is recorded at an effective rate of 44.8% for the year
ended December 31, 2013, compared with 45.0% for the year ended December 31, 2012.

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 a short time before we pay 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 10 years or less (excluding
auction rate securities and variable rate securities, for which interest rates are periodically reset) and that the
average maturity be three years or less. Professional portfolio managers operating under documented guidelines
manage our investments. As of December 31, 2014, 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 increased to $8.1 million for the year ended December 31, 2014, compared with $6.9 million
for the year ended December 31, 2013, primarily due to the increase in invested assets. Our annualized portfolio
yields for the years ended December 31, 2014 and 2013 were 0.4% and for 2012 was 0.5%.

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.
We did not receive any dividends from our health plan subsidiaries during the year ended December 31, 2014,
because significant growth across all of our health plans necessitated that the plans retain their capital for
operations. See further discussion in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note
20, “Commitments and Contingencies,” under the subheading “Regulatory Capital and Dividend Restrictions,”
and Note 23, “Condensed Financial Information of Registrant,” under “Note C — Dividends and Capital
Contributions.”

Liquidity

A condensed schedule of cash flows to facilitate our discussion of liquidity follows:

Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities

Year Ended December 31,

2014

2013

Change

$1,060,257
(535,729)
78,640

(In thousands)
$ 190,083
(543,311)
493,353

$ 870,174
7,582
(414,713)

Net increase in cash and cash equivalents

$ 603,168

$ 140,125

$ 463,043

Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities

Year Ended December 31,

2013

2012

Change

$ 190,083
(543,311)
493,353

(In thousands)
$347,784
(93,584)
47,743

$(157,701)
(449,727)
445,610

Net increase in cash and cash equivalents

$ 140,125

$301,943

$(161,818)

Operating Activities. Cash provided by operating activities was $1,060.3 million in 2014 compared with $190.1
million in 2013, an increase of $870.2 million. This increase was due primarily to the following:

•

$441.8 million increase in amounts due to government agencies, due to a significant increase in
amounts accrued for medical cost floor contract provisions primarily associated with our Medicaid
expansion membership; and

$355.5 million increase in medical claims and benefits payable due to significant membership growth
in 2014.

In 2013, cash provided by operating activities was $190.1 million compared with $347.8 million for 2012, a
decrease of $157.7 million. In 2013, deferred revenue was a use of cash from operations amounting to

$19.6 million, compared with a source of cash amounting to $90.9 million in 2012. This was primarily due to an
advance premium payment received by our Washington health plan in December 2012, with no comparable
advance premium receipts in December 2013.

Investing Activities. Cash used in investing activities decreased to $535.7 million in 2014, compared with $543.3
million in 2013. This $7.6 million decline in cash used was primarily due to lower purchases of investments, net
of sales and maturities, compared with 2013. As described below, there was greater investment activity in 2013
associated with significant debt financing transactions.

In 2013, cash used in investing activities was $543.3 million compared with $93.6 million in 2012. This $449.7
million increase was primarily due to greater purchases of investments in 2013, as a result of the cash generated
in financing activities, described below. In addition to increased purchases of investments, we paid $61.5 million
in connection with business combinations in 2013, with no comparable activity in 2012.

Financing Activities. Cash provided by financing activities was $78.6 million in 2014 compared with $493.4
million in 2013, a decrease of $414.7 million. Cash provided by financing activities in 2014 included primarily
$122.6 million net proceeds from our fiscal 2014 offering of 1.625% Notes, partially offset by $50.3 million paid
in the settlement of contingent consideration liabilities associated with our 2013 business combinations. Cash
provided by financing activities in 2014 was significantly outpaced by debt financing activities in 2013, as
described below.

In 2013, cash provided by financing activities was $493.4 million compared with $47.7 million in 2012, an
increase of $445.6 million. The increase in cash provided by financing activities was primarily due to 2013
activity including $538.0 million in proceeds received from our offering of 1.125% Notes, $158.7 million
received from sale-leaseback transactions, and $75.1 million from the sale of warrants, partially offset by $149.3
million paid for the purchased call option relating to 1.125% Notes, $52.7 million paid for repurchases of our
common stock, $47.5 million used to repay our term loan, and $40.0 million used to repay our credit facility. Our
credit facility was terminated in early 2013 when the balance was repaid.

Financial Condition

On a consolidated basis, at December 31, 2014, our working capital was $1,070.6 million compared with $745.7
million at December 31, 2013. At December 31, 2014, our cash and investments amounted to $2,665.9 million,
compared with $1,712.9 million of cash and investments at December 31, 2013.

Health Insurer Fee. One notable provision of the ACA is an excise tax or annual fee that applies to most health
plans, including commercial health plans and Medicaid 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 higher commercial insurance premiums.

However, because Medicaid is a government funded program, Medicaid health plans have no alternative but to look
to their respective state partners for payment to offset the impact of this tax. Additionally, when states reimburse us
for the amount of the HIF, that reimbursement is itself subject to income tax, the HIF, and applicable state premium
taxes. Because the HIF is not deductible for income tax purposes, our net income is reduced by the full amount of
the assessment. We expect our 2015 HIF assessment related to our Medicaid business to be approximately $143
million, with an expected tax effect from the reimbursement of the assessment of approximately $88 million.
Therefore, the total reimbursement needed as a result of the Medicaid-related HIF is approximately $231 million.

Our 2014 HIF assessment amounted to $88.6 million, which was paid in September 2014. As indicated in the
table below, it was necessary for the states to pay us an incremental amount of approximately $131 million
during 2014 to account for the HIF and the absence of its deductibility.

The state of California has not formally committed to reimburse us for either the HIF itself, or the related tax
effects. The states of Michigan and Utah have reimbursed us for the HIF, but have not formally committed to
reimbursement for the related tax effect. The total amount of HIF revenue for which agreements were not secured
(and revenue was not recognized) amounted to approximately $20 million for fiscal 2014. We expect to collect
and recognize this revenue related to 2014 in 2015. We further expect to recognize revenue in 2015 sufficient to
reimburse us for the full amount of the HIF we will pay (along with related tax effects) in September of 2015.

We continue to work with our state partners to obtain reimbursement for the full economic impact of the excise
tax. The failure of our state partners to reimburse us in full for the HIF and its related tax effects could have a
material adverse effect on our business, financial condition, cash flows or results of operations.

The following table provides the details of our HIF revenue reimbursement by health plan to date in 2014 (in
thousands):

HIF Reimbursement Recognized

Three Months Ended

March 31,
2014

June 30,
2014

Sept. 30,
2014

Dec. 31,
2014

Year Ended
Dec. 31, 2014

Required HIF
Reimbursement
through Dec. 31, 2014

Gross (1)

California
Florida
Illinois
Michigan
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin

Medicaid
Medicare

Recognized in:

1,473
42

1,416
40

$ — $ — $ — $ — $ —
5,835
1,487
162
40
10,674
8,011
11,322
—
30,426
6,912
18,518
—
4,049
3,000
25,246
6,217
4,771
1,372

1,459
40
2,663
11,322
7,606
18,518
1,049
6,311
1,193

—
—
8,117
—
—
6,489
1,126

—
—
7,791
—
—
6,229
1,080

16,556
2,892

17,247
3,199

27,039
3,068

50,161
3,053

111,003
12,212

$ 11,616
5,835
162
17,471
11,322
30,426
18,518
5,332
25,246
4,771

130,699
12,212

$19,448

$20,446

$30,107

$53,214

$123,215

$142,911

Health insurer fee revenue
Premium tax revenue

$18,696
752

$19,662
784

$29,427
680

$51,699
1,515

$119,484
3,731

$19,448

$20,446

$30,107

$53,214

$123,215

(1) Amounts in the table include the full economic impact of the excise tax including premium tax and the

income tax effect.

Regulatory Capital and Dividend Restrictions

For a comprehensive discussion of our regulatory capital requirements and dividend restrictions, refer to Item 8
of this Form 10-K, Notes to Consolidated Financial Statements, in Note 20 “Commitments and Contingencies.”

Future Sources and Uses of Liquidity

For a comprehensive discussion of our debt instruments, including our convertible senior notes transactions in
2014 and 2013, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 12
“Long-Term Debt.”

For a discussion of our shelf registration statement, and our securities repurchase programs through
December 31, 2014, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 15,
“Stockholders’ Equity.”

Effective as of February 25, 2015, our board of directors authorized the repurchase of up to $50 million in
aggregate of our common stock. Stock repurchases under this program may be made through open-market and/or
privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and
actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory
requirements and market conditions. This newly authorized repurchase program extends through December 31,
2015.

Critical Accounting Estimates

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 estimates relate to:

• Health Plans segment medical claims and benefits payable (see discussion below).

• Health Plans segment contractual provisions that may adjust or limit revenue or profit. For a

comprehensive discussion of this topic, including amounts recorded in our consolidated financial
statements, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 2,
“Significant Accounting Policies.”

• Health Plans segment quality incentives. For a comprehensive discussion of this topic, including

amounts recorded in our consolidated financial statements, refer to Item 8 of this Form 10-K, Notes to
Consolidated Financial Statements, in Note 2, “Significant Accounting Policies.”

• Molina Medicaid Solutions segment revenue and cost recognition. For a comprehensive discussion of
this topic, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 2,
“Significant Accounting Policies.”

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)
Pharmacy payable
Capitation payable
Other (1)

December 31,

2014

2013

2012

$ 870,429
71,412
28,150
230,531

(In thousands)
$424,173
45,037
20,267
180,310

$377,614
38,992
49,066
28,858

$1,200,522

$669,787

$494,530

(1) “Other” medical claims and benefits payable include amounts payable to certain providers for which we act
as an intermediary on behalf of various state agencies without assuming financial risk. Such receipts and
payments do not impact our consolidated statements of income. As of December 31, 2014 and 2013, we
recorded non-risk provider payables relating to such intermediary arrangements of approximately $119.3
million and $151.3 million, respectively.

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 (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 $870.4 million of our total medical claims and benefits payable of $1,200.5 million as of
December 31, 2014. Excluding amounts that we anticipate paying on behalf of certain capitated providers in
Ohio (which we will subsequently withhold from those providers’ monthly capitation payments), our IBNP
liability at December 31, 2014, was $861.8 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 provision for adverse claims deviation, 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, 2014 that would
have resulted had we changed our completion factors for the fifth through the twelfth months preceding
December 31, 2014, by the percentages indicated. A reduction in the completion factor results in an increase in
medical claims liabilities. Dollar amounts are in thousands.

Increase (Decrease) in Estimated Completion Factors

(6)%
(4)%
(2)%
2%
4%
6%

Increase (Decrease) in
Medical Claims and
Benefits Payable

$ 223,129
148,753
74,376
(74,376)
(148,753)
(223,129)

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, 2014 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%

(Decrease) Increase in
Medical Claims and
Benefits Payable

$(135,631)
(90,421)
(45,210)
45,210
90,421
135,631

The following per-share amounts are based on a combined federal and state statutory tax rate of 37%, and
48.3 million diluted shares outstanding for the year ended December 31, 2014. Assuming a hypothetical 1%
change in completion factors from those used in our calculation of IBNP at December 31, 2014, net income for
the year ended December 31, 2014 would increase or decrease by approximately $23 million, or $0.48 per
diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of
IBNP at December 31, 2014, net income for the year ended December 31, 2014 would increase or decrease by
approximately $14 million, or $0.29 per diluted share. The corresponding figures for a 5% change in completion
factors and PMPM cost estimates would be $117 million, or $2.42 per diluted share, and $71 million, or $1.47
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 $23 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 deviation 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 deviation. The provision for
adverse claims deviation 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 deviation.

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.

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.

Refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 11, “Medical Claims and
Benefits Payable,” for additional information regarding the specific factors used to determine our changes in
estimates of IBNP for all periods presented in the accompanying consolidated financial statements.

The following table presents the components of the change in our medical claims and benefits payable from
continuing and discontinued operations combined for the periods indicated. The amounts presented for
“Components of medical care costs related to: Prior periods” represent the amount by which our original estimate
of medical claims and benefits payable at the beginning of the period were more than the actual amount of the
liability based on information (principally the payment of claims) developed since that liability was first
reported.

Year ended December 31,

2014

2013

2012

Balances at beginning of period
Components of medical care costs related to:

(Dollars in thousands, except
per-member amounts)
$

494,530

669,787

402,476

Current period
Prior periods

Total medical care costs

Change in non-risk provider payables

Payments for medical care costs related to:

Current period
Prior periods

Total paid

Balances at end of period

Benefit from prior periods as a percentage of:

Balance at beginning of period
Premium revenue
Medical care costs

8,122,885
(45,979)

5,434,443
(52,779)

5,136,055
(39,295)

8,076,906

5,381,664

5,096,760

(31,973)

111,267

(7,004)

7,064,427
449,771

4,932,195
385,479

4,689,395
308,307

7,514,198

5,317,674

4,997,702

$ 1,200,522

669,787

494,530

6.9%
0.5%
0.6%

10.7%
0.9%
1.0%

9.8%
0.7%
0.8%

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

49
2,623,000
307,700
718,500
0.12
$
273.92
27,597,000
$30,315,600

43
1,931,000
145,800
276,500
0.08
143.19
21,317,500
$21,414,600

40
1,797,000
122,700
255,200
0.07
142.01
20,842,400
$19,429,300

Commitments and Contingencies

We are not a party to off-balance sheet financing arrangements, except for operating leases which are disclosed
in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 20, “Commitments and
Contingencies.”

Contractual Obligations

In the table below, we present our contractual obligations as of December 31, 2014.(1) 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 convertible senior notes (2)
Amounts due government agencies
Lease financing obligations
Interest on long-term debt
Operating leases
Lease financing obligations—related party
Purchase commitments

Total

2015

2016-2017

2018-2019 2020 and Beyond

$1,200,522 $1,200,522 $ — $ — $

—

851,551
527,193
380,956
176,405
122,035
102,394
26,029

—
527,193
11,397
11,088
29,142
5,346
14,232

—
—
23,830
22,176
44,591
11,243
11,797

—
—
25,282
22,175
33,073
12,021
—

851,551

—
320,447
120,966
15,229
73,784
—

$3,387,085 $1,798,920 $113,637 $92,551

$1,381,977

(1) As of December 31, 2014, we have recorded approximately $2.6 million of unrecognized tax benefits. The
table does not contain this amount because we cannot reasonably estimate when or if such amount may be
settled. For further information, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial
Statements, in Note 14, “Income Taxes.”

(2) Represents the principal amounts due on our 1.125% Cash Convertible Senior Notes due 2020, and our

1.625% Convertible Senior Notes due 2044 (1.625% Notes). The 1.625% Notes have a contractual maturity
date in 2044; however, on specified dates beginning in 2018 holders of the 1.625% Notes may require us to
repurchase some or all of the 1.625% Notes, as described in Item 8 of this Form 10-K, Notes to
Consolidated Financial Statements, in Note 12, “Long-Term Debt.”

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk

Refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 2, “Significant
Accounting Policies,” Note 5, “Fair Value Measurements,” and Note 6, “Investments.”

Inflation

We use various strategies to mitigate the negative effects of health care cost inflation. Specifically, our health
plans try to control medical and hospital costs through contracts with independent providers of health care
services. Through these contracted providers, our health plans emphasize preventive health care and appropriate
use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate health
care cost inflation will be successful. Competitive pressures, new health care and pharmaceutical product
introductions, demands from health care providers and customers, applicable regulations, or other factors may
affect our ability to control health care costs.

Compliance Costs

Our health plans are regulated by both state and federal government agencies. Regulation of managed care
products and health care services is an evolving area of law that varies from jurisdiction to jurisdiction.
Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules.
Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to
additional costs related to the implementation of additional systems, procedures and programs that we have not
yet identified.

Item 8. Financial Statements and Supplementary Data

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

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, 2014 and 2013, and the related consolidated statements of income, comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. 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, 2014 and 2013, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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, 2014,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26,
2015 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 26, 2015

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
Restricted investments
Derivative asset
Other assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Medical claims and benefits payable
Accounts payable and accrued liabilities
Amounts due government agencies
Deferred revenue
Income taxes payable
Current maturities of long-term debt

Total current liabilities

Convertible senior notes
Lease financing obligations
Lease financing obligations — related party
Deferred income taxes
Derivative liability
Other long-term liabilities

Total liabilities

Stockholders’ equity:

Common stock, $0.001 par value; 150,000 shares authorized; outstanding:

49,727 shares at December 31, 2014 and 45,871 shares at December 31, 2013
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and

outstanding

Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings

Total stockholders’ equity

See accompanying notes.

