“I hope that no one ever forgets that
it all began with a single clinic.”
… 35 years ago.
2015 Annual Report
2014 Company 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. Through our locally
operated health plans in 11 states across the nation
and in the Commonwealth of Puerto Rico, Molina
serves more than 3.5 million members. Dr. C. David
Molina (on the cover) 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
MolinaHealthcare.com.
Historical Highlights
Membership Profile
66%
Mothers, Children
& Families (TANF
& CHIP)
16%
10%
1%
6%
Eligible
Membership
(Thousands)
Premium Revenue (exludes premium tax)
($ Millions)
3
3
5
,
3 3
2
6
,
1 2
3
9
,
1
8
1
6
,
1
7
9
7
,
1
1
4
2
,
3
1
2
1
2
,
4
‘14
‘15
‘14
‘15
EBITDA1
($ Millions)
Diluted Net Income per Share,
from Continuing Operations
8
0
5
$
8
5
.
2
$
1 EBITDA is a non‑GAAP financial measure, please refer to page 46 & 47 of the 10‑K for the reconciliation of non‑GAAP measures.
‘14
‘15
‘14
‘15
Financial Highlights
(Amounts in millions, except net income per share)
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 (income) expense, net
Total other expenses, net
Income from continuing operations before income tax expense
Income tax expense
Net income
Diluted net income per share, continuing operations (2)
Loss from discontinued operations
Diluted net income per share
Diluted weighted average shares outstanding
Operating Statistics, Continuing Operations: (2)
Medical care ratio (3)
General and administrative expense ratio (4)
Effective tax rate
Net profit margin (4)
Year Ended December 31,
2014
2015
$13,241
253
397
264
18
5
14,178
11,794
193
1,146
397
157
104
13,791
387
66
(1)
65
322
179
$ 143
$ 2.58
—
$ 2.58
55.6
89.1%
8.1%
55.5%
1.0%
$9,023
210
294
120
8
12
9,667
8,076
157
765
294
89
93
9,474
193
57
1
58
135
73
$ 62
$ 1.30
(0.01
)
$ 1.29
48.3
89.5%
7.9%
53.8%
0.6%
(1) Service revenue and cost of service revenue include revenue and costs generated by our Pathways SM subsidiary, which was acquired on November 1, 2015.
(2) Source data for calculations in thousands.
(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.
(4) Computed as a percentage of total revenue.
Molina Healthcare | Annual Report 2015
A1
To Our Shareholders
Joseph M. Molina, MD
Chairman of the Board,
President and
Chief Executive Officer
Throughout last year, Molina Healthcare executed on the
key priorities we laid out for 2015: revenue growth, profit
improvement, and business diversification. We did this by
continuing to build on our success and momentum from 2014, and
as a result we enjoyed another year of significant membership and
geographic expansion. We positioned ourselves to better serve
the complete spectrum of both the physical and behavioral health
needs of our members — needs that are deeply interconnected.
Not only will we be able to provide a more comprehensive level of
care, but our bottom line will directly benefit as well. In sum, we
made new gains in our continuing efforts to facilitate the delivery
of high‑quality care more efficiently and with better outcomes for
our members.
As a result of our progress in all these areas, I am pleased to report
on what was a very solid year of performance by our organization.
Moreover, that performance not only made for a successful year,
but also helped lay the groundwork for our continued growth and
success in years to come. For the year, we enjoyed a 47 percent
increase in premium revenue over the prior year, which in turn
pushed total revenue for the year to $14.2 billion, also up 47
percent. Diluted net income per share for 2015 doubled to $2.58,
up from $1.29 in the preceding year, and our cash flow from
operations was in excess of $1.1 billion.
A decrease in our medical care costs as a percentage of premium
revenue largely contributed to our positive results. This reduction
is a reflection of our ability to cost‑effectively manage the care of
our members — particularly new enrollees in our health plans
who had previously received care under traditional fee‑for‑service
plans. For the year, our medical cost ratio declined to 89.1 percent
from 89.5 percent in 2014.
We also worked to improve other areas of the company. Last
year, we reported that in several states we had not yet received
reimbursement for fees previously paid by our company. We
received those payments during 2015, which bolstered our results
for the year.
Our business is simultaneously maturing
and evolving
When our company began over 35 years ago, the overwhelming
majority of our health plan members were beneficiaries of what is
now called the TANF (Temporary Assistance for Needy Families)
program. In recent years, as the company has matured, the
composition of our membership has changed in subtle ways that
have enormous implications for our future. Now, roughly 11 percent
of the beneficiaries we serve are “dual‑eligibles” — persons who
qualify for both Medicaid and Medicare benefits — or are classified
as aged, blind or disabled (ABD). In contrast to TANF members,
dual‑eligible and ABD members tend to be older and suffer
from multiple chronic conditions affecting both their physical and
mental health. Understanding and meeting their needs represents
a continuous and ongoing challenge — one that involves not only
careful management of care, but also the coordination of an array
of long‑term support services that will have lasting effects on their
health.
Today, older individuals with more complex needs only represent
one‑eighth of our membership. However we have placed an
increased emphasis on growing this segment of our business for
some very simple reasons. This small percentage of the Medicaid
population accounts for an enormously disproportionate share of
Medicaid spending. That means there is a significant opportunity to
reap higher levels of reimbursement for these member populations
by improving the efficiencies and outcomes for those whose care
has been managed little, if at all, in the past under a fragmented, fee‑
for‑service model. Because these members have chronic conditions,
their enrollment tends to be more stable and they typically retain
their health plan membership for longer periods of time than do
TANF members who exit the program as their life circumstances
and income improve.
A2
Molina Healthcare | Annual Report 2015
As a reflection of how our evolving patient mix has positively
impacted the company, over the past decade, our premium revenue
has increased at roughly 1.5 times the rate of our membership
growth. During that same period, as we have faced ongoing
pressure on reimbursement rates, we have enjoyed a compounded
annual growth rate of 24 percent. We believe our strategic focus has
been a major reason for that success.
We also believe that health care trends are
continuing to move in a direction that plays to
our established strengths
Today, although three‑quarters of all Medicaid recipients now
participate in managed care, 60 percent of Medicaid spending
— that is, roughly $280 billion — remains in fee‑for‑service
programs. A considerable portion of that total involves long‑term
services and support for the elderly and people with physical
and/or developmental disabilities. As states try to contain their
Medicaid costs, the need to accelerate the migration to managed
care from fee‑for‑service will continue. In addition, the growth of
value‑based payment structures is also leading the transformation
of health plans from mere fiscal agents to organizations that work
more closely and in concert with providers to deliver value. As
a company, we do not believe we contribute much value simply
by paying claims. Instead, as we manage the care of more
patients with complex needs, such as the dual‑eligibles, Molina
encapsulates more of the traits we see in provider organizations,
complementing our traditional service offering and in turn, making
us more than just a typical insurance company.
We believe we are singularly equipped for this transformation, not
just in the Medicaid arena but across our entire business model.
In a real sense, we are coming full circle, back to a company
that began as a direct provider of care (and continues to operate
clinics for the population we serve). Deep experience in serving
low‑income patients equipped us for the special challenges that
come with managing the care of dual‑eligible beneficiaries — a
responsibility that no other managed care organization has been
able to fully break into before Molina. We remain pioneers in this
arena, and our expertise uniquely positions us for what we see as
the accelerating migration of high utilizing, unmanaged populations
into managed care‑‑ a significant driver of total Medicaid spending
for states and the federal government.
Molina Healthcare | Annual Report 2015
A3
For us, 2015 was characterized by significant,
strategic growth
We began the year with 2.6 million members. By the end of
2015, our health plans were serving 3.5 million members, with a
presence in 11 states and the U.S. territory of Puerto Rico. With
aggregate membership up 35 percent for the year, this expansion
helped drive our increased premium revenue.
As in 2014, much of our growth last year was organic. With our
presence in the Marketplace, serving premium‑paying members
whose rising incomes had “graduated” them out of Medicaid
eligibility, we saw strong enrollment increases in all of the states
where we operate. Our organic growth was especially notable
in Florida, where the majority of our Marketplace membership
resides.
With perhaps even more significant long‑term implications, we
experienced substantial growth from the successful execution of
our acquisition strategy. This strategy, which we believe will play a
major role in our long‑term success, is built on three main pillars.