December 31,

2014

2013

(Amounts in thousands,
except per-share data)

$1,539,063
1,019,462
596,456
—
39,532
50,884

$ 935,895
703,052
298,935
32,742
26,556
42,484

3,245,397
340,778
53,675
89,273
271,964
102,479
329,323
44,326

2,039,664
292,083
45,675
98,871
230,738
63,093
186,351
46,462

$4,477,215

$3,002,937

$1,200,522
241,654
527,193
196,076
8,987
341

2,174,773
704,097
160,710
40,241
24,271
329,194
33,487

$ 669,787
263,043
56,922
122,216
—
182,008

1,293,976
416,368
159,394
27,092
580
186,239
26,351

3,466,773

2,110,000

—
396,059
(1,019)
615,352

1,010,442

—
340,848
(1,086)
553,129

892,937

$4,477,215

$3,002,937

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

Revenue:

Premium revenue
Service revenue
Premium tax revenue
Health insurer fee revenue
Investment income
Other revenue

Total revenue

Operating expenses:

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

Total operating expenses

Operating income

Other expenses, net:
Interest expense
Other expense, net

Total other expenses, net

Income from continuing operations before income tax expense
Income tax expense

Income from continuing operations
(Loss) income from discontinued operations, net of tax (benefit)

expense of $(203), $(9,912), and $(1,238), respectively

Net income

Basic net income per share:

Income from continuing operations
(Loss) income from discontinued operations

Basic net income per share

Diluted net income per share:

Income from continuing operations
(Loss) income from discontinued operations

Diluted net income per share

Weighted average shares outstanding:

Basic

Diluted

See accompanying notes.

Year Ended December 31,

2014

2013

2012

(In thousands, except per-share data)

$9,022,511
210,051
294,388
119,484
8,093
12,074

$6,179,170
204,535
172,017
—
6,890
26,322

$5,544,121
187,710
158,991
—
5,075
18,312

9,666,601

6,588,934

5,914,209

8,076,331
156,764
764,693
294,388
88,591
92,917

5,380,124
161,494
665,996
172,017
—
72,743

4,991,188
141,208
518,615
158,991
—
63,114

9,473,684

6,452,374

5,873,116

192,917

136,560

41,093

56,811
802

57,613

135,304
72,726

62,578

52,071
3,343

55,414

81,146
36,316

44,830

16,769
945

17,714

23,379
10,513

12,866

(355)

8,099

(3,076)

62,223

1.34
(0.01)

1.33

1.30
(0.01)

1.29

52,929

9,790

0.98
0.18

1.16

0.96
0.17

1.13

0.28
(0.07)

0.21

0.27
(0.06)

0.21

46,935

48,340

45,717

46,862

46,380

46,999

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Net income
Other comprehensive income (loss):

Unrealized investment gain (loss)
Effect of income tax expense (benefit)

Other comprehensive income (loss), net of tax

Comprehensive income

See accompanying notes.

Year Ended December 31,

2014

2013

2012

$62,223

(In thousands)
$52,929

$ 9,790

108
41

(1,015)
(386)

(629)

1,529
581

948

$62,290

$52,300

$10,738

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock

Outstanding Amount

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Loss

Retained
Earnings

Treasury
Stock

Total

Balance at December 31, 2013

45,871

340,848

(1,086)

553,129

—

1,602

—

—
—

—

62,223
—

Balance at January 1, 2012

45,815

$ 46 $266,022

Net income
Other comprehensive income, net
Purchase of treasury stock
Share-based compensation
Tax benefit from share-based

—
—
—
—
(111) —
1,058

—
—
—
16,361

compensation

—

3,141

Balance at December 31, 2012

46,762

285,524

—
—
(1,710)
—
—
819

—
—

(2)

—
—

—
—
—
(55,660)
78,997
30,385

Net income
Other comprehensive loss, net
Purchase of treasury stock
Retirement of treasury stock
Issuance of warrants
Share-based compensation
Tax benefit from share-based

compensation

Net income
Other comprehensive income, net
Convertible senior notes

transactions, including issuance
costs

Share-based compensation
Tax benefit from share-based

(In thousands)
$(1,405)

$490,410 $ — $ 755,073

—
948
—
—

—

(457)

—
(629)
—
—
—
—

9,790
—
—
—

—
—
(3,000)
—

9,790
948
(3,000)
16,362

—

3,141

500,200

(3,000)

782,314

—
—

52,929
—
— (52,660)
— 55,660
—
—
—
—

52,929
(629)
(52,662)
—
78,997
30,386

1,602

892,937

62,223
67

21,963
30,263

2,989

—

—
—

—

compensation

—

2,989

1,787
2,069

2
2

21,961
30,261

—
—

—

—
—

—

Balance at December 31, 2014

49,727

$ 50 $396,059

$(1,019)

$615,352 $ — $1,010,442

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating

activities:

Depreciation and amortization
Deferred income taxes
Share-based compensation
Amortization of convertible senior notes and lease financing obligations
Gain on sale of subsidiary
Other, net
Changes in operating assets and liabilities:

Receivables
Prepaid expenses and other current assets
Medical claims and benefits payable
Accounts payable and accrued liabilities
Amounts due government agencies
Deferred revenue
Income taxes

Net cash provided by operating activities

Investing activities:

Purchases of investments
Proceeds from sales and maturities of investments
Purchases of equipment
Net cash paid in business combinations
Increase in restricted investments
Proceeds from sale of subsidiary, net of cash surrendered
Other, net

Net cash used in investing activities

Financing activities:

Proceeds from issuance of convertible senior notes, net of financing

costs paid

Proceeds from sale-leaseback transactions
Purchase of call option
Proceeds from issuance of warrants
Contingent consideration liabilities settled
Treasury stock purchases
Principal payments on term loan
Repayment of amount borrowed under credit facility
Proceeds from employee stock plans
Principal payments on convertible senior notes
Amount borrowed under credit facility
Other, net

Net cash provided by financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

See accompanying notes.

Year Ended December 31,

2014

2013

2012

(In thousands)

62,223 $ 52,929 $

9,790

134,404
(2,352)
21,727
27,379
—
6,222

93,866
(31,047)
28,694
22,820
—
17,729

(297,521)
(19,517)
530,735
11,097
470,271
73,860
41,729
1,060,257

(149,253)
(23,064)
175,257
32,550
28,446
(19,582)
(39,262)
190,083

78,764
(9,887)
20,018
5,942
(1,747)
11,224

18,216
(8,958)
92,054
8,078
15,267
90,851
18,172
347,784

(953,355)
632,800
(114,934)
(44,133)
(33,661)
—
(22,446)
(535,729)

(770,083)
399,595
(98,049)
(61,521)
(18,992)
—
5,739
(543,311)

(306,437)
298,006
(78,145)
—
(2,647)
9,162
(13,523)
(93,584)

122,625

537,973
— 158,694
— (149,331)
75,074
—
—
(50,349)
(52,662)
—
(47,471)
—
(40,000)
—
9,402
14,040
—
(10,449)
—
—
1,674
2,773
493,353
78,640
140,125
603,168
795,770
935,895

—
—
—
—
—
(3,000)
(1,129)
(20,000)
8,205
—
60,000
3,667
47,743
301,943
493,827
$1,539,063 $ 935,895 $ 795,770

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

Supplemental cash flow information:

Cash paid (received) during the period for:

Income taxes

Interest

Schedule of non-cash investing and financing activities:

3.75% Notes exchanged for 1.625% Notes

Retirement of treasury stock

Year Ended December 31,

2014

2013

2012

(Amounts in thousands)
(Unaudited)

$ 30,413

$ 95,240

$ (4,634)

$ 29,178

$ 34,881

$ 10,099

$ 176,551

— $ —

— $ 55,660

$ —

Increase in non-cash lease financing obligation — related party

$ 13,841

$ 27,211

$ —

Common stock used for stock-based compensation

(8,802) $

(7,711) $(11,862)

Details of business combinations:
Fair value of assets acquired
Fair value of contingent consideration liabilities incurred
Payable to seller
Escrow deposit

$ (52,057) $(121,801) $ —
—
—
—

59,948
—
332

—
7,924
—

Net cash paid in business combinations

$ (44,133) $ (61,521) $ —

Details of change in fair value of derivatives, net:

Gain on 1.125% Call Option
Loss on 1.125% Notes Conversion Option
Loss on 1.125% Warrants
Gain (loss) on interest rate swap

Change in fair value of derivatives, net

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

See accompanying notes.

$ 142,972
(142,955)

—
—

$ 37,020
(36,908)
(3,923)
433

$ —
—
—
(1,307)

$ (3,378) $ (1,307)

— $
—
—

— $

— $ 30,942
(23,527)
—
1,747
—

— $ 9,162

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Organization and Operations

Market Updates — Health Plans Segment

Florida. During 2014, our Florida health plan acquired two Medicaid contracts, adding approximately 73,000
members. See Note 4, “Business Combinations,” for further information.

Puerto Rico. In 2014, we were awarded a managed care contract in the Commonwealth of Puerto Rico that is
expected to enroll its first members April 1, 2015.

South Carolina. Our South Carolina health plan began serving members under the state of South Carolina’s new
full-risk Medicaid managed care program effective January 1, 2014.

Market Update — Molina Medicaid Solutions Segment

In 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state intended to award the
contract for a replacement Medicaid management information system (MMIS) to a different vendor, CNSI.
However, in March 2013, the state of Louisiana canceled its contract award to CNSI. The state had informed us that
we will continue to perform under our current contract until a successor is named. On December 18, 2014, Molina
Medicaid Solutions received notice from the state of Louisiana that they have extended our contract through
December 31, 2015. We recognized approximately $41 million of service revenue under this contract in 2014.

Consolidation

The consolidated financial statements include the accounts of Molina Healthcare, Inc., its subsidiaries, and
variable interest entities in which Molina Healthcare, Inc. is considered to be the primary beneficiary. See

Note 19, “Variable Interest Entities,” for more information regarding these variable interest entities. In the
opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date
and for the periods presented have been included; such adjustments consist of normal recurring adjustments. All
significant inter-company balances and transactions have been eliminated in consolidation. Financial information
related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition.

Presentation and Reclassifications

We previously reported that our Medicaid managed care contract with the state of Missouri expired without
renewal in 2012, and effective June 2013 the transition obligations associated with that contract terminated.
Therefore, beginning in the second quarter of 2013, we reported the results relating to the Missouri health plan as
discontinued operations for all periods presented. Additionally, we abandoned our equity interests in the Missouri
health plan during the second quarter of 2013, resulting in the recognition of a tax benefit of $9.5 million, which
is also included in discontinued operations in the consolidated statements of income. The Missouri health plan’s
premium revenues were insignificant in 2014 and 2013, and amounted to $114.4 million for the year ended
December 31, 2012.

We have reclassified certain amounts in the 2013 consolidated balance sheet, and 2013 and 2012 statements of
cash flows to conform to the 2014 presentation, including the presentation of amounts due government agencies
as a separate line item in the consolidated balance sheets and statements of cash flows.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates
also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from these estimates. Principal areas requiring the use of estimates include:

• Health plan contractual provisions that may limit revenue recognition based upon the costs incurred or

the profits realized under a specific contract;

• Health plan quality incentives that allow us to recognize incremental revenue if certain quality

standards are met;

• The determination of medical claims and benefits payable of our Health Plans segment;

• The valuation of certain investments;

•

Settlements under risk or savings sharing programs;

• The assessment of deferred contract costs, deferred revenue, long-lived and intangible assets, and

goodwill for impairment;

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

claims unpaid by insolvent providers;

• The determination of reserves for the outcome of litigation;

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

• The determination of unrecognized tax benefits.

2. Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily
convertible into known amounts of cash and have a maturity of three months or less on the date of purchase.

Investments

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

Our investment policy requires that all of our investments have final maturities of 10 years or less (excluding
auction rate and variable rate securities where interest rates may be periodically reset), and that the average
maturity be three years or less. Investments and restricted investments are subject to interest rate risk and will
decrease in value if market rates increase. Declines in interest rates over time will reduce our investment income.

In general, our available-for-sale securities are classified as current assets without regard to the securities’
contractual maturity dates because they may be readily liquidated. Our auction rate securities are classified as
non-current assets and reported in other assets. We monitor our investments for other-than-temporary
impairment. For comprehensive discussions of the fair value and classification of our current and non-current
investments, including auction rate securities, see Note 5, “Fair Value Measurements,” Note 6, “Investments,”
and Note 10, “Restricted Investments.”

Receivables

Receivables are readily determinable and because our creditors are primarily state governments, our allowance
for doubtful accounts is immaterial. Any amounts determined to be uncollectible are charged to expense when
such determination is made. See Note 7, “Receivables.”

Property, Equipment, and Capitalized Software

Property and equipment are stated at historical cost. Replacements and major improvements are capitalized, and
repairs and maintenance are charged to expense as incurred. Furniture and equipment are generally depreciated
using the straight-line method over estimated useful lives ranging from three to seven years. Software developed
for internal use is capitalized. Software is generally amortized over its estimated useful life of three years.
Leasehold improvements are amortized over the term of the lease, or over their useful lives from five to 10 years,
whichever is shorter. Buildings are depreciated over their estimated useful lives of 31.5 to 40 years. See Note 8,
“Property, Equipment, and Capitalized Software.”

As discussed below, the costs associated with certain of our Molina Medicaid Solutions segment equipment and
software are capitalized and recorded as deferred contract costs. Such costs are amortized on a straight-line basis
over the shorter of the useful life or the contract period.

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

• Amortization of capitalized software is recorded within the heading “Cost of service revenue.”

Depreciation, and amortization of capitalized software, continuing operations
Amortization of intangible assets, continuing operations

Depreciation and amortization, continuing operations

Depreciation and amortization, discontinued operations
Amortization recorded as reduction of service revenue
Amortization of capitalized software recorded as cost of service revenue

Year Ended December 31,

2014

2013

2012

$ 75,402
17,515

(In thousands)
$54,837
17,906

92,917
—
2,914
38,573

72,743
2
2,914
18,207

$42,938
20,176

63,114
590
1,571
13,489

Depreciation and amortization reported in the statement of cash flows

$134,404

$93,866

$78,764

Long-Lived Assets, including Intangible Assets

Long-lived assets comprise primarily property, equipment, capitalized software and intangible assets. Finite-
lived, separately-identifiable intangible assets are acquired in business combinations and are assets that represent
future expected benefits but lack physical substance (such as purchased contract rights and provider contracts).
Intangible assets are initially recorded at their fair values and are then amortized on a straight-line basis over
their expected useful lives, generally between three and 15 years.

Identifiable intangible assets associated with Molina Medicaid Solutions are classified as either contract backlog
or customer relationships as follows:

• The contract backlog intangible asset comprises all contractual cash flows anticipated to be received
during the remaining contracted period for each specific contract relating to work that was performed
prior to acquisition. Because each acquired contract constitutes a single revenue stream, amortization
of the contract backlog intangible is recorded to contra-service revenue so that amortization is matched
to any revenues associated with contract performance that occurred prior to the acquisition date. The
contract backlog intangible asset is amortized on a straight-line basis for each specific contract over
periods generally ranging from one to six years. The contract backlog intangible assets will be fully
amortized in 2015.

• The customer relationship intangible asset comprises all contractual cash flows that are anticipated to
be received during the option periods of each specific contract as well as anticipated renewals of those
contracts. The customer relationship intangible is amortized on a straight-line basis for each specific
contract over periods generally ranging from four to nine years.

Our intangible assets are subject to impairment tests when events or circumstances indicate that a finite-lived
intangible asset’s (or asset group’s) carrying value may not be recoverable. Consideration is given to a number of
potential impairment indicators. 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.

Following the identification of any potential impairment indicators, to determine whether an impairment exists,
we would compare the carrying amount of a finite-lived intangible asset with the undiscounted cash flows that
are expected to result from the use of the asset or related group of assets. If it is determined that the carrying
amount of the asset is not recoverable, the amount by which the carrying value exceeds the estimated fair value is
recorded as an impairment.

No significant impairment charges relating to long-lived assets, including intangible assets, were recorded in the
years ended December 31, 2014, 2013, and 2012.

Goodwill

To determine whether goodwill is impaired, we measure the fair values of our reporting units and compare them
to the carrying values of the respective units, including goodwill. If the fair value is less than the carrying value
of the reporting unit, then the implied value of goodwill would be calculated and compared to the carrying
amount of goodwill to determine whether goodwill is impaired.

We estimate the fair values of our reporting units using discounted cash flows. To determine fair values, we must
make assumptions about a wide variety of internal and external factors. Significant assumptions used in the
impairment analysis include financial projections of free cash flow (including significant assumptions about
operations, capital requirements and income taxes), long-term growth rates for determining terminal value, and
discount rates.

No impairment charges relating to goodwill were recorded in the years ended December 31, 2014, 2013, and
2012.

Restricted Investments

Restricted investments, which consist of certificates of deposit and U.S. treasury securities, are designated as
held-to-maturity and are carried at amortized cost, which approximates market value. The use of these funds is
limited to specific purposes as required by each state, or as protection against the insolvency of capitated
providers. We have the ability to hold our restricted investments until maturity and, as a result, we would not
expect the value of these investments to decline significantly due to a sudden change in market interest rates. See
Note 10, “Restricted Investments.”