Each of them complements our existing business in differing ways,
and each in turn helps create new opportunities for us.
First, we are working to acquire managed care contracts from
health plans in the states where we already have an established
presence. Through such acquisitions based selectively on attractive
pricing and in states with a favorable regulatory environment, we
can strengthen our competitive position while simultaneously
improving our efficiency by adding to our membership base while
our administrative costs in these states remain relatively flat. In
2015, we significantly expanded our reach in three of our key
states. After entering the Illinois market in 2014, we announced
three Medicaid‑related acquisitions in the Chicago area last year:
Loyola Physician Partners, LLC, MyCare Chicago, and Better
Health Network, LLC. These transactions, which closed in the
first quarter of 2016, are estimated to add more than 120,000
Medicaid plan members into Molina Healthcare of Illinois. Notably,
as all three acquisitions were sold by provider owners, we will
continue to work with these provider organizations going forward
to coordinate the care of the beneficiaries they had served as plan
members.
Meanwhile, in Florida we completed two similarly structured
acquisitions. The first, with Preferred Medical Plan, Inc., added
approximately 25,000 Medicaid beneficiaries in South Florida,
while the second, with Integral Health Plan, Inc., involved more
than 100,000 Medicaid enrollees in the Pensacola, Tampa, and
A4
Molina Healthcare | Annual Report 2015
southwest regions of the state. In Michigan, we acquired contracts
to serve roughly 80,000 members of the state’s Medicaid and
MIChild programs from HAP Midwest Health Plan. And in
Washington, where we have been working for more than 30 years,
we acquired the Medicaid assets of Columbia United Providers,
whose 55,000 members in the southwest region will increase the
number of individuals we serve statewide by nearly ten percent.
Acquiring Providence Human Services was a
significant achievement for our company and
our plan members
The second pillar of our strategy involves acquiring key capabilities
that we currently lack, but would be of strategic significance to the
company. On this front, we successfully completed the purchase of
Providence Human Services, a provider of behavioral and mental
health services with 6,800 employees and operations in 23 states
and the District of Columbia. We will operate business as a wholly
owned subsidiary of Molina Healthcare under the brand name
Pathways SM. The acquisition was funded with cash on our balance
sheet and it expands our ability to coordinate both physical and
behavioral health services for our plan members.
well‑recognized impact of behavioral health on physical health,
these “carve‑outs” made it more difficult to coordinate care among
different providers. Now, we increasingly see states issue requests
for proposal that call for an integrated solution for both physical
and mental health. With Pathways SM, we now have the capacity to
merge these previously divergent fields into a more holistic, single
state offering. That ability, in turn, places Molina in a stronger
position to win and retain contracts, both in states where Molina
already has an established presence and in states that we newly
entered via the Pathways SM acquisition.
Pathways SM also improves our ability to deliver services more
effectively. For example, patients who have exhausted their
outpatient behavioral health benefits often wind up in the hospital
by default — and at great expense — when they can no longer
obtain the treatment they need. Integrated, coordinated care will
help reduce that problem. In addition, Pathways’ demonstrated
expertise in serving people with developmental disabilities —
whose health care needs are more expensive to meet than any of
the other Medicaid recipients we serve — will help us manage their
care in ways that benefit patients, payors, and providers.
The behavioral health services capability is becoming increasingly
important to our business. For that reason, we believe the
acquisition of Providence and the formation of Pathways SM will put
our company in an advantageous position over our peers. Today,
the prevalence of mental illness among the Medicaid population
is twice that of the general population. In fact, almost half of
all Medicaid enrollees with disabilities suffer from a psychiatric
illness, and more than two‑thirds of adults with mental illness
have at least one chronic physical illness. As a result, more than 25
percent of all spending on behavioral health in this country flows
through Medicaid. Simultaneously, mental health parity is coming
to the program. In the past, many states had limited mental
health benefits. As this changes — a transformation dramatically
accelerated by the Affordable Care Act — we expect to see
increasing use of mental health benefits by Medicaid beneficiaries.
In another major transformation, states’ contracts for serving
Medicaid populations today are less likely to separate the
management of mental and physical health services. Given the
Finally, adding Pathways’ capabilities aligns with our company’s
strategy going forward. With 5,700 new client‑facing employees,
we have augmented our strength as a provider while adding
proficiency in an area essential to any organization seeking to
capitalize on the opportunities created by the mandate to shift
beneficiaries to managed care in an integrated manner. We are
excited about the possibilities for consolidating Molina Medical
clinics with Pathways SM providers so that our members, especially
the elderly and disabled, can receive medical and behavioral health
services (and perhaps dental care and pharmacy services as well)
under one roof.
We are also better positioned to enter new markets
The launch of Pathways SM will also help us execute on the
third pillar of our growth strategy: entering states where we
have not previously expanded into managed care. Growing our
footprint judiciously — based on such criteria as a competitive
provider environment, sizable Medicaid population, and favorable
regulatory climate — lowers risk and helps us leverage our
Molina Healthcare | Annual Report 2015
A5
we announced the offering of $700 million in senior notes that
will help fund future acquisitions and capital expenditures, and
add to our working capital. We have a seasoned management
team that has demonstrated the ability over the years to navigate
our company successfully through headwinds and changes in the
marketplace.
Now, as we are building for the future, we also are building Molina
Healthcare as a cohesive national brand that is recognized for its
best‑in‑class expertise and ability to improve outcomes for payors
and plan members. In addition, drawing on our history as a direct
provider, we are also recognized for our extraordinary commitment
to the health care of Americans receiving government assistance.
As the demands of the shifting managed care marketplace
necessitate closer, more seamless relationships between providers
and insurers, we believe the intersection of our expertise and our
commitment will serve us well. And as we look ahead to 2016 and
beyond, we remain profoundly grateful for your continuing support
and your investment.
Sincerely,
Joseph M. Molina, MD
President and Chief Executive Officer
administrative costs. Pathways SM gave us an immediate presence
in 12 new states and the District of Columbia, where we now will
be better positioned to win contracts to manage medical care as
well as behavioral health.
Meanwhile, we continued throughout 2015 to integrate new
members into our health plan in Puerto Rico, where we began
operations in the second quarter of the year. By December 31, we
had enrolled approximately 350,000 members. While Puerto Rico
has endured well‑publicized fiscal difficulties, to date there have
not been any disruptions to our reimbursements, which we have
continued to receive, per our contract, on a weekly basis.
We believe Molina Healthcare is well situated
to make the most of the abundant opportunities
in our field
We have extended our presence across the country and
strengthened our position in some of the most populous states. At
the same time, we continue to diversify our geographic exposure
to mitigate the risks inherent to managed care. In addition to
geographic diversity, we continue to offer diversified services
— notably, Molina Medicaid Solutions, which continues to help
states seamlessly manage their vast flows of Medicaid‑related
information — that provide steady revenue streams.
With the acquisition of Providence and the formation of Pathways SM,
we significantly enhanced our ability to address the broad array of
physical and behavioral health needs of the beneficiaries who
account for a disproportionate share of total Medicaid spending
— and who are increasingly important to our company. At the
same time, the presence we established in the individual insurance
marketplace should continue to pay increasing dividends in the
future. As the financial penalties increase in 2016 for individuals
who choose to go without coverage, we expect that more
uninsured persons with incomes too high to qualify for Medicaid
will purchase policies, and our strong presence in five of the most
populous states positions us to capture an increasing volume of
this business.
We have a scalable administrative structure that enables us to
reduce or maintain our administrative cost ratio as we grow. As
we enter new states, we have demonstrated the ability to integrate
new members cost‑effectively into our plans who have not been
previously covered by managed care. We continue to uphold our
high standards for quality, as reflected in the ratings for our various
state plans. We maintain a strong balance sheet, and in November
A6
Molina Healthcare | Annual Report 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, a Medicaid management
information systems business, and a behavioral/mental
health and social services provider.
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.
A7
Corporate Information
1.
2.
7.
8.
3.
9.
4.
5.
6.
10.
11.
Board of Directors
Joseph M. Molina, MD
Chairman of the Board,
President and Chief
Executive Officer, Molina
Healthcare, Inc.