Other Assets

Other assets primarily includes deferred financing costs associated with our convertible senior notes and lease
financing obligations, and certain investments held in connection with our employee deferred compensation
program. The deferred financing costs are being amortized on a straight-line basis over the terms of the
convertible senior notes and lease financing obligations.

Delegated Provider Insolvency

Circumstances may arise where providers to whom we have delegated risk are unable to pay claims they have
incurred with third parties in connection with referral services (including hospital inpatient services) provided to
our members. The inability of delegated providers to pay referral claims presents us with both immediate
financial risk and potential disruption to member care. Depending on states’ laws, we may be held liable for such
unpaid referral claims even though the delegated provider has contractually assumed such risk. Additionally,
competitive pressures may force us to pay such claims even when we have no legal obligation to do so. To
reduce the risk that delegated providers are unable to pay referral claims, we monitor the operational and
financial performance of such providers. We also maintain contingency plans that include transferring members
to other providers in response to potential network instability.

In certain instances, we have required providers to place funds on deposit with us as protection against their
potential insolvency. These reserves are frequently in the form of segregated funds received from the provider
and held by us or placed in a third-party financial institution. These funds may be used to pay claims that are the
financial responsibility of the provider in the event the provider is unable to meet these obligations. Additionally,
we have recorded liabilities for estimated losses arising from provider instability or insolvency in excess of
provider funds on deposit with us. Such liabilities were not material at December 31, 2014 and 2013.

Premium Revenue

Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally
subject to significant accounting estimates. For the year ended December 31, 2014, we received more than 95%
of our premium revenue as a fixed amount per member per month (PMPM), pursuant to our Medicaid, Medicare
and Marketplace contracts, including agreements 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. Revenue not received on a fixed PMPM basis is recognized as earned. The state Medicaid
programs and the federal Medicare program periodically adjust premium rates.

The following table summarizes premium revenue from continuing operations for the periods indicated:

Year Ended December 31,

2014

2013

2012

Amount

% of Total

Amount

% of Total

Amount

% of Total

(Dollars in thousands)

California
Florida
Illinois
Michigan
New Mexico
Ohio
South Carolina
Texas
Utah
Washington
Wisconsin
Direct delivery

$1,523,084
439,107
153,271
780,896
1,075,330
1,552,949
381,317
1,318,192
309,411
1,304,605
156,229
28,120

16.9% $ 749,755
264,998
4.9
8,121
1.7
676,000
8.7
11.9
446,758
17.2
1,098,795
4.2
14.6
3.4
14.5
1.7
0.3

1,291,001
310,895
1,168,405
143,465
20,977

—

12.1% $ 665,600
228,832
4.3
—
0.1
646,551
11.0
7.2
321,853
17.8
1,095,137
—
20.9
5.0
18.9
2.3
0.4

1,233,621
298,392
974,712
70,678
8,745

—

12.0%
4.1
—
11.7
5.8
19.7
—
22.2
5.4
17.6
1.3
0.2

$9,022,511

100.0% $6,179,170

100.0% $5,544,121

100.0%

Certain components of premium revenue are subject to accounting estimates and fall into the following
categories:

Contractual Provisions That May Adjust or Limit Revenue or Profit

Health Plan Medical Cost Floors (Minimums), Medical Cost Corridors, and Administrative Cost Ceilings
(Maximums): A portion of certain Medicaid, Medicare, and Marketplace premiums received by our health plans
may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we
recorded a liability under the terms of such contract provisions of $392.4 million and $1.4 million at
December 31, 2014, and December 31, 2013, respectively, to amounts due government agencies. Such liability
amounts could be subject to future changes in estimate. The increase is primarily driven by contractual
provisions relating to the Medicaid expansion program, which began to phase in during January 2014. Beginning
in 2014, the health plans may receive additional premiums if amounts spent on medical care costs exceed a
defined maximum threshold. Separately, in certain states we may be levied with non-monetary sanctions if
certain minimum amounts are not spent on defined medical care costs, or if administrative costs exceed certain
amounts.

Health Plan Profit Sharing and Profit Ceiling: Our contracts with certain states contain profit-sharing or profit
ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain
specified percentage, in some cases in accordance with a tiered rebate schedule. In some cases, we are limited in
the amount of administrative costs that we may deduct in calculating the refund, if any. As a result of profits in
excess of the amount we are allowed to fully retain, we recorded a liability of $0.5 million and $2.5 million at
December 31, 2014 and December 31, 2013, respectively.

Medicare Revenue Risk Adjustment: Based on member encounter data that we submit to the Centers for Medicare
and Medicaid Services (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’ health 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 $7.6 million and $20.8 million for anticipated Medicare risk adjustment premiums at
December 31, 2014 and December 31, 2013, respectively.

Quality Incentives

At our California, Illinois, New Mexico, Ohio, Texas, Washington and Wisconsin health plans, revenue ranging
from approximately 1% to 4% of certain health plan premiums is earned if certain performance measures are
met.

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, 2014 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, 2014.

Maximum available quality incentive premium — current period

Amount of quality incentive premium revenue recognized in current

period:

Earned current period
Earned prior periods

Total

2014

Year Ended December 31,
2013
(In thousands)
63,311
$

90,327

2012

74,564

40,396
3,950

44,346

45,803
9,056

54,859

62,489
2,202

64,691

Total premium revenue recognized for state health plans with quality

incentive premiums

$7,083,660

$2,980,019

$2,721,289

California Health Plan Rate Settlement Agreement

In the fourth quarter of 2013, our California health plan entered into a settlement agreement with the California
Department of Health Care Services (DHCS). The agreement settled rate disputes initiated by our California
health plan dating back to 2003 with respect to its participation in Medi-Cal (California’s Medicaid program).
Under the terms of the agreement, a settlement account (the Account) applicable to the California health plan’s
managed care contracts has been established.

Effective January 1, 2014, the Account was established with an initial balance of zero, and will be settled after
December 31, 2017. DHCS will make an interim partial settlement payment to us if it terminates early, without
replacement, any of our managed care contracts. The Account will be adjusted annually to reflect a calendar year
deficit or surplus, which is determined by comparing the California health plan’s pre-tax margin and a target
margin established in the settlement agreement. Upon expiration of the settlement agreement, if the Account is in

a deficit position, then DHCS will pay the amount of the deficit to us, subject to an alternative minimum payment
amount. If the Account is in a surplus position, then no amount is owed to either party. The maximum amount
that DHCS would pay to us under the terms of the settlement agreement is $40.0 million.

We estimate and recognize the retrospective adjustments to premium revenue based on our experience to date
under the California health plan’s managed care contracts. As of December 31, 2014, the California health plan’s
pre-tax margin exceeded the target margin, resulting in a surplus position. Consequently, a retrospective
premium adjustment was not required for the year ended December 31, 2014.

Medical Care Costs

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

• Fee-for-service expenses: Nearly all hospital services and the majority of our primary care and

• Capitation expenses: Many of our primary care physicians and a small portion of our specialists and

hospitals are paid on a capitated basis. Under capitation arrangements, we pay a fixed amount PMPM to the
provider without regard to the frequency, extent, or nature of the medical services actually furnished. Under
capitated arrangements, we remain liable for the provision of certain health care services. 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.

• Direct delivery expenses: All costs associated with our direct delivery of medical care are separately

identified.

The following table provides the details of our consolidated medical care costs from continuing operations for the
periods indicated (dollars in thousands, except PMPM amounts):

Year Ended December 31,

2014

Amount
$5,672,483
1,273,329
748,388
96,196
285,935
$8,076,331

PMPM
$202.87
45.54
26.77
3.44
10.22
$288.84

Amount

% of
Total
70.2% $3,611,529
935,204
15.8
603,938
9.3
1.2
48,288
181,165
3.5
100.0% $5,380,124

2013

PMPM
$160.43
41.54
26.83
2.14
8.05
$238.99

Amount

% of
Total
67.1% $3,423,751
835,830
17.4
552,136
11.2
33,920
0.9
145,551
3.4
100.0% $4,991,188

2012

PMPM
$161.67
39.47
26.07
1.60
6.87
$235.68

% of
Total
68.6%
16.7
11.1
0.7
2.9
100.0%

Fee-for-service
Pharmacy
Capitation
Direct delivery
Other

Total

The Missouri health plan’s medical care costs, which are not included in the table above, amounted to $0.6
million, $1.5 million, and $105.6 million for the years ended December 31, 2014, 2013, and 2012, 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. 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.

We report reinsurance premiums as medical care costs, while related reinsurance recoveries are reported as
deductions from medical care costs. We limit our risk of catastrophic losses by maintaining high deductible
reinsurance coverage. We do not consider this coverage to be material because the cost is not significant and the
likelihood that coverage will apply is low.

Taxes Based on Premiums

Health Insurer Fee. The federal government under the Patient Protection and Affordable Care Act and the Health
Care and Education Reconciliation Act of 2010 (collectively, the Affordable Care Act, or ACA) imposes an
annual fee, or excise tax, on health insurers for each calendar year. The health insurer fee (HIF) is based on a
company’s share of the industry’s net premiums written during the preceding calendar year, and is non-
deductible for income tax purposes. We recognize expense for the HIF over the year on a straight-line basis.
Because we primarily serve individuals in government-sponsored programs, we must secure additional
reimbursement from our state partners for this added cost. We recognize the related revenue when we have
obtained a contractual commitment from a state to reimburse us for the HIF; such HIF revenue is recognized
ratably throughout the year.

Premium and Use Tax. Certain of our health plans are assessed a tax based on premium revenue collected. The
premium revenues we receive from these states include the premium tax assessment. We have reported these
taxes on a gross basis, as premium tax revenue and as premium tax expense in the consolidated statements of
income.

Premium Deficiency Reserves on Loss Contracts

We assess the profitability of our contracts for providing medical care services to our members and identify those
contracts where current operating results or forecasts indicate probable future losses. Anticipated future
premiums are compared to anticipated medical care costs, including the cost of processing claims. If the
anticipated future costs exceed the premiums, a loss contract accrual is recognized. No such accrual was recorded
as of December 31, 2014, or 2013.

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 (DDI) of a
Medicaid management information system (MMIS). An additional service, following completion of DDI, is the
operation of the MMIS under a business process outsourcing (BPO) arrangement. When 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 contract term during which BPO, hosting, and support and maintenance
services are delivered. There may be certain contractual provisions containing contingencies, however that
require us to delay recognition of all or part of our service revenue until such contingencies have been removed.

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, and are therefore multiple-element service arrangements.

Additionally, we evaluate each required deliverable under our multiple-element service arrangements to
determine whether it qualifies as a separate unit of accounting. Such evaluation is generally based on whether the
deliverable has standalone value to the customer. If the deliverable has standalone value, 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 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. 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. Therefore, absent any contingencies as discussed in the following paragraph, or contract extensions,
we would recognize all revenue associated with those contracts over the initial contract period. When a contract
is extended, we generally consider the extension to be a continuation of the single unit of accounting; therefore,
the deferred revenue as of the extension date is recognized prospectively over the new remaining term of the
contract. 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, for example. 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; and

• 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.

Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which is generally
greater than the U.S. federal statutory rate primarily because of state taxes, nondeductible HIF expenses,
nondeductible compensation and other general and administrative expenses. The effective tax rate may be subject
to fluctuations during the year, particularly as a result of the mathematical impact of the level of pretax earnings,
and also as new information is obtained. Such information may affect the assumptions used to estimate the
annual effective tax rate, including factors such as the mix of pretax earnings in the various tax jurisdictions in
which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the
recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in
jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net
operating loss and tax credit carryovers. For further discussion and disclosure, see Note 14, “Income Taxes.”

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash
equivalents, investments, receivables, and restricted investments. We invest a substantial portion of our cash in
the PFM Funds Prime Series — Institutional Class, and the PFM Funds Government Series. These funds
represent a portfolio of highly liquid money market securities that are managed by PFM Asset Management LLC
(PFM), a Virginia business trust registered as an open-end management investment fund. As of December 31,
2014, and 2013, our investments with PFM amounted to approximately $321 million and $374 million,
respectively. Our investments and a portion of our cash equivalents are managed by professional portfolio
managers operating under documented investment guidelines. No investment that is in a loss position can be sold
by our managers without our prior approval. Our investments consist solely of investment grade debt securities
with a maximum maturity of 10 years and an average duration of three 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 plan subsidiaries operate.

Risks and Uncertainties

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

We operate health plans in 11 states, primarily as a direct contractor with the states, and in Los Angeles County,
California, as a subcontractor to another health plan holding a direct contract with the state. We are therefore
dependent upon a small number of contracts to support our revenue. The loss of any one of those contracts could
have a material adverse effect on our financial position, results of operations, or cash flows. Our ability to
arrange for the provision of medical services to our members is dependent upon our ability to develop and
maintain adequate provider networks. Our inability to develop or maintain such networks might, in certain
circumstances, have a material adverse effect on our financial position, results of operations, or cash flows.

Recent Accounting Pronouncements

Health Insurer Fee. In the first quarter of 2014, we adopted the guidance of the Financial Accounting Standards
Board (FASB) related to accounting for the fees to be paid by health insurers to the federal government under the
ACA, specifically the HIF. The HIF is imposed beginning in 2014, is based on a company’s share of the
industry’s net premiums written during the preceding calendar year, and is payable on September 30 of each
year. Effective January 1, 2014, we recorded our estimate of the 2014 liability to accounts payable and accrued
liabilities. During the third quarter of 2014 we paid our 2014 HIF assessment, which amounted to $88.6 million.

Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09 — Revenue from
Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. generally
accepted accounting principles (GAAP). The core principal of this ASU is that an entity should recognize revenue
when it transfers promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including
significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a
contract. This ASU will be effective for us in the first quarter of 2017; early adoption is not permitted. The ASU allows
for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be
elected and the potential effects of the adoption of this ASU on our financial statements.

Discontinued Operations. In April 2014, the FASB issued ASU 2014-08 — Reporting Discontinued Operations
and Disclosures of Disposal of Components of an Entity, which raises the threshold for disposals to qualify as
discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s
operations and financial results. This ASU will be effective for us in the first quarter of 2015, and is applied
prospectively. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not
been reported in financial statements previously issued or available for issue. We are evaluating the potential
effects of the adoption of the ASU on our financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the
American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission
(SEC), did not have, or are not believed by management to have, a material impact on our present or future
consolidated financial statements.

3. Net Income per Share

The following table sets forth the calculation of the denominators used to compute basic and diluted net income
per share:

Shares outstanding at the beginning of the period
Weighted-average number of shares:

Repurchased
Issued, 3.75% Notes and 3.75% Exchange (1)
Issued, share-based compensation

December 31,

2014

2013

2012

45,871

(In thousands)
46,762

45,815

—
566
498

(1,445)
—
400

(2)

—
567

Denominator for basic net income per share

46,935

45,717

46,380

Effect of dilutive securities:

Share-based compensation
3.75% Notes and 3.75% Exchange (1)

498
907

643
502

619
—

Denominator for diluted net income per share

48,340

46,862

46,999

Potentially dilutive common shares excluded from calculations (2):

Stock options
1.125% Warrants
Restricted shares

—
13,490
—

51
11,975
—

87
—
304

(1) For more information regarding the 3.75% Exchange and 3.75% Notes, refer to Note 12, “Long-Term

Debt.”

(2) Potentially dilutive shares issuable pursuant to certain of our employee stock options, 1.125% Warrants

(defined in Note 13, “Derivative Financial Instruments”), and 1.625% Notes (defined in Note 12, “Long-
Term Debt”) were not included in the computation of diluted net income per share because to do so would
have been anti-dilutive.

4. Business Combinations

Health Plans Segment

Florida. In December 2014, our Florida health plan acquired certain assets relating to the Medicaid business of
First Coast Advantage, LLC (FCA). As part of the transaction, we assumed FCA’s Medicaid contract and certain
provider agreements for Region 4 of the Statewide Medicaid Managed Care Managed Medical Assistance
Program in the state of Florida. The Florida health plan’s membership increased by approximately 62,000
members as a result of this transaction. We estimate that the final purchase price for this acquisition, to be settled
in the first quarter of 2015, will be approximately $44.6 million.

In August 2014, our Florida health plan acquired certain assets relating to the Medicaid business of Healthy Palm
Beaches, Inc. The final purchase price for this acquisition was $7.5 million. The Florida health plan’s
membership increased by approximately 11,000 members as a result of this transaction.

In connection with these transactions, we recorded goodwill amounting to $41.2 million, which relates to future
economic benefits arising from expected synergies to be achieved. Such synergies include use of our existing
infrastructure to support the added membership. The amount recorded as goodwill represents intangible assets
that do not qualify for separate recognition as identifiable intangible assets. Goodwill is not amortized, but is
subject to an annual impairment test. The entire amount recorded as goodwill is deductible for income tax
purposes. We also recorded intangible assets in the following major classes: contract rights and licenses
amounting to $5.8 million, and provider networks amounting to $5.0 million. Contract rights and licenses are
amortized over a period of five years, and provider networks are amortized over a period of 10 years. The
weighted-average amortization period, in the aggregate, is 7.3 years.