(1)
Steven J. Orlando, CPA
Founder, Orlando
Consulting
(7)
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)
Richard M. Schapiro
Retired Investment
Banker
(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)
Officers and Key Executives
Joseph M. Molina, MD
Chairman of the Board,
President and Chief
Executive Officer
(1)
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
Corporate Data
Annual
Meeting
Corporate
Headquarters
Common
Stock
Transfer
Agent
The annual meeting of stockholders will be held on Wednesday,
April 27th, 2016, 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)
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; 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); ey.com
NYSE
Disclosures
A8
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, 2015.
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 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
or
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-31719
MOLINA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13-4204626
(I.R.S. Employer
Identification No.)
200 Oceangate, Suite 100, Long Beach, California 90802
(Address of principal executive offices)
(562) 435-3666
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $0.001 Par Value
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. S Yes £ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. £ Yes S No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. S Yes £ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). S Yes £ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. S
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):
S
£ (Do not check if a smaller reporting company)
Large accelerated filer
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ Yes S No
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2015, the last business day of our most recently
completed second fiscal quarter, was approximately $2,823.5 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, 2015).
Accelerated filer
Smaller reporting company
£
£
As of February 23, 2016, approximately 56,199,000 shares of the registrant’s Common Stock, $0.001 par value per share, were outstanding.
Portions of the registrant’s Proxy Statement for the 2016 Annual Meeting of Stockholders to be held on April 27, 2016, 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, 2015
TABLE OF CONTENTS
Part I
Page
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
15
35
35
36
36
37
40
42
64
65
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . .
115
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Part III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . .
118
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120
Part IV
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
Our Vision and Mission
OVERVIEW
Molina Healthcare, Inc. offers cost-effective Medicaid-related solutions to meet the health care needs of low-income families and
individuals, and to assist government agencies in their administration of the Medicaid program.We envision a future where everyone
receives quality health care, and our mission is to provide quality health care to people receiving government assistance. To execute
on our vision and mission, we dedicate ourselves to the following core values:
• Caring - We care about those we serve and advocate on their behalf.
• Enthusiasm - We enthusiastically address problems and seek creative solutions.
• Respect - We respect each other and value ethical business practices.
•
Focus - We focus on our mission.
• Thrift - We are careful with scarce resources.
• Accountability - We are personally accountable for our actions and collaborate to get results.
•
Feedback - We strive to improve the organization and achieve meaningful change through feedback and coaching.
Our Strategy
The primary objectives of our strategy over the past 35 years have been to grow and diversify our revenue; sustain our mission by
being profitable; and to always remain focused on providing access to high quality healthcare for our members.
According to the U.S. Department of Health and Human Services (HHS), by late 2015 nearly 18 million people nationally gained
health insurance by signing up for Medicaid or the Health Insurance Marketplace (Marketplace), since several of the Affordable
Care Act’s coverage provisions took effect. The uninsured rate has fallen from a high of 18% to nearly 11%; the lowest uninsured
rate in 50 years according to an ongoing study by the Centers for Disease Control and Prevention. We have participated in this
trend by enrolling approximately 1.6 million members since January 2014, including more than a half million Medicaid expansion
members and 205,000 low-income Marketplace members. In total, as of December 31, 2015, our health plans served over 3.5
million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families
and individuals.
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Beyond growing the number of members we serve, we believe our most important contribution lies in our commitment to provide
access to quality health care for our members. To that end, we have set about expanding and deepening the care capabilities that we
provide, focusing on quality outcomes, care integration, and measurable results. For example, the National Committee for Quality
Assurance (NCQA) has accredited nine of our 12 Medicaid managed care plans. Our newer Illinois and South Carolina health plans
are preparing for NCQA accreditation review in 2016. Our Puerto Rico health plan, which began serving members in 2015, will
seek NCQA accreditation as soon as it is eligible to do so. We believe that these objective measures of the quality of the services we
provide are increasingly important to state Medicaid agencies.
In addition, as states continue to seek cost-effective strategies to manage the care of individuals with more complex healthcare and
behavioral needs, we believe that the movement toward the integration of behavioral health and medical care will continue.
Our growth strategy has four components:
• Growth and retention in our existing markets;
• Expansion into new geographies;
• Transitioning members and benefits from fee for service to managed care; and
• Developing and acquiring new products and capabilities.