South Carolina. In July 2013, we entered into an agreement with Community Health Solutions of America, Inc.
(CHS) to acquire certain assets, including rights to convert certain of CHS’ Medicaid members covered by South
Carolina’s full-risk Medicaid managed care program. The conversion conditions under the agreement were
satisfied by January 1, 2014, and on that date such Medicaid members were converted to the managed care
program and enrolled with our South Carolina health plan. The total purchase price for the converted Medicaid
membership amounted to $57.2 million, of which $49.7 million was paid in the first half of 2014, and $7.5
million was paid when the agreement was executed in 2013. The total amount paid included indemnification
withhold funds transferred to restricted investments amounting to $5.7 million, which were released to CHS in
January 2015.

Because the number of Medicaid members we would ultimately convert was unknown as of the acquisition date
in 2013, we recorded a contingent consideration liability for such members to be settled when the final purchase
price was known in the second quarter of 2014. In addition, we recorded a contingent consideration liability for
dual-eligible members we expect to enroll in our Medicare-Medicaid Plan (MMP) implementation in South
Carolina in 2015. The contingent consideration liability is remeasured to fair value at each quarter until the
contingency is resolved with fair value adjustments, if any, recorded to operations. As of December 31, 2014, the
fair value of the remaining contingent consideration liability for the MMP implementation amounted to $0.5
million. The aggregate contingent consideration liability fair value adjustments for the South Carolina transaction
resulted in a gain of $5.2 million in the year ended December 31, 2014.

New Mexico. In August 2013, our New Mexico health plan acquired Lovelace Community Health Plan’s contract
for the state of New Mexico’s Medicaid program. In addition to Lovelace’s Medicaid members, we also added
membership previously covered under New Mexico’s State Coverage Insurance (SCI) program with Lovelace.
Effective January 1, 2014, these SCI members were either enrolled in New Mexico’s Medicaid program, or
eligible to enroll in New Mexico’s Marketplace. Because the number of SCI members we would ultimately retain
was unknown as of the acquisition date in 2013, we recorded a contingent consideration liability for such
members to be settled when the final purchase price was known in the second quarter of 2014. The aggregate
contingent consideration liability fair value adjustments for the New Mexico transaction resulted in a gain of $1.5
million in the year ended December 31, 2014.

5. Fair Value Measurements

Our consolidated balance sheets include the following financial instruments: cash and cash equivalents,
investments, receivables, other assets, trade accounts payable, medical claims and benefits payable, amounts due
government agencies, long-term debt, and other liabilities. We consider the carrying amounts of cash and cash
equivalents, receivables, other current assets and current liabilities (excluding contingent consideration) to
approximate their fair values because of the relatively short period of time between the origination of these
instruments and their expected realization or payment. For our financial instruments measured at fair value on a
recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy
as follows:

Level 1 — Observable Inputs

Level 1 financial instruments recorded at fair value consist of investments including government-sponsored
enterprise securities (GSEs) and U.S. treasury notes that are classified as current investments in the
accompanying consolidated balance sheets. These financial instruments are actively traded and therefore the fair
value for these securities is based on quoted market prices on one or more securities exchanges.

Level 2 — Directly or Indirectly Observable Inputs

Level 2 financial instruments recorded at fair value consist of investments including corporate debt securities,
municipal securities, and certificates of deposit that are classified as current investments in the accompanying

consolidated balance sheets. Such investments are traded frequently though not necessarily daily. Fair value for
these investments is determined using a market approach based on quoted prices for similar securities in active
markets or quoted prices for identical securities in inactive markets.

Level 3 — Unobservable Inputs

Derivative financial instruments. Derivative financial instruments include the 1.125% Call Option derivative
asset and the 1.125% Notes Conversion Option derivative liability. These derivatives are not actively traded and
are valued based on an option pricing model that uses observable and unobservable market data for inputs.
Significant market data inputs used to determine fair value as of December 31, 2014 included our common stock
price, time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our
common stock. As described further in Note 13, “Derivative Financial Instruments,” the 1.125% Call Option
asset and the 1.125% Notes Conversion Option liability were designed such that changes in their fair values
would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes
in the unobservable inputs to the option pricing model for such instruments is mitigated.

Contingent consideration liability. Such liability relates to our South Carolina health plan acquisition described
in Note 4, “Business Combinations,” and is recorded in accounts payable and accrued liabilities. We applied a
cash flow analysis to determine the fair value of this liability. Significant unobservable inputs primarily related to
the purchase price estimate for the projected membership.

Auction rate securities. Auction rate securities are designated as available-for-sale and are reported at fair value
in other assets. To estimate the fair value of these securities we use valuation data from our primary pricing
source, a third party who provides a marketplace for illiquid assets with over 10,000 participants. This valuation
data is based on a range of prices that represent indicative bids from potential buyers. To validate the
reasonableness of the data, we compare these valuations to data from other third-party pricing sources, which
also provide a range of prices representing indicative bids from potential buyers. We have concluded that these
estimates, given the lack of market available pricing, provide a reasonable basis for determining the fair value of
the auction rate securities as of December 31, 2014.

Our financial instruments measured at fair value on a recurring basis at December 31, 2014, were as follows:

Corporate debt securities
Municipal securities
GSEs
U.S. treasury notes
Certificates of deposit
Auction rate securities
1.125% Call Option derivative asset

Total

Level 1

Level 2

Level 3

$ 641,729
127,045
122,269
59,543
68,876
4,847
329,323

(In thousands)
$ — $641,729
127,045
—
—
68,876
—
—

—
122,269
59,543
—
—
—

$ —
—
—
—
—
4,847
329,323

Total assets measured at fair value on a recurring basis

$1,353,632

$181,812

$837,650

$334,170

1.125% Notes Conversion Option derivative liability
Contingent consideration liability

$ 329,194
500

$ — $ — $329,194
500

—

Total liabilities measured at fair value on a recurring basis

$ 329,694

$ — $ — $329,694

Our financial instruments measured at fair value on a recurring basis at December 31, 2013, were as follows:

Total

Level 1

Level 2

Level 3

Corporate debt securities
Municipal securities
GSEs
U.S. treasury notes
Certificates of deposit
Auction rate securities
1.125% Call Option derivative asset

Total assets measured at fair value on a recurring basis

1.125% Notes Conversion Option derivative liability
Contingent consideration liabilities

Total liabilities measured at fair value on a recurring basis

$449,772
113,330
68,817
37,376
33,757
10,898
186,351
$900,301

$186,239
57,548
$243,787

(In thousands)
$ — $449,772
113,330
—
—
33,757
—
—

—
68,817
37,376
—
—
—

$106,193

$596,859

$ —
—
—
—
—
10,898
186,351
$197,249

$ — $ — $186,239
57,548
$ — $ — $243,787

—

The following table presents activity relating to our assets (liabilities) measured at fair value on a recurring basis
using significant unobservable inputs (Level 3):

Balance at December 31, 2013

Total gains for the period recognized in:

General and administrative expenses
Other expense, net
Other comprehensive income

Settlements

Balance at December 31, 2014

Fair Value Measurements — Disclosure Only

Changes in Level 3 Instruments

Auction
Rate
Securities

Derivatives,
Net

Contingent
Consideration
Liabilities

(In thousands)

$10,898

$112

$(57,548)

—
—
249
(6,300)

—
17
—
—

6,699
—
—
50,349

$ 4,847

$129

(500)

The carrying amounts and estimated fair values of our convertible senior notes, which are classified as Level 2
financial instruments, are indicated in the following table. Fair value for these securities is determined using a
market approach based on quoted prices for similar securities in active markets or quoted prices for identical
securities in inactive markets.

December 31, 2014

Carrying
Amount

Total Fair
Value

Level 1

Level 2

Level 3

(In thousands)

1.125% Notes
1.625% Notes

$435,330
268,767

$ 767,377

$— $ 767,377

$—
337,292 —

337,292 —

$704,097

$1,104,669

$— $1,104,669

$—

December 31, 2013

Carrying
Amount

Total Fair
Value

Level 1

Level 2

Level 3

(In thousands)

1.125% Notes
3.75% Notes

$416,368
181,872

$ 572,627

$— $ 572,627

$—
219,491 —

219,491 —

$598,240

$ 792,118

$— $ 792,118

$—

6. Investments

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

Corporate debt securities
Municipal securities
GSEs
U.S. treasury notes
Certificates of deposit

Subtotal - current investments

Auction rate securities

Corporate debt securities
Municipal securities
GSEs
U.S. treasury notes
Certificates of deposit

Subtotal - current investments

Auction rate securities

December 31, 2014

Gross
Unrealized

Amortized

Cost

Gains

Losses

(In thousands)

$ 642,910
127,185
122,317
59,546
68,893

1,020,851
5,100

$201
129
34
30
1

395
—

$1,382
269
82
33
18

1,784
253

Estimated

Fair Value

$ 641,729
127,045
122,269
59,543
68,876

1,019,462
4,847

$1,025,951

$395

$2,037

$1,024,309

December 31, 2013
Gross
Unrealized

Gains

Losses
(In thousands)

$442
119
6
44
2

613
—

$ 832
915
87
28
1

1,863
502

Amortized
Cost

$450,162
114,126
68,898
37,360
33,756

704,302
11,400

Estimated
Fair Value

$449,772
113,330
68,817
37,376
33,757

703,052
10,898

$715,702

$613

$2,365

$713,950

The contractual maturities of our investments as of December 31, 2014 are summarized below:

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

Amortized
Cost

Estimated
Fair Value

(In thousands)

$ 448,880
571,971
5,100

$ 448,732
570,730
4,847

$1,025,951

$1,024,309

Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific
identification method and are included in investment income. Gross realized investment gains and losses for the
year ended December 31, 2014, 2013, and 2012 were insignificant.

For investments other than our auction rate securities, discussed below, we have determined that unrealized gains
and losses at December 31, 2014, and 2013, are temporary in nature, because the change in market value for
these securities has resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of
the issuers. So long as we hold these securities to maturity, we are unlikely to experience gains or losses. In the
event that we dispose of these securities before maturity, we expect that realized gains or losses, if any, will be
immaterial.

The following table segregates those available-for-sale investments that have been in a continuous loss position
for less than 12 months, and those that have been in a loss position for 12 months or more as of December 31,
2014.

In a Continuous Loss Position
for Less than 12 Months

In a Continuous Loss Position
for 12 Months or More

Corporate debt securities
Municipal securities
GSEs
U.S. treasury notes
Certificates of deposit
Auction rate securities

Estimated
Fair
Value

$379,034
53,626
75,025
19,199
12,591
—

Unrealized
Losses

Total Number
of Positions

Estimated
Fair
Value

Unrealized
Losses

Total Number
of Positions

$1,151
168
69
33
18
—

(Dollars in thousands)
$28,668
265
11,075
64
2,986
22
—
13
—
52
4,847
—

$231
101
13
—
—
253

$598

10
13
3

—
—

$539,475

$1,439

416

$47,576

In a Continuous Loss Position
for Less than 12 Months

In a Continuous Loss Position
for 12 Months or More

Corporate debt securities
Municipal securities
GSEs
U.S. treasury notes
Certificates of deposit
Auction rate securities

Estimated
Fair
Value

$210,057
30,715
53,308
12,037
414
—

Unrealized
Losses

Total Number
of Positions

Estimated
Fair
Value

Unrealized
Losses

Total Number
of Positions

$ 802
398
87
28
1

—

(Dollars in thousands)
$ 2,540
31,091
—
—
—
10,898

91
49
21
11
2

—

30
517
—
—
—
502

$306,531

$1,316

174

$44,529

$1,049

3
39
—
—
—
15

Auction Rate Securities. Due to events in the credit markets, the auction rate securities held by us experienced
failed auctions beginning in the first quarter of 2008, and such auctions have not resumed. Therefore, quoted
prices in active markets have not been available since early 2008. Our investments in auction rate securities are
collateralized by student loan portfolios guaranteed by the U.S. government, and the range of maturities for such
securities is from 16 years to 32 years. Considering the insignificance of these securities when compared with our
liquid assets and other sources of liquidity, we have no current intention of selling these securities nor do we
expect to be required to sell these securities before a recovery in their cost basis. For this reason, and because the
decline in the fair value of the auction rate securities was not due to the credit quality of the issuers, we do not
consider the auction rate securities to be other-than-temporarily impaired at December 31, 2014. At the time of
the first failed auctions during first quarter 2008, we held a total of $82.1 million in auction rate securities at par
value; since that time, we have settled $77.0 million of these instruments at par value.

For the years ended December 31, 2014, 2013 and 2012, we recorded unrealized gains of $0.2 million, $0.7
million and $1.6 million, respectively, to accumulated other comprehensive income for the changes in their fair
value. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including
any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income. If we
determine that any future impairment is other-than-temporary, we will record a charge to earnings as appropriate.

7. Receivables

Receivables consist primarily of amounts due from the various states in which we operate, which may be subject
to potential retroactive adjustments. Because all of our receivable amounts are readily determinable and
substantially all of our creditors are state governments, our allowance for doubtful accounts is immaterial.
Accounts receivable increased as of December 31, 2014, primarily due to significant enrollment growth in 2014.

California
Florida
Illinois
Michigan
New Mexico
Ohio
South Carolina
Texas
Utah
Washington
Wisconsin
Direct delivery and other

Total Health Plans segment
Molina Medicaid Solutions segment

8. Property, Equipment, and Capitalized Software

A summary of property, equipment, and capitalized software is as follows:

Land
Building and improvements
Furniture and equipment
Capitalized software

Less: accumulated depreciation and amortization on building and improvements,

furniture and equipment

Less: accumulated amortization for capitalized software

Property, equipment, and capitalized software, net

December 31,

2014

2013

(In thousands)

$310,938
2,141
31,594
19,880
49,609
45,187
4,134
29,348
6,389
42,848
8,102
11,295

561,465
34,991

$148,654
2,901
5,773
15,253
17,056
43,969
—
9,736
10,953
13,455
8,087
2,463

278,300
20,635

$596,456

$298,935

December 31,

2014

2013

(In thousands)

$ 15,514
195,405
140,691
266,782

$ 15,764
165,670
131,478
187,105

618,392

500,017

(129,161)
(148,453)

(103,918)
(104,016)

(277,614)

(207,934)

$ 340,778

$ 292,083

Depreciation recognized for building and improvements, and furniture and equipment was $34.6 million, $26.6
million, and $20.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amortization of
capitalized software was $58.7 million, $46.4 million, and $36.2 million for the years ended December 31, 2014,
2013 and 2012, respectively.

Molina Center. We acquired the Molina Center in December 2011. Subsequently, in June 2013 we entered into a
sale-leaseback transaction for the sale and contemporaneous leaseback of the Molina Center. Due to our
continuing involvement with the leased property, the sale did not qualify for sale-leaseback accounting treatment
and we remain the “accounting owner” of the property. See Note 12, “Long-Term Debt.”

Future minimum rental income on noncancelable leases from third party tenants of the Molina Center is sublease
rental income, and is reported in other revenue in our consolidated statements of income. The future minimum
rental income is as follows:

2015
2016
2017
2018
2019
Thereafter

Total minimum future rentals

(In thousands)

$ 4,313
4,035
4,256
4,116
1,557
2,164

$20,441

9. Goodwill and Intangible Assets

The following table provides the details of identified intangible assets, by major class, for the periods indicated:

Intangible assets:

Contract rights and licenses
Customer relationships
Contract backlog
Provider networks

Balance at December 31, 2014

Intangible assets:

Contract rights and licenses
Customer relationships
Contract backlog
Provider networks

Balance at December 31, 2013

Cost

Accumulated
Amortization
(In thousands)

Net
Balance

$182,228
24,550
23,600
18,401

$105,613
22,154
22,540
9,199

$76,615
2,396
1,060
9,202

$248,779

$159,506

$89,273

$176,428
24,550
23,600
13,370

$ 92,789
18,801
19,624
7,863

$83,639
5,749
3,976
5,507

$237,948

$139,077

$98,871

Based on the balances of our identifiable intangible assets as of December 31, 2014, we estimate that our
intangible asset amortization will be $16.3 million in 2015, $14.4 million in 2016, $14.1 million in 2017, $13.8
million in 2018, and $9.2 million in 2019. For a presentation of our goodwill and intangible assets by reportable
segment, refer to Note 21, “Segment Information.”

The following table presents the balances of goodwill as of December 31, 2014 and 2013:

Goodwill, gross
Accumulated impairment losses

Goodwill, net

December 31, 2013

Acquisitions

December 31, 2014

$289,268
(58,530)

$230,738

(In thousands)
$41,226

—

$41,226

$330,494
(58,530)

$271,964

The change in the carrying amount of goodwill in 2014 was due to the acquisitions described in Note 4,
“Business Combinations.”

10. Restricted Investments

Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and
deposits required by state authorities in certificates of deposit and U.S. treasury securities. We also maintain
restricted investments as protection against the insolvency of certain capitated providers. Additionally, in
connection with a Molina Medicaid Solutions segment state contract, we maintain restricted investments as
collateral for a letter of credit. The following table presents the balances of restricted investments:

December 31,

2014

2013

California
Florida
Illinois
Michigan
New Mexico
Ohio
South Carolina
Texas
Utah
Washington
Other

(In thousands)
373
28,649
311
1,014
35,135
12,719
6,040
3,500
3,601
151
5,985

373
9,242
310
1,014
24,622
9,080
310
3,500
3,301
151
886

Total Health Plans segment
Molina Medicaid Solutions segment

97,478
5,001

52,789
10,304

$102,479

$63,093

The contractual maturities of our held-to-maturity restricted investments as of December 31, 2014 are
summarized below.

Due in one year or less
Due one year through five years

Amortized
Cost

Estimated
Fair Value

(In thousands)

$101,017
1,462

$101,022
1,462

$102,479

$102,484

11. Medical Claims and Benefits Payable

The following table provides the details of our medical claims and benefits payable (including amounts payable
for the provision of long-term services and supports, or LTSS) as of the dates indicated.

Fee-for-service claims incurred but not paid (IBNP)
Pharmacy payable
Capitation payable
Other

December 31,

2014

2013

2012

$ 870,429
71,412
28,150
230,531

(In thousands)
$424,173
45,037
20,267
180,310

$377,614
38,992
49,066
28,858

$1,200,522

$669,787

$494,530

“Other” medical claims and benefits payable include amounts payable to certain providers for which we act as an
intermediary on behalf of various state agencies without assuming financial risk. Such receipts and payments do
not impact our consolidated statements of income. Such non-risk provider payables amounted to $119.3 million
and $151.3 million as of December 31, 2014 and 2013, respectively.

Year Ended December 31,

2014

2013

2012

Balances at beginning of period
Components of medical care costs related to:

Current period
Prior periods

Total medical care costs

$ 669,787

(Dollars in thousands)
$ 494,530

$ 402,476

8,122,885
(45,979)

5,434,443
(52,779)

5,136,055
(39,295)

8,076,906

5,381,664

5,096,760

Change in non-risk provider payables

(31,973)

111,267

(7,004)

Payments for medical care costs related to:

Current period
Prior periods

Total paid

7,064,427
449,771

4,932,195
385,479

4,689,395
308,307

7,514,198

5,317,674

4,997,702

Balances at end of period

$1,200,522

$ 669,787

$ 494,530

That portion of our total medical claims and benefits payable liability that is most subject to variability in the
estimate is fee-for-service claims incurred but not paid (IBNP). Our IBNP, as included in medical claims and
benefits payable, 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.

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 IBNP liability recorded at the end of the period as a result of the
inclusion in that liability of the provision for adverse claims deviation and the accrued cost of settling those
claims. Because the amount of our initial liability is merely an estimate (and therefore not 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 fall within the range of 8% to
10% lower than the liability that was initially recorded. Furthermore, because our 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 factors are out of the ordinary.

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. In particular, the use of a consistent methodology
should result in the replenishment of reserves during any given period in a manner that generally offsets the
benefit of favorable prior period development in that period. 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

100

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.

As indicated above, the amounts ultimately paid out on our medical claims and benefits payable liabilities in
fiscal years 2014, 2013, and 2012 were less than what we had expected when we had established those liabilities.
The differences between our original estimates and the amounts ultimately paid out (or now expected to be
ultimately paid out) for the most part related to IBNP. 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 estimates.

2014

We believe that the most significant factors that will determine the accuracy of our IBNP estimates at
December 31, 2014 are:

• The addition since January 1, 2014, of 385,000 members under Medicaid expansion in six of our health
plans. Because these members are transitioning into managed care, and have different demographics
than those of our legacy membership, we have little insight into their utilization of medical services.
Additionally, as of December 31, 2014, we have relatively little medical claims payment history related
to Medicaid expansion membership in Illinois, Michigan and Ohio because such members were
enrolled in these states later in the year. Accordingly, our estimates of the claims liability for this
population are subject to a higher degree of uncertainty.

• The addition of approximately 6,000 to 8,000 members per month on a retroactive basis during the last
several months of 2014 at our New Mexico health plan. Because we have no claims payment history
for these members, our estimates of the claims liability for this population are subject to a higher
degree of uncertainty. However, for these members, the state will reimburse the health plan for claims
with dates of services during the retroactive period on a cost-plus basis (claims paid plus an
administration fee).

• The addition of new membership to our MMP and aged, blind or disabled (ABD) programs at several
of our health plans whose benefits include a substantial amount of managed LTSS benefits. Because
these are newer members with substantially different benefits than our legacy members, our estimates
of the claims liability for this population are subject to a higher degree of uncertainty.

We recognized favorable prior period claims development in the amount of $46.0 million for the year ended
December 31, 2014. This amount represents our estimate as of December 31, 2014, of the extent to which our
initial estimate of medical claims and benefits payable at December 31, 2013 was more than the amount that will
ultimately be paid out in satisfaction of that liability. We believe the overestimation was due primarily to the
following factors:

• At our Ohio health plan, we entered new regions in the state, and a new product, ABD Kids, in July
2013. Since we did not have enough historical claims data to use the pattern of paid and incurred
claims, we initially estimated the reserves for these new members by applying an estimated medical
care ratio (MCR). This resulted in an overstatement of our reserve liability as of December 31, 2013.

• At our Michigan health plan, we overestimated the impact of certain unpaid potentially high-dollar
claims. In addition, we overestimated the impact of the flu season on the outpatient claims for
November and December 2013, which caused an overestimation in our outpatient reserve liability as of
December 31, 2013.

101

2013

We recognized favorable prior period claims development in the amount of $52.8 million for the year ended
December 31, 2013. This amount represents our estimate as of December 31, 2013, of the extent to which our initial
estimate of medical claims and benefits payable at December 31, 2012 was more than the amount that was ultimately
paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:

• At our Washington health plan certain high-cost newborns, as well as other high-cost disabled

members, were covered by the health plan effective July 1, 2012. At the end of 2012, we had limited
claims history with which to estimate the claims liability of these members, and overstated the liability
for such members.

• At our New Mexico health plan, we overestimated the impact of certain high-dollar outstanding claim

payments as of December 31, 2012.

• At our Ohio health plan, we overestimated the impact of several potential high-dollar claims relating to

our ABD members.

2012

Prior period claims development of our estimate as of December 31, 2011 through December 31, 2012 was
favorable by $39.3 million.

12. Long-Term Debt

As of December 31, 2014, maturities of long-term debt for the years ending December 31 are as follows (in
thousands):

1.125% Notes
1.625% Notes (1)

Total

2015

2016

2017

2018

2019

Thereafter

$550,000
301,551

$851,551

$—
—

$—

$—
—

$—

$—
—

$—

$—
—

$—

$—
—

$—

$550,000
301,551

$851,551

(1) The 1.625% Notes have a contractual maturity date in 2044; however, on specified dates beginning in 2018
as described below, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625%
Notes, or we may redeem any or all of the 1.625% Notes.

1.125% Cash Convertible Senior Notes due 2020. In February 2013, we issued $550.0 million aggregate
principal amount of 1.125% cash convertible senior notes (the 1.125% Notes) due January 15, 2020, unless
earlier repurchased or converted. Interest on the 1.125% Notes is payable semiannually in arrears on January 15
and July 15 at a rate of 1.125% per annum.

The 1.125% Notes are senior unsecured obligations and rank senior in right of payment to any of our
indebtedness that is expressly subordinated in right of payment to the 1.125% Notes; equal in right of payment to
any of our unsecured indebtedness that is not 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 of our subsidiaries.

The 1.125% Notes are convertible only into cash, and not into shares of our common stock or any other
securities. The initial conversion rate for the 1.125% Notes is 24.5277 shares of our common stock per $1,000
principal amount of the 1.125% Notes. This represents an initial conversion price of approximately $40.77 per
share of our common stock. The conversion rate is subject to adjustment in some events but will not be adjusted
for any accrued and unpaid interest. Holders may convert their 1.125% Notes only under the following
circumstances:

•

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

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•

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;

during the five business day period immediately after any five consecutive trading day period (the
measurement period) in which the trading price per $1,000 principal amount of 1.125% 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;

upon the occurrence of specified corporate events; or

at any time on or after July 15, 2019 until the close of business on the second scheduled trading day
immediately preceding the maturity date. 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 1.125% Notes, equal to
the settlement amount, determined in the manner set forth in the indenture. We may not redeem the
1.125% Notes prior to the maturity date.

As of December 31, 2014, the 1.125% Notes were not convertible.

The 1.125% Notes contain an embedded cash conversion option (the 1.125% Notes Conversion Option), which
was separated from the 1.125% Notes and accounted for separately as a derivative liability, with changes in fair
value reported in our consolidated statements of income until the 1.125% Notes Conversion Option transaction
settles or expires. The initial fair value liability of the 1.125% Notes Conversion Option simultaneously reduced
the carrying value of the 1.125% Notes (effectively an original issuance discount). This discount is amortized to
the 1.125% Notes’ principal amount through the recognition of non-cash interest expense over the expected life
of the debt. This has resulted in our recognition of interest expense on the 1.125% Notes at an effective rate
approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued,
or approximately 6%. As of December 31, 2014, we expect the 1.125% Notes to be outstanding until their
maturity date, for a remaining amortization period of 5.0 years. The 1.125% Notes’ if-converted value exceeded
their principal amount by approximately $93 million as of December 31, 2014, and did not exceed their principal
amount as of December 31, 2013.

3.75% Exchange. In August 2014, we entered into separate, privately negotiated, exchange agreements (the
3.75% Exchange) with certain holders of our outstanding 3.75% convertible senior notes due 2014 (the 3.75%
Notes). In this transaction, we exchanged $176.6 million aggregate principal amount of the 3.75% Notes for
$176.6 million principal amount of 1.625% convertible senior notes due 2044 (see further discussion below),
approximately 1.7 million shares of our common stock, and payment of accrued interest on the exchanged 3.75%
Notes. We did not receive any proceeds related to the 3.75% Exchange.

1.625% Convertible Senior Notes due 2044. In September 2014, we issued $125.0 million principal amount of
1.625% convertible senior notes (the 1.625% Notes) due August 15, 2044, unless earlier repurchased, redeemed
or converted. Combined with the 1.625% Notes issued in connection with the 3.75% Exchange described above,
the aggregate principal amount issued under the 1.625% Notes was $301.6 million.

Interest on the 1.625% Notes is payable semiannually in arrears on February 15 and August 15, at a rate of
1.625% per annum, beginning on February 15, 2015. In addition, beginning with the semiannual interest period
commencing immediately following the interest payment date on August 15, 2018, contingent interest will
accrue on the 1.625% Notes during any semiannual interest period in which certain conditions or events occur, or
under certain events of default. For example, additional interest of 0.25% per year will be payable on the 1.625%
Notes for any semiannual interest period for which the principal amount of 1.625% Notes outstanding is less than
$100 million.

The proceeds from the issuance of the 1.625% Notes amounted to $122.6 million, including a premium of $0.6
million, and net of deferred issuance costs paid for both the 3.75% Exchange and the additional $125.0 million

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principal amount issued. In connection with aggregate principal amount of the 1.625% Notes, we have recorded
total deferred issuance costs of approximately $6 million, which will be amortized over the expected term of the
debt, as discussed further below.

The 1.625% Notes are senior unsecured obligations and rank senior in right of payment to any of our
indebtedness that is expressly subordinated in right of payment to the 1.625% Notes; equal in right of payment to
any of our unsecured indebtedness that is not 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 of our subsidiaries.

The initial conversion rate for the 1.625% Notes is 17.2157 shares of our common stock per $1,000 principal
amount of the 1.625% Notes. This represents an initial conversion price of approximately $58.09 per share of our
common stock. Upon conversion, we will pay cash and, if applicable, deliver shares of our common stock to the
converting holder in an amount per $1,000 principal amount of 1.625% Notes equal to the settlement amount (as
defined in the related indenture). Holders may convert their 1.625% Notes only under the following
circumstances:

•

during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (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;

during the five business day period after any five consecutive trading day period (the measurement
period) in which the trading price per $1,000 principal amount of 1.625% 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;

upon the occurrence of specified corporate events;

if we call any 1.625% Notes for redemption, at any time until the close of business on the business day
immediately preceding the redemption date;

during the period from, and including, May 15, 2018 to the close of business on the business day
immediately preceding August 19, 2018; or

at any time on or after February 15, 2044 until the close of business on the second scheduled trading
day immediately preceding the maturity date, holders may convert their 1.625% Notes, in integral
multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing
circumstances.

As of December 31, 2014, the 1.625% Notes were not convertible.

We may not redeem the 1.625% Notes prior to August 19, 2018. On or after August 19, 2018, we may redeem
for cash all or part of the 1.625% Notes, except for the 1.625% Notes we are required to repurchase in connection
with a fundamental change or on any specified repurchase date. The redemption price for the 1.625% Notes will
equal 100% of the principal amount of the 1.625% Notes being redeemed, plus accrued and unpaid interest. In
addition, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes for cash on
August 19, 2018, August 19, 2024, August 19, 2029, August 19, 2034 and August 19, 2039, in each case, at a
specified price equal to 100% of the principal amount of the 1.625% Notes to be repurchased, plus accrued and
unpaid interest.

Because the 1.625% Notes have cash settlement features, we have allocated the principal amount between a
liability component and an equity component. The reduced carrying value on the 1.625% Notes resulted in a debt
discount that is amortized back to the 1.625% Notes’ principal amount through the recognition of non-cash
interest expense over the expected life of the debt. The expected life of the debt is approximately four years,
beginning on the issuance date and ending on the first date we may redeem the notes in August 2018. As of

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December 31, 2014, we expect the 1.625% Notes to be outstanding until August 2018, for a remaining
amortization period of 3.6 years. This has resulted in our recognition of interest expense on the 1.625% Notes at
an effective rate approximating what we would have incurred had nonconvertible debt with otherwise similar
terms been issued, or approximately 5%. The outstanding 1.625% Notes’ if-converted value did not exceed their
principal amount as of December 31, 2014. At December 31, 2014, the equity component of the 1.625% Notes,
including the impact of deferred taxes, was $22.9 million.

3.75% Convertible Senior Notes due 2014. As described above, we entered into the 3.75% Exchange transaction
in August 2014, under which we exchanged $176.6 million of the outstanding principal amount of the 3.75%
Notes for the 1.625% Notes. The remaining $10.4 million principle amount was repaid in full in October 2014. In
addition to the repayment of the outstanding principle balance, in early October 2014 we issued approximately
0.1 million shares to settle the 3.75% Notes’ conversion feature.

The principal amounts, unamortized discount (net of premium related to 1.625% Notes), and net carrying
amounts of the convertible senior notes were as follows:

December 31, 2014:
1.125% Notes
1.625% Notes

December 31, 2013:
1.125% Notes
3.75% Notes

Interest cost recognized for the period relating to the:

Contractual interest coupon rate
Amortization of the discount

Principal
Balance

Unamortized
Discount

Net Carrying
Amount

(In thousands)

$550,000
301,551

$114,670
32,784

$435,330
268,767

$851,551

$147,454

$704,097

$550,000
187,000

$133,632
5,128

$416,368
181,872

$737,000

$138,760

$598,240

Years Ended December 31,

2014

2013

2012

(In thousands)

$12,504
26,064

$38,568

$12,427
22,103

$34,530

$ 7,012
5,942

$12,954

Lease Financing Obligations. In 2013 we entered into a sale-leaseback transaction for the sale and
contemporaneous leaseback of the Molina Center located in Long Beach, California, and our Ohio health plan
office building located in Columbus, Ohio. Due to our continuing involvement with these leased properties, the
sale did not qualify for sale-leaseback accounting treatment and we remain the “accounting owner” of the
properties. These assets continue to be included in our consolidated balance sheets, and also continue to be
depreciated and amortized over their remaining useful lives. The lease financing obligation is amortized over the
25-year lease term such that there will be no gain or loss recorded if the lease is not extended at the end of its
term. Rent will increase 3% per year through the initial term. Payments under the lease adjust the lease financing
obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income.
Such interest amounted to $12.5 million and $6.8 million for the year ended December 31, 2014 and 2013,
respectively.

As described and defined in further detail in Note 18, “Related Party Transactions,” we entered into a lease for
office space in February 2013 consisting of two office buildings. We have concluded that we are the accounting
owner of the buildings due to our continuing involvement with the properties. We have recorded $38.4 million to
property, equipment and capitalized software, net, in the accompanying consolidated balance sheet as of

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December 31, 2014, which represents the total cost incurred by the Landlord for the construction of the
buildings, net of accumulated depreciation. As of December 31, 2014, the aggregate amount recorded to lease
financing obligations, including the current portion, amounted to $40.6 million. Payments under the lease adjust
the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated
statements of income. Such interest expense for the years ended December 31, 2014, and 2013, was $3.2 million
and $1.3 million, respectively. In addition to the capitalization of the costs incurred by the Landlord, we impute
and record rent expense relating to the ground leases for the property sites. Such rent expense is computed based
on the fair value of the land and our incremental borrowing rate, amounting to $1.1 million for the year ended
December 31, 2014, and insignificant for the year ended December 31, 2013. For information regarding the
future minimum lease obligation, refer to Note 20, “Commitments and Contingencies.”

13. Derivative Financial Instruments

The following table summarizes the fair values and the presentation of our derivative financial instruments
(defined and discussed individually below) in the consolidated balance sheets:

Derivative asset:

1.125% Call Option

Derivative liability:

Balance Sheet Location

December 31,

2014

2013

(In thousands)

Non-current assets: Derivative asset

$329,323

$186,351

1.125% Notes Conversion Option

Non-current liabilities: Derivative
liability

$329,194

$186,239

Our derivative financial instruments do not qualify for hedge treatment, therefore the change in fair value of
these instruments is recognized immediately in our consolidated statements of income, and reported in other
expense, net. Gains and losses for our derivative financial instruments are presented individually in the
consolidated statements of cash flows, supplemental cash flow information.

1.125% Notes Call Spread Overlay. Concurrent with the issuance of the 1.125% Notes in 2013 as described in
Note 12, “Long-Term Debt,” we entered into privately negotiated hedge transactions (collectively, the 1.125%
Call Option) and warrant transactions (collectively, the 1.125% Warrants), with certain of the initial purchasers
of the 1.125% Notes (the Counterparties). We refer to these transactions collectively as the Call Spread Overlay.
Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon
conversion of the 1.125% Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full
performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the
1.125% Notes), these transactions are intended to offset cash payments due upon any conversion of the 1.125%
Notes.

1.125% Call Option. The 1.125% Call Option, which is indexed to our common stock, is a derivative asset that
requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option
settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option,
refer to Note 5, “Fair Value Measurements.”

1.125% Notes Conversion Option. The embedded cash conversion option within the 1.125% Notes is accounted
for separately as a derivative liability, with changes in fair value reported in our consolidated statements of
income until the cash conversion option settles or expires. For further discussion of the inputs used to determine
the fair value of the 1.125% Notes Conversion Option, refer to Note 5, “Fair Value Measurements.”

Interest Rate Swap. In 2012, we entered into a $42.5 million notional amount interest rate swap, which was
intended to reduce our exposure to fluctuations in the contractual variable interest rates under our term loan
agreement that was repaid in June 2013. In June 2013, we settled the interest rate swap for $0.9 million.

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14. Income Taxes

The provision for income taxes for continuing operations consisted of the following:

Current:

Federal
State

Total current

Deferred:

Federal
State

Total deferred

Year Ended December 31,

2014

2013

2012

(In thousands)

$72,040
3,038

$ 66,883
581

$ 23,019
1,254

75,078

67,464

24,273

(72)
(2,280)

(25,498)
(5,650)

(9,205)
(4,555)

(2,352)

(31,148)

(13,760)

$72,726

$ 36,316

$ 10,513

A reconciliation of the U.S. federal statutory income tax rate to the combined effective income tax rate for
continuing operations is as follows:

Statutory federal tax rate
State income taxes, net of federal benefit
Change in unrecognized tax benefits
Nondeductible health insurer fee (HIF)
Nondeductible compensation
Nondeductible lobbying
Nondeductible fair value of 1.125% Warrants
Change in fair value of contingent consideration

liabilities

Other

Effective tax rate

Year Ended December 31,

2014

2013

2012

35.0%
0.4
(0.1)
22.9
(4.1)
(0.3)
—

—
—

35.0%
(0.5)
(3.7)
—
9.6
1.6
2.4

(0.3)
0.7

35.0%
(9.2)
0.7
—
6.2
4.2
—

4.8
3.3

53.8%

44.8%

45.0%

Our effective tax rate is based on expected income, statutory tax rates, and tax planning opportunities available to
us in the various jurisdictions in which we operate. Significant management estimates and judgments are required
in determining our effective tax rate. We are routinely under audit by federal, state, or local authorities regarding
the timing and amount of deductions, nexus of income among various tax jurisdictions, and compliance with
federal, state, and local tax laws.

During 2014, the Internal Revenue Service (IRS) issued final regulations related to compensation deduction
limitations applicable to certain health insurance issuers. Pursuant to these final regulations, we reversed amounts
treated as nondeductible in 2013 and recognized a tax benefit during 2014.

During 2014, 2013, and 2012, excess tax benefits from share-based compensation amounted to $3.0 million, $1.6
million, and $3.1 million, respectively. These amounts were recorded as a decrease to income taxes payable and
an increase to additional paid-in capital.

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Deferred tax assets and liabilities are classified as current or non-current according to the classification of the
related asset or liability. Significant components of our deferred tax assets and liabilities as of December 31,
2014 and 2013 were as follows:

Accrued expenses
Reserve liabilities
State taxes
Other accrued medical costs
Net operating losses
Unrealized losses
Unearned premiums
Prepaid expenses
Basis in debt
Deferred compensation
Other, net
Valuation allowance

December 31,

2014

2013

(In thousands)

$ 13,323
2,487
(134)
3,800
27
444
21,749
(5,920)
(210)
5,252
(244)
(1,042)

$ 19,545
1,712
(1,323)
2,540
27
380
10,543
(5,354)
(2,162)
2,087
(928)
(511)

Deferred tax asset, net of valuation allowance — current

39,532

26,556

Reserve liabilities
State tax credit carryover
Net operating losses
Unrealized losses
Depreciation and amortization
Deferred compensation
Lease financing obligation
Basis in debt
Other, net
Valuation allowance

Deferred tax liability, net of valuation allowance — long term

2,017
8,157
3,138
181
(57,068)
4,405
34,084
(14,724)
(96)
(4,365)

(24,271)

1,909
7,027
2,326
286
(40,433)
3,404
27,543
466
(24)
(3,084)

(580)

Net deferred income tax asset

$ 15,261

$ 25,976

At December 31, 2014, we had federal and state net operating loss carryforwards of $0.2 million and $84.0
million, respectively. The federal net operating loss begins expiring in 2018, and state net operating losses begin
expiring in 2015. The utilization of the net operating losses is subject to certain limitations under federal law.

At December 31, 2014, we had California enterprise zone tax credit carryovers of $12.5 million which expire in
2024.

We evaluate the need for a valuation allowance taking into consideration the ability to carry back and carry
forward tax credits and losses, available tax planning strategies and future income, including reversal of
temporary differences. We have determined that as of December 31, 2014, $5.4 million of deferred tax assets did
not satisfy the recognition criteria due to uncertainty regarding the realization of some of our state tax operating
loss carryforwards. Therefore, we increased our valuation allowance by $1.8 million, from $3.6 million at
December 31, 2013, to $5.4 million as of December 31, 2014.

We recognize tax benefits only if the tax position is more likely than not to be sustained. We are subject to
income taxes in the U.S. and numerous state jurisdictions. Significant judgment is required in evaluating our tax
positions and determining our provision for income taxes. During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for

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tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due.
These reserves are established when we believe that certain positions might be challenged despite our belief that
our tax return positions are fully supportable. We adjust these reserves in light of changing facts and
circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve
provisions and changes to reserves that are considered appropriate.

The roll forward of our unrecognized tax benefits is as follows:

Gross unrecognized tax benefits at beginning of period
Increases in tax positions for prior years
Decreases in tax positions for prior years
Increases in tax positions for current year
Decreases in tax positions for current year
Settlements
Lapse in statute of limitations

Year Ended December 31,

2014

2013

2012

$(8,030)
—
—
(777)
—
5,960
253

(In thousands)
$(10,622)

—
3,615
(2,084)
886
—
175

$(10,712)
(441)
320
—
—
—
211

Gross unrecognized tax benefits at end of period

$(2,594)

$ (8,030)

$(10,622)

The total amount of unrecognized tax benefits at December 31, 2014, 2013 and 2012 that, if recognized, would
affect the effective tax rates is $1.6 million, $5.7 million and $7.4 million, respectively. We expect that during
the next 12 months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as
$0.1 million due to the normal expiration of statutes of limitation.

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income
tax expense. Amounts accrued for the payment of interest and penalties as of December 31, 2014, and 2013 were
insignificant.

We are under examination by the IRS for calendar year 2011 and may be subject to examination for calendar
years 2012 through 2014. We are under examination, or may be subject to examination, in certain state and local
jurisdictions, with the major jurisdictions being California, Utah, and Michigan, for the years 2010 through 2014.

15. Stockholders’ Equity

Stockholders’ equity increased $117.5 million during the year ended December 31, 2014. The increase was due
to net income of $62.2 million, $22.0 million related to 1.625% Notes and 3.75% Exchange, $33.2 million
related to share-based compensation transactions, and $0.1 million related to other comprehensive income.

3.75% Exchange and 3.75% Notes. As described in Note 12, “Long-Term Debt,” we issued approximately
1.8 million shares in connection with the 3.75% Exchange, and the 3.75% Notes settlement in 2014; additionally,
we issued approximately 81,000 shares of common stock for services rendered in connection with the 3.75%
Exchange.

1.125% Warrants. In connection with the 1.125% Notes Call Spread Overlay transaction described in Note 13,
“Derivative Financial Instruments,” 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. If the market value
per share of our common stock exceeds the strike price of the 1.125% Warrants on any trading day during the
160 trading day measurement period under the 1.125% Warrants, we will be obligated to issue to the
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
1.125% Warrants, subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to

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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 1.125% Warrants. We will not receive any additional
proceeds if the 1.125% Warrants are exercised.

Securities Repurchases. In connection with the issuance and settlement of the 1.125% Notes, we used a portion
of the net proceeds from the 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. In February 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 Repurchase Programs. Effective as of February 25, 2015, our board of directors authorized the
repurchase of up to $50 million in aggregate of our common stock. Stock repurchases under this program may be
made through open-market and/or privately negotiated transactions at times and in such amounts as management
deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors
including price, corporate and regulatory requirements and market conditions. This newly authorized repurchase
program extends through December 31, 2015.

Effective as of September 30, 2013, our board of directors authorized the repurchase of up to $50 million in
aggregate of our common stock. Under this program, we purchased approximately 85,000 shares of our common
stock for $2.7 million (average cost of $31.28 per share) during November 2013. This repurchase program
expired December 31, 2014.

Shelf Registration Statement. In May 2012, we filed an automatic shelf registration statement on Form S-3 with
the SEC 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.

Stock Plans. In connection with the stock plans described in Note 17, “Share-Based Compensation,” we issued
approximately 840,000, and 820,000 shares of common stock, net of shares used to settle employees’ income tax
obligations, for the years ended December 31, 2014 and 2013, respectively.

16. Employee Benefits

We sponsor a defined contribution 401(k) plan that covers substantially all full-time salaried and hourly
employees of our company and its subsidiaries. Eligible employees are permitted to contribute up to the
maximum amount allowed by law. We match up to the first 4% of compensation contributed by employees.
Expense recognized in connection with our contributions to the 401(k) plan totaled $21.2 million, $12.8 million
and $10.7 million in the years ended December 31, 2014, 2013, and 2012, respectively.

We also have a nonqualified deferred compensation plan for certain key employees. Under this plan, eligible
participants may defer up to 100% of their base salary and 100% of their bonus to provide tax-deferred growth
for retirement. The funds deferred are invested in corporate-owned life insurance, under a rabbi trust.

17. Share-Based Compensation

At December 31, 2014, we had employee equity incentives outstanding under two plans: (1) the 2011 Equity
Incentive Plan (2011 Plan); and (2) the 2002 Equity Incentive Plan (from which equity incentives are no longer
awarded).

The 2011 Plan provides for the award of stock options, restricted shares and units, performance shares and units,
and stock bonuses to the company’s officers, employees, directors, consultants, advisers, and other service
providers. The 2011 Plan allows for the issuance of 4.5 million shares of common stock.

In March 2014, our named executive officers were granted a total of 356,292 restricted shares with service,
market, and performance conditions. In the event the vesting conditions are not achieved, the awards shall lapse.
As of December 31, 2014, we expect the performance conditions to be met in full.

110

Restricted share awards are granted with a fair value equal to the market price of our common stock on the date
of grant, and generally vest in equal annual installments over periods up to four years from the date of grant.
Stock option awards have an exercise price equal to the fair market value of our common stock on the date of
grant, generally vest in equal annual installments over periods up to four years from the date of grant, and have a
maximum term of ten years from the date of grant.

Under our employee stock purchase plan (ESPP), eligible employees may purchase common shares at 85% of the
lower of the fair market value of our common stock on either the first or last trading day of each six-month
offering period. Each participant is limited to a maximum purchase of $25,000 (as measured by the fair value of
the stock acquired) per year through payroll deductions. We estimate the fair value of the stock issued using the
Black-Scholes option pricing model. For the years ended December 31, 2014, 2013, 2012, the inputs to this
model were as follows: risk-free interest rates ranging from approximately 0.1% to 0.2%; expected volatilities
ranging from approximately 30% to 50%, dividend yields of 0%, and an average expected life of 0.5 years. We
issued approximately 327,200, 299,600 and 277,400 shares of our common stock under the ESPP during the
years ended December 31, 2014, 2013, and 2012, respectively. The 2011 ESPP allows for the issuance of three
million shares of common stock.

The following table illustrates the components of our share-based compensation expense that are reported in
general and administrative expenses in the consolidated statements of income:

Restricted stock and performance awards
Employee stock purchase plan and stock

options

2014

Year Ended December 31,

2013

(In thousands)

2012

Pretax
Charges

Net-of-Tax
Amount

Pretax
Charges

Net-of-Tax
Amount

Pretax
Charges

Net-of-Tax
Amount

$18,535

$11,936

$26,116

$22,489

$18,106

$12,943

3,192

2,352

2,578

2,012

1,912

1,613

$21,727

$14,288

$28,694

$24,501

$20,018

$14,556

As of December 31, 2014, there was $24.5 million of total unrecognized compensation expense related to
unvested restricted share awards, including those with performance conditions, which we expect to recognize
over a remaining weighted-average period of 1.7 years. This unrecognized compensation cost assumes an
estimated forfeiture rate of 4.0% as of December 31, 2014. Also as of December 31, 2014, there was $0.3 million
of unrecognized compensation expense related to unvested stock options, which we expect to recognize over a
weighted-average period of 1.0 year.

Restricted and performance stock activity for the year ended December 31, 2014 is summarized below:

Unvested balance as of December 31, 2013
Granted — restricted stock
Granted — performance stock
Vested — restricted stock
Vested — performance stock
Forfeited

Unvested balance as of December 31, 2014

Weighted
Average
Grant Date
Fair Value

$29.03
38.06
34.61
26.70
30.18
31.31

33.55

1,299,852
420,352
249,402
(423,970)
(199,948)
(63,616)

1,282,072

The total fair value of restricted and performance awards granted during the year ended December 31, 2014,
2013, and 2012 was $25.4 million, $33.3 million, and $16.2 million, respectively. The total fair value of

111

restricted awards, including those with performance and market conditions which vested during the year ended
December 31, 2014, 2013, and 2012 was $23.7 million, $22.3 million, and $25.4 million, respectively.

The weighted-average grant date fair value per share of the performance awards with vesting conditions based on
one-year Total Stockholder Return (TSR) was $27.25. We estimated the fair value on the grant date using a
Monte Carlo Simulation to project TSR over the performance period using correlations and volatilities of the ISS
peer group. Additional inputs included a risk-free interest rate of 0.1%, dividend yield of 0%, and an expected
life of 0.8 years. The weighted-average grant date fair value per share of the performance awards with vesting
conditions based on three-year TSR, as described above, was $26.60. Additional inputs included a risk-free
interest rate of 0.5%, dividend yield of 0%, and an expected life of 2.8 years.

The total fair value of restricted stock units granted during the year ended December 31, 2012 was $0.3 million
with a weighted average grant date fair value of $35.01. These restricted stock units vested during 2013. No
restricted stock units were granted in 2014 and 2013 and there were no outstanding restricted stock units as of
December 31, 2014.

Stock option activity for the year ended December 31, 2014 is summarized below:

Weighted
Average
Exercise Price

Aggregate
Intrinsic
Value
(In thousands)

Weighted
Average
Remaining
Contractual
term
(Years)

Stock options outstanding as of December 31, 2013
Exercised

Stock options outstanding as of December 31, 2014

379,221
(122,523)

256,698

$24.14
24.93

23.77

Stock options exercisable and expected to vest as of

December 31, 2014

Exercisable as of December 31, 2014

256,698

221,698

23.77

22.26

$7,640

$6,932

3.3

2.5

The weighted-average grant date fair value per share of the stock options awarded to the new members of our
board of directors during 2013 was $14.67. The weighted-average grant date fair value per share of the stock
option awarded to the director appointed during 2012 was $13.97. We estimate the fair value of each stock option
award on the grant date using the Black-Scholes option pricing model. To determine the fair value of these stock
options we applied risk-free interest rates of 1.1% to 1.4%, expected volatilities of 41.3% to 43.0%, dividend
yields of 0%, and expected lives of 6 years to 7 years. No stock options were granted in 2014.

The total intrinsic value of options exercised during the year ended December 31, 2014, 2013, and 2012 was $2.1
million, $1.2 million, and $2.0 million, respectively. The following is a summary of information about stock
options outstanding and exercisable at December 31, 2014:

Options Outstanding

Options Exercisable

Range of Exercise Prices

$19.11
$20.88
$22.86 — $34.82

Weighted-
Average
Remaining
Contractual
Life (Years)

1.1
2.2
6.9

Weighted-
Average
Exercise
Price

$19.11
20.88
32.46

Weighted-
Average
Exercise
Price

$19.11
20.88
31.66

Number
Exercisable

46,148
139,500
36,050

221,698

Number
Outstanding

46,148
139,500
71,050

256,698

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18. Related Party Transactions

In February 2013, the Parent (as defined in Note 23, “Condensed Financial Information of Registrant,”) entered
into a lease with 6th & Pine Development, LLC (the Landlord) for two office buildings, referred to as Building A
and Building B, in Long Beach, California. The lease term for Building A commenced in June 2013, and the
lease term for Building B commenced in July 2014.

The principal members of the Landlord are John C. Molina, our chief financial officer and a director of the
Company, and his wife. In addition, in connection with the development of the buildings being leased, John C.
Molina has pledged shares of common stock in the Company that he holds. Dr. J. Mario Molina, our chief
executive officer, president and chairman of the board of directors, holds a partial interest in such shares as trust
beneficiary.

Effective October 31, 2014, the Parent entered into the First Amendment to Office Building Lease (the Amended
Lease) with the Landlord. The Amended Lease reduced the annual rent escalator under the original lease from
3.75% per year to 3.4% per year. The Amended Lease also extended the initial base term of the original lease by
five years such that the Amended Lease will now expire on December 31, 2029, unless extended or earlier
terminated. The Amended Lease also converted the original lease from a full service gross lease to a triple-net
lease. For information regarding the future minimum lease payments, refer to Note 20, “Commitments and
Contingencies.” For information regarding the lease financing obligation, refer to Note 12, “Long-Term Debt.”

Refer to Note 19, “Variable Interest Entities,” for a discussion of the Joseph M. Molina, M.D. Professional
Corporations.

19. Variable Interest Entities

Joseph M. Molina M.D., Professional Corporations

The Joseph M. Molina, M.D. Professional Corporations (JMMPC) were created in 2012 to further advance our
direct delivery business. JMMPC’s sole shareholder is Dr. J. Mario Molina, our chief executive officer,
president, and chairman of the board of directors. Dr. Molina is paid no salary and receives no dividends in
connection with his work for, or ownership of, JMMPC. JMMPC provides primary care medical services through
its employed physicians and other medical professionals. Beginning in the fourth quarter of 2014, JMMPC also
provided certain specialty referral services to our California health plan members through a contracted provider
network. Substantially all of the individuals served by JMMPC are members of our health plans. JMMPC does
not have agreements to provide professional medical services with any other entities.

Our wholly owned subsidiary, Molina Medical Management, Inc. (MMM), has entered into services agreements
with JMMPC to provide clinic facilities, clinic administrative support staff, patient scheduling services and
medical supplies to JMMPC. The services agreements were designed such that JMMPC will operate at break
even, ensuring the availability of quality care and access for our health plan members. The services agreements
provide that the administrative fees charged to JMMPC by MMM are reviewed annually to assure the
achievement of this goal.

Separately, our California, Florida, New Mexico, Utah and Washington health plans have entered into primary
care services agreements with JMMPC. These agreements direct our health plans to perform a monthly
reconciliation, to either fund JMMPC’s operating deficits, or receive JMMPC’s operating surpluses, such that
JMMPC will derive no profit or loss. Because the MMM services agreements described above mitigate the
likelihood of significant operating deficits or surpluses, such monthly reconciliation amounts are generally
insignificant.

We have determined that JMMPC is a variable interest entity (VIE), and that we are its primary beneficiary. We
have reached this conclusion under the power and benefits criterion model according to GAAP. Specifically, we
have the power to direct the activities that most significantly affect JMMPC’s economic performance, and the

113

obligation to absorb losses or right to receive benefits that are potentially significant to the VIE, under the
agreements described above. Because we are its primary beneficiary, we have consolidated JMMPC. JMMPC’s
assets may be used to settle only JMMPC’s obligations, and JMMPC’s creditors have no recourse to the general
credit of Molina Healthcare, Inc. As of December 31, 2014, JMMPC had total assets of $31.1 million, and total
liabilities of $30.8 million. As of December 31, 2013, JMMPC had total assets of $6.9 million, and total
liabilities of $6.6 million.

Our maximum exposure to loss as a result of our involvement with JMMPC is generally limited to the amounts
needed to fund JMMPC’s ongoing payroll and employee benefits. Additionally, in connection with specialty
referral services provided beginning in 2014, our exposure to loss includes medical care costs associated with
such services. We believe that such loss exposures will be immaterial to our consolidated operating results and
cash flows for the foreseeable future.

New Markets Tax Credit

In 2011, our New Mexico data center subsidiary entered into a financing transaction with Wells Fargo
Community Investment Holdings, LLC (Wells Fargo), its wholly owned subsidiary New Mexico Healthcare Data
Center Investment Fund, LLC (Investment Fund), and certain of Wells Fargo’s affiliated Community
Development Entities (CDEs), in connection with our participation in the federal government’s New Markets
Tax Credit Program (NMTC). The NMTC was established by Congress in 2000 to facilitate new or increased
investments in businesses and real estate projects in low-income communities. The NMTC attracts investment
capital to low-income communities by permitting investors to receive a tax credit against their federal income tax
return in exchange for equity investments in specialized financial institutions, called CDEs, which provide
financing to qualified active businesses operating in low-income communities. The credit amounts to 39% of the
original investment amount and is claimed over a period of seven years (five percent for each of the first three
years, and six percent for each of the remaining four years). The investment in the CDE cannot be redeemed
before the end of the seven-year period.

In the fourth quarter of 2011, as a result of a series of simultaneous financing transactions, Wells Fargo
contributed capital of $5.9 million to the Investment Fund, and Molina Healthcare, Inc. loaned the principal
amount of $15.5 million to the Investment Fund. The Investment Fund then contributed the proceeds to certain
CDEs, which, in turn, loaned the proceeds of $20.9 million to our New Mexico data center subsidiary. Wells
Fargo will be entitled to claim the NMTC while we effectively received net loan proceeds equal to Wells Fargo’s
contribution to the Investment Fund, or approximately $5.9 million. Additionally, financing costs incurred in
structuring the arrangement amounting to $1.2 million were deferred and will be recognized as expense over the
term of the loans. This transaction also includes a put/call feature that becomes enforceable at the end of the
seven-year compliance period. Wells Fargo may exercise its put option or we can exercise the call, both of which
will serve to transfer the debt obligation to us. Incremental costs to maintain the structure during the compliance
period will be recognized as incurred.

We have determined that the financing arrangement with Investment Fund and CDEs is a VIE, and that we are
the primary beneficiary of the VIE. We reached this conclusion based on the following:

• The ongoing activities of the VIE — collecting and remitting interest and fees and NMTC

compliance — were all considered in the initial design and are not expected to significantly affect
economic performance throughout the life of the VIE;

• Contractual arrangements obligate us to comply with NMTC rules and regulations and provide various

other guarantees to Investment Fund and CDEs;

• Wells Fargo lacks a material interest in the underling economics of the project; and

• We are obligated to absorb losses of the VIE.

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Because we are the primary beneficiary of the VIE, we have included it in our consolidated financial statements.
Wells Fargo’s contribution of $5.9 million is included in cash at December 31, 2014 and December 31, 2013 and
the offsetting Wells Fargo’s interest in the financing arrangement is included in other liabilities in the
accompanying consolidated balance sheets.

As described above, this transaction also includes a put/call provision whereby we may be obligated or entitled to
repurchase Wells Fargo’s interest in the Investment Fund. The value attributed to the put/call is nominal. The
NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code and
applicable U.S. Treasury regulations. We are required to be in compliance with various regulations and
contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could
result in Wells Fargo’s projected tax benefits not being realized and, therefore, require us to indemnify Wells
Fargo for any loss or recapture of NMTCs related to the financing until such time as the recapture provisions
have expired under the applicable statute of limitations. We do not anticipate any credit recaptures will be
required in connection with this arrangement.

20. Commitments and Contingencies

Certain Leasing Transactions. As described in Note 12, “Long-Term Debt,” we entered into certain leasing
transactions that have been classified as lease financing obligations. Such leases have initial terms that range
from 16.5 years to 25 years. Additionally, the leases provide for renewal options ranging from 10 years to 25
years in aggregate.

Operating Leases. We lease administrative and clinic facilities and certain equipment under non-cancelable
operating leases expiring at various dates through 2023. Facility lease terms generally range from five to 10 years
with one to two renewal options for extended terms. In most cases, we are required to make additional payments
under facility operating leases for taxes, insurance and other operating expenses incurred during the lease period.
Certain of our leases contain rent escalation clauses or lease incentives, including rent abatements and tenant
improvement allowances. Rent escalation clauses and lease incentives are taken into account in determining total
rent expense to be recognized during the lease term.

Future minimum lease payments by year and in the aggregate under all operating leases and lease financing
obligations consist of the following approximate amounts:

2015
2016
2017
2018
2019
Thereafter

Lease Financing
Obligations

Lease Financing
Obligations —
Related Party

Operating
Leases

Total

$ 11,397
11,739
12,091
12,454
12,828
320,447

$380,956

(In thousands)
5,346
5,528
5,715
5,910
6,111
73,784

$ 29,142
22,989
21,602
20,296
12,777
15,229

$ 45,885
40,256
39,408
38,660
31,716
409,460

$102,394

$122,035

$605,385

Rental expense related to operating leases amounted to $32.4 million, $24.5 million, and $20.5 million for the
years ended December 31, 2014, 2013, and 2012, respectively. The amounts reported in “Lease Financing
Obligations,” and “Lease Financing Obligations — Related Party,” above represent our contractual lease
commitments for the properties described in Note 12, “Long-Term Debt” under the subheading “Lease Financing
Obligations.” Payments under these leases adjust the lease financing obligation, and the imputed interest is
recorded to interest expense in our consolidated statements of income.

Employment Agreements. In 2002 we entered into employment agreements with our Chief Executive Officer and
Chief Financial Officer, which were amended and restated in 2009. These employment agreements had initial

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terms of one to three years and are subject to automatic one-year extensions thereafter. Should the executives be
terminated without cause or resign for good reason before a change of control, as defined, we will pay one year’s
base salary and termination bonus, as defined, in addition to full vesting of stock-based awards, and a cash
payment for health and welfare benefits.

In 2013 we entered into employment agreements with our Chief Operating Officer, Chief Accounting Officer,
and Chief Legal Officer. These agreements continue until terminated by us, or the executive resigns. If the
executive’s employment is terminated by us without cause or the executive resigns for good reason, the executive
will be entitled to receive one year’s base salary and termination bonus, as defined, full vesting of all time-based
equity compensation, and a cash payment for health and welfare benefits.

Payment of the executives’ severance benefits is contingent upon the executive’s signing a release agreement
waiving claims against us. If the executives are terminated for cause, no further payments are due under the
contracts.

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

Washington Health Plan. In September 2014, our Washington health plan paid $19.2 million to the Washington
Health Care Authority (HCA) to settle two outstanding overpayment matters. The matters related to demands for
recoupment of claims for psychotropic drugs and claims for health plan members under the Washington
Community Options Program Entry System (COPES). Additionally, in September 2014 HCA paid our
Washington health plan $8.0 million to settle certain matters brought by the Washington health plan related to
auto-assignment provisions in the parties’ contract. The net effect of these settlements resulted in a premium
revenue reduction of $11.2 million in the third quarter of 2014, and resolved all pending disputes between the
parties.

State of Louisiana. On June 26, 2014, the state of Louisiana filed a Petition for Damages against Molina
Medicaid Solutions, Molina Healthcare, Inc., Unisys Corporation, and Paramax Systems Corporation, a
subsidiary of Unisys, in the Parish of Baton Rouge, 19th Judicial District, versus number 631612. The Petition
alleges that between 1989 and 2012, the defendants utilized an incorrect reimbursement formula for the payment
of pharmaceutical claims. We believe we have several meritorious defenses to the claims of the state, and any
liability for the alleged claims is not currently probable or reasonably estimable.

USA and State of Florida ex rel. Charles Wilhelm. On July 24, 2014, Molina Healthcare, Inc. and Molina
Healthcare of Florida, Inc. were served with a Complaint filed under seal on December 5, 2012 in District Court
for the Southern District of Florida by relator, Charles C. Wilhelm, M.D., Case No. 12-24298. The Complaint

116

alleges that, in late 2008 and early 2009, in connection with the acquisition of Florida NetPass by which Molina
Healthcare entered into the state of Florida, the defendants failed to adequately staff the plan and provide other
services, resulting in a disproportionate number of sicker beneficiaries of Florida NetPass moving back into the
Florida fee-for-service Medicaid program. This alleged conduct purportedly resulted in a violation of the federal
False Claims Act. Both the United States of America and the state of Florida have declined to intervene. We
believe we have several meritorious defenses to the claims of the relator, and any liability for the alleged claims
is not currently probable or reasonably estimable.

United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc., et al. On or around
October 14, 2014, Molina Healthcare of California, Molina Healthcare of California Partner Plan, Inc., Mobile
Medical Examination Services, Inc. (MedXM), and other health plan defendants were served with a Complaint
previously filed under seal in the Central District Court of California by relator, Anita Silingo, Case No.
SACV13-1348-FMO(SHx). The Complaint alleges that MedXM improperly modified medical records and
otherwise took inappropriate steps to increase members’ risk adjustment scores, and that the defendants,
including Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc., purportedly
turned a “blind eye” to these unlawful practices. The Department of Justice has declined to intervene. We believe
that we have several meritorious defenses to the claims of the relator, and any liability for the alleged claims is
not currently probable or reasonably estimable.

Professional Liability Insurance. We carry medical professional liability insurance for health care services
rendered in the primary care and hospital institutions that we manage. In addition, we also carry errors and
omissions insurance for all Molina entities.

Provider Claims. Many of our medical contracts are complex in nature and may be subject to differing
interpretations regarding amounts due for the provision of various services. Such differing interpretations have
led certain medical providers to pursue us for additional compensation. The claims made by providers in such
circumstances often involve issues of contract compliance, interpretation, payment methodology, and intent.
These claims often extend to services provided by the providers over a number of years.

Various providers have contacted us seeking additional compensation for claims that we believe to have been
settled. These matters, when finally concluded and determined, will not, in our opinion, have a material adverse
effect on our business, consolidated financial position, results of operations, or cash flows.

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. Regulators in some states may also
attempt to enforce capital requirements upon us that require the retention of net worth in excess of amounts
formally required by statute or regulation. Such statutes, regulations and informal capital requirements 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 our subsidiaries must comply with these regulations, they may not have the financial
flexibility to transfer funds to us. Based upon current statutes and regulations, the net assets in these subsidiaries
(after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash
dividends was approximately $859 million at December 31, 2014, and $608 million at December 31, 2013.
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 is generally limited to cash,
cash equivalents and investments held by the parent company — Molina Healthcare, Inc. Such cash, cash
equivalents and investments amounted to $202.6 million and $365.2 million as of December 31, 2014, and 2013,
respectively.

The National Association of Insurance Commissioners (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

117

(RBC), rules. Illinois, Michigan, New Mexico, Ohio, South Carolina, Texas, Utah, Washington, and Wisconsin
have adopted these rules, which may vary from state to state. California and Florida have not 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, 2014, our health plans had aggregate statutory capital and surplus of approximately $955
million compared with the required minimum aggregate statutory capital and surplus of approximately $541
million. All of our health plans were in compliance with the minimum capital requirements at
December 31, 2014, with the exception of our Florida health plan, which was funded in February 2015 to meet
the minimum capital requirement. 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.

21. Segment Information

We report our financial performance based on two reportable segments: the Health Plans segment and the Molina
Medicaid Solutions segment. Our reportable segments are consistent with how we manage the business and view
the markets we serve. Our Health Plans segment consists of our state health plans and our direct delivery
business. Our state health plans represent operating segments that have been aggregated for reporting purposes
because they share similar economic characteristics.

Our Molina Medicaid Solutions segment provides MMIS design, development, implementation; business process
outsourcing solutions; hosting services; and information technology support services to state Medicaid agencies.

We rely on an internal management reporting process that provides segment information to the operating income
level for purposes of making financial decisions and allocating resources. The accounting policies of the
segments are the same as those described in Note 2, “Significant Accounting Policies.” For presentation
purposes, the cost of centralized services is reported within the Health Plans segment.

Revenue, continuing operations:
Health Plans segment:
Premium revenue
Premium tax revenue
Health insurer fee revenue
Investment income
Other revenue

Molina Medicaid Solutions segment:

Service revenue

Depreciation and amortization reported in the consolidated

statements of cash flows:

Health Plans segment
Molina Medicaid Solutions segment

Income from continuing operations before income tax expense:
Health Plans segment
Molina Medicaid Solutions segment

Operating income, continuing operations

Other expenses, net

118

2014

Year Ended December 31,
2013
(In thousands)

2012

$9,022,511
294,388
119,484
8,093
12,074

$6,179,170
172,017
—
6,890
26,322

$5,544,121
158,991
—
5,075
18,312

210,051

204,535

187,710

$9,666,601

$6,588,934

$5,914,209

89,438
44,966

$ 134,404

67,446
26,420

93,866

$ 150,090
42,827

$ 103,931
32,629

192,917
57,613
$ 135,304

136,560
55,414
81,146

58,577
20,187

78,764

17,366
23,727

41,093
17,714
23,379

Goodwill and intangible assets, net:
Health Plans segment
Molina Medicaid Solutions segment

Total assets:
Health Plans segment
Molina Medicaid Solutions segment

As of December 31,

2014

2013

2012

(In thousands)

$ 286,459
74,778

$ 248,562
81,047

$ 139,710
89,089

$ 361,237

$ 329,609

$ 228,799

$4,270,870
206,345

$2,809,439
193,498

$1,702,212
232,610

$4,477,215

$3,002,937

$1,934,822

Goodwill and intangible assets increased in the Health Plans segment due to the acquisitions described in Note 4,
“Business Combinations.”

22. Quarterly Results of Operations (Unaudited)

The following table summarizes quarterly unaudited results of operations for the years ended December 31, 2014
and 2013. As described in Note 1, “Basis of Presentation,” the results of the Missouri health plan are reported as
discontinued operations for all periods presented. For further information relating to our segment reporting, refer
to Note 21, “Segment Information.”

Premium revenue
Service revenue
Operating income, Health Plans segment
Operating income, Molina Medicaid Solutions segment
Income from continuing operations
(Loss) income from discontinued operations

Net income

Net income per share (1):

Basic

Diluted

Premium revenue
Service revenue
Operating income (loss), Health Plans segment
Operating income, Molina Medicaid Solutions segment
Income (loss) from continuing operations
(Loss) income from discontinued operations

Net income (loss)

Net income (loss) per share (1):

Basic

Diluted

119

For The Quarter Ended

March 31,
2014

June 30,
2014

September 30,
2014

December 31,
2014

(In thousands, except per-share data)

$1,940,337
53,630
14,019
10,248
4,834
(336)

$2,167,142
50,232
21,986
10,441
7,741
70

$2,316,759
52,557
29,874
9,905
16,070
52

$2,598,273
53,632
84,211
12,233
33,933
(141)

4,498

0.10

0.09

7,811

0.17

0.16

16,122

0.34

0.33

33,792

0.70

0.69

March 31,
2013

For The Quarter Ended
June 30,
2013 (2)

September 30,
2013

December 31,
2013

(In thousands, except per-share data)

$1,497,433
49,756
61,520
6,353
30,522
(607)

$1,501,729
49,672
40,151
6,295
15,796
8,775

$1,584,656
51,100
16,929
7,997
7,553
16

$1,595,352
54,007
(14,669)
11,984
(9,041)
(85)

29,915

0.65

0.64

24,571

0.54

0.53

7,569

0.17

0.16

(9,126)

(0.20)

(1) Potentially dilutive shares issuable pursuant to our 1.125% Warrants and 1.625% Notes were not included in
the computation of diluted net income per share, because to do so would have been anti-dilutive. Potentially
dilutive shares issuable pursuant to our 3.75% Notes were not included in the computation of diluted net
income per share for the quarter ended March 31, 2013, because to do so would have been anti-dilutive.
(2) We abandoned our equity interests in the Missouri health plan during the second quarter of 2013, resulting
in the recognition of a tax benefit of $9.5 million, which is reported in (loss) income from discontinued
operations.

23. Condensed Financial Information of Registrant

Following are our parent company only condensed balance sheets as of December 31, 2014 and 2013, and our
condensed statements of income, condensed statements of comprehensive income and condensed statements of
cash flows for each of the three years in the period ended December 31, 2014.

Condensed Balance Sheets

ASSETS

Current assets:

Cash and cash equivalents
Investments
Income tax refundable
Deferred income taxes
Due from affiliates
Prepaid expenses and other current assets

Total current assets

Property, equipment, and capitalized software, net
Goodwill and intangible assets, net
Investments in subsidiaries
Deferred income taxes
Derivative asset
Advances to related parties and other assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Accounts payable and accrued liabilities
Long-term debt
Lease financing obligations — related party
Derivative liability
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.001 par value; 150,000 shares authorized; outstanding:

49,727 shares at December 31, 2014 and 45,871 shares at December 31, 2013

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

outstanding

Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings

Total stockholders’ equity

120

December 31,

2014

2013

(Amounts in thousands,
except per-share data)

74,696
126,439
13,413
8,546
17,567
36,143
276,804
265,110
64,972
1,376,613
2,824
329,323
57,263
$2,372,909

99,698
262,665
8,403
10,073
35,928
28,387
445,154
225,522
68,902
992,998
17,245
186,351
52,615
$1,988,787

$ 106,212
865,148
40,241
329,194
21,672
1,362,467

$ 109,388
757,770
27,092
186,239
15,361
1,095,850

—
396,059
(1,019)
615,352
1,010,442
$2,372,909

—
340,848
(1,086)
553,129
892,937
$1,988,787

Condensed Statements of Income

Revenue:

Management fees and other operating revenue
Investment income

Total revenue

Expenses:

Medical care costs
General and administrative expenses
Depreciation and amortization

Total operating expenses

Operating income (loss)
Interest expense
Other expense

Loss before income taxes and equity in net income of subsidiaries
Income tax benefit

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

Net income

Year Ended December 31,

2014

2013

2012

(In thousands)

$703,710
2,218

$599,049
2,768

$406,981
550

705,928

601,817

407,531

46,437
582,587
72,995

37,862
503,781
51,562

33,102
367,606
38,794

702,019

593,205

439,502

3,909
56,728
844

(53,663)
(26,776)

(26,887)
89,110

8,612
50,508
3,811

(45,707)
(15,455)

(30,252)
83,181

(31,971)
14,469
—

(46,440)
(15,779)

(30,661)
40,451

$ 62,223

$ 52,929

9,790

Condensed Statements of Comprehensive Income

Net income
Other comprehensive income (loss):

Unrealized investment gain (loss)
Effect of income tax expense (benefit)

Other comprehensive income (loss), net of tax

Comprehensive income

Year Ended December 31,

2014

2013

2012

$62,223

(In thousands)
$52,929

$ 9,790

108
41

(1,015)
(386)

(629)

1,529
581

948

$62,290

$52,300

$10,738

121

Condensed Statements of Cash Flows

Operating activities:
Net cash provided by operating activities

Investing activities:
Capital contributions to subsidiaries
Dividends received from subsidiaries
Purchases of investments
Proceeds from sales and maturities of investments
Proceeds from sale of subsidiary, net of cash surrendered
Purchases of equipment
Change in amounts due to/from affiliates
Other, net

Net cash used in investing activities

Financing activities:
Proceeds from issuance of convertible senior notes, net of financing costs

paid

Proceeds from sale-leaseback transactions
Purchase of call option
Proceeds from issuance of warrants
Treasury stock repurchases
Principal payment on term loan of subsidiary
Repayment of amount borrowed under credit facility
Proceeds from employee stock plans
Principal payments on convertible senior notes
Amount borrowed under credit facility
Other, net

Net cash provided by financing activities

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

Year Ended December 31,

2014

2013

2012

(In thousands)

$ 73,674

$ 62,602

$ 20,611

(292,232)

—

(128,996)
263,479
—
(93,610)
16,054
7,640

(166,112)
24,429
(362,927)
97,713
—
(76,873)
(5,888)
(6,175)

(100,221)
101,800
(1,905)
4,067
9,162
(61,813)
5,187
(1,342)

(227,665)

(495,833)

(45,065)

122,625
—
—
—
—
—
—
14,040
(10,449)
—
2,773

537,973
158,694
(149,331)
75,074
(52,662)
(46,963)
(40,000)
9,402
—
—
1,674

128,989

493,861

(25,002)
99,698

60,630
39,068

—
—
—
—
(3,000)
—
(20,000)
8,205
—
60,000
3,667

48,872

24,418
14,650

Cash and cash equivalents at end of year

$ 74,696

$ 99,698

$ 39,068

Notes to Condensed Financial Information of Registrant

Note A — Basis of Presentation

Molina Healthcare, Inc. (the Registrant, or the Parent), was incorporated on July 24, 2002. Prior to that date,
Molina Healthcare of California (formerly known as Molina Medical Centers) operated as a California health
plan and as the parent company for Molina Healthcare of Utah, Inc., Molina Healthcare of Michigan, Inc., and
Molina Healthcare of Washington, Inc. In June 2003, the employees and operations of the corporate entity were
transferred from Molina Healthcare of California to the Registrant.

The Registrant’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries
since the date of acquisition. The accompanying condensed financial information of the Registrant should be read
in conjunction with the consolidated financial statements and accompanying notes.

122

Note B — Transactions with Subsidiaries

The Registrant provides certain centralized medical and administrative services to its subsidiaries pursuant to
administrative services agreements, including medical affairs and quality management, health education,
credentialing, management, financial, legal, information systems and human resources services. Fees are based
on the fair market value of services rendered and are recorded as operating revenue. Payment is subordinated to
the subsidiaries’ ability to comply with minimum capital and other restrictive financial requirements of the states
in which they operate. Charges in 2014, 2013, and 2012 for these services amounted to $691.6 million, $592.1
million, and $406.4 million, respectively, and are included in operating revenue.

During 2013, the Registrant used a portion of the proceeds from the sale of the Molina Center, described in Note
12, “Long-Term Debt,” to repay the remaining principal balance of the related term loan, on behalf of a
subsidiary of the Registrant.

The Registrant and its subsidiaries are included in the consolidated federal and state income tax returns filed by
the Registrant. Income taxes are allocated to each subsidiary in accordance with an intercompany tax allocation
agreement. The agreement allocates income taxes in an amount generally equivalent to the amount which would
be expensed by the subsidiary if it filed a separate tax return. Net operating loss benefits are paid to the
subsidiary by the Registrant to the extent such losses are utilized in the consolidated tax returns.

Note C — Dividends and Capital Contributions

During 2013 and 2012, the Registrant received dividends from its subsidiaries. Such amounts have been recorded
as a reduction to the investments in the respective subsidiaries.

During 2014, 2013, and 2012, the Registrant made capital contributions to certain subsidiaries primarily to
comply with minimum net worth requirements and to fund contract acquisitions. Such amounts have been
recorded as an increase in investment in the respective subsidiaries, net of insignificant returns of capital.

Note D — Related Party Transactions

The Registrant’s related party transactions are described in Note 18, “Related Party Transactions.”

123

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

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures: Our management is responsible for establishing and maintaining effective
internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934 (the “Exchange Act”). Our internal control over financial reporting is designed to provide
reasonable assurance to our management and board of directors regarding the preparation and fair presentation of
published financial statements. We maintain controls and procedures designed to ensure that we are able to
collect the information we are required to disclose in the reports we file with the Securities and Exchange
Commission, and to process, summarize and disclose this information within the time periods specified in the
rules of the Securities and Exchange Commission.

Evaluation of Disclosure Controls and Procedures: Our management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our “disclosure
controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls
and procedures are effective as of the end of the period covered by this report to ensure that information required to
be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.

Management’s Report on Internal Control over Financial Reporting: Management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles in the
United States. However, all internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and reporting.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework).

Based on our assessment, management believes that the Company maintained effective internal control over
financial reporting as of December 31, 2014, based on those criteria.

Ernst & Young, LLP, the independent registered public accounting firm who audited the Company’s
Consolidated Financial Statements included in this Form 10-K, has issued a report on the Company’s internal
control over financial reporting, which is included herein.

Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control
over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended
December 31, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.

Item 9B. Other Information

None.

124

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
of Molina Healthcare, Inc.

We have audited Molina Healthcare, Inc.’s (the “Company’s”) internal control over financial reporting as of

December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
The Company’s management is responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, Molina Healthcare, Inc. maintained, in all material respects, effective internal control over

financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the consolidated balance sheets of Molina Healthcare, Inc. as of December 31, 2014 and 2013,
and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2014 and our report dated February 26, 2015
expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 26, 2015

125

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K,
information regarding our executive officers is provided in Item 1 of Part I of this Annual Report on Form 10-K
under the caption “Executive Officers of the Registrant,” and will also appear in our definitive proxy statement
for our 2015 Annual Meeting of Stockholders. The remaining information required by Items 401, 405, 406 and
407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be included under the headings “Election of Directors,”
“Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive
proxy statement for our 2015 Annual Meeting of Stockholders, and such required information is incorporated
herein by reference.

Item 11. Executive Compensation

The information required by Items 402, 407(e)(4), and (e)(5) of Regulation S-K will be included under the
headings “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” in our
definitive proxy statement for our 2015 Annual Meeting of Stockholders, and such required information is
incorporated herein by reference.

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

Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2014)

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)

Plan Category

Equity compensation plans approved by security

holders

256,698(1)

$23.77

4,529,223(2)

(1) Options to purchase shares of our common stock issued under the 2002 Equity Incentive Plan and 2011
Equity Incentive Plan. Further grants under the 2002 Equity Incentive Plan have been suspended.
Includes shares remaining available to issue under the 2011 Equity Incentive Plan, and the 2011 Employee
Stock Purchase Plan.

(2)

The remaining information required by Item 403 of Regulation S-K will be included under the heading “Security
Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for our 2015
Annual Meeting of Stockholders, and such required information is incorporated herein by reference.

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

The information required by Items 404 and 407(a) of Regulation S-K will be included under the headings
“Related Party Transactions,” “Corporate Governance,” and “Director Independence” in our definitive proxy
statement for our 2015 Annual Meeting of Stockholders, and such required information is incorporated herein by
reference.

Additionally, refer to Part II, Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 18,
“Related Party Transactions,” and Note 19, “Variable Interest Entities,” under the subheading “Joseph M. Molina
M.D., Professional Corporations.”

126

Item 14. Principal Accountant Fees and Services

The information required by Item 9(e) of Schedule 14A will be included under the heading “Disclosure of
Auditor Fees” in our definitive proxy statement for our 2015 Annual Meeting of Stockholders, and such required
information is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The consolidated financial statements and exhibits listed below are filed as part of this report.

(1) The financial statements included in Item 8 of this Form 10-K, Financial Statements and

Supplementary Data, above are filed as part of this annual report.

(2) Financial Statement Schedules

None of the schedules apply, or the information required is included in the Notes to the
Consolidated Financial Statements.

(3) Exhibits

Reference is made to the accompanying Index to Exhibits.

127

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
undersigned registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 26th day of February, 2015.

MOLINA HEALTHCARE, INC.

By: /s/ Joseph M. Molina

Joseph M. Molina, M.D. (Dr. J. Mario Molina)
Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ Joseph M. Molina
Joseph M. Molina, M.D.

/s/ John C. Molina
John C. Molina, J.D.

/s/ Joseph W. White
Joseph W. White

/s/ Garrey E. Carruthers
Garrey E. Carruthers, Ph.D.

/s/ Daniel Cooperman
Daniel Cooperman

/s/ Charles Z. Fedak
Charles Z. Fedak

/s/ Steven G. James
Steven G. James

/s/ Frank E. Murray
Frank E. Murray, M.D.

/s/ Steven J. Orlando
Steven J. Orlando

/s/ Ronna E. Romney
Ronna E. Romney

/s/ John P. Szabo, Jr.
John P. Szabo, Jr.

/s/ Dale B. Wolf
Dale B. Wolf

Chairman of the Board, Chief Executive

February 26, 2015

Officer, and President

(Principal Executive Officer)

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

February 26, 2015

Chief Accounting Officer
(Principal Accounting Officer)

February 26, 2015

Director

128

February 26, 2015

Our Story

Our company was founded in 1980 by Dr. C. David Molina with
a single clinic and a commitment. That clinic was in Southern
California, and that commitment was to provide quality health care
to those most in need and least able to afford it.

Every year, since that humble beginning, our company has worked
to fulfill Dr. Molina’s original vision. Meanwhile, we have grown
significantly in the decades since then, adding more direct-delivery
medical offices, Medicaid and Medicare health plans, and a Medicaid
management information systems business.

Each day, we draw upon the depth and breadth of experience we’ve
gained from our diverse lineup of Medicaid and Medicare related
health care offerings. That experience, we believe, places us in
a unique position to help meet the challenges presented by the
evolving world of government-sponsored health care programs.

2014 Annual Report

200 Oceangate, Suite 100, Long Beach, CA 90802
www.MolinaHealthcare.com