Significant accomplishments in support of our strategic growth initiatives during 2015 and early 2016 included:
• Growth and retention in our existing markets.
◦ We retained and grew existing business with our re-procurement wins in Michigan and Washington. Our new
contract in Michigan expanded our service area across all of the Lower Peninsula, spanning an additional 18
counties. The Washington win, along with the acquisition described below, strengthens our position in the
southwestern region of that state.
◦ Our Florida and Michigan health plans acquired Medicaid contracts which added approximately 192,000 new
members in 2015.
◦ We have announced and/or closed on Medicaid contract acquisitions in Illinois, Michigan and Washington that we
expect to add approximately 257,000 new members in the first quarter of 2016.
◦ Our Marketplace enrollment grew from approximately 15,000 members in 2014, to over 200,000 members as of
December 31, 2015.
◦ Molina Medicaid Solutions entered into a 10-year contract with the state of New Jersey to design and operate that
state’s new Medicaid management information system (MMIS).
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• Expansion into new geographies. Our Puerto Rico health plan began serving its first members in April 2015. As of
December 31, 2015, our Puerto Rico plan enrollment amounted to approximately 348,000 members.
•
Transitioning members and benefits from fee for service to managed care. In 2015, we saw strong growth in our
Medicare-Medicaid Plan (MMP) and Aged, Blind or Disabled (ABD) programs. While smaller programs in total
membership, they translate to strong revenue growth because these members bring much higher premiums when
compared with our other members, including those in the Temporary Assistance for Needy Families, Medicaid
expansion and Marketplace programs.
• Developing and acquiring new products and capabilities. We acquired Pathways Health and Community Support LLC
(Pathways), formerly known as Providence Human Services, LLC, a division of The Providence Service Corporation.
Pathways is one of the largest national providers of accessible, outcome-based behavioral/mental health and social
services with operations in 23 states and the District of Columbia. We believe this acquisition will complement our
Health Plans segment services with behavioral health and other services that focus on social determinants of health, as
we increasingly arrange for healthcare services for members with complex needs.
Finally, to support our future growth initiatives, in 2015 we raised approximately $1.1 billion under debt and equity financing
transactions, and supplemented our financing resources under a new unsecured $250 million revolving credit facility.
Our Strengths
From a strategic perspective, we believe our organizational structure allows us to participate in an expanding sector of the economy
and continue our mission to provide quality health care to people receiving government assistance. Our approach to our business is
based on the following strengths:
Flexible Health Services Portfolio. We offer a comprehensive suite of Medicaid services, ranging from quality care, disease
management, cost management, and direct delivery of health care services, to state-level Medicaid management information
systems (MMIS) administration through our Molina Medicaid Solutions segment. 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.
Focus on People Receiving Government Assistance. Our experience over more than 35 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.
Scalable Administrative Infrastructure. Our operations share common systems platforms, which allow 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. In addition, we have designed our administrative and operational infrastructure to be
scalable for cost-effective expansion into new and existing markets.
Consistent Medicaid National Brand. 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 Health Plans membership to 3.5 million members as
of December 31, 2015, added Molina Medicaid Solutions, and introduced new capabilities with the acquisition of Pathways.
Seasoned Management Team. 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, whose tenure
with Molina is over 19 years. The rest of our named executive officers have been with Molina for periods ranging from 10 years to
20 years. We believe that this extensive experience allows senior management to take a longer-term view of our operations, while
maintaining consistency.
Unique Culture. We believe that we are unique culturally because of our employees’ dedication to our core values and our mission.
Many of our employees seek to work here—and continue to work here—because of our shared belief that we envision a future
where everyone receives quality healthcare.
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Medicaid
OUR INDUSTRY
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 jurisdictions is currently about 59%, 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 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.
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 with 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
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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, ACS (owned by Xerox Corporation),
Computer Services Corporation, and CNSI.
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Our Structure
BUSINESS OPERATIONS
We currently manage our operations through three reportable segments: the Health Plans segment, the Molina Medicaid Solutions
segment, and Other, which includes our recent Pathways acquisition described above. We regularly evaluate the appropriateness
of our reportable segments, particularly in light of organizational changes, acquisition activity and changing laws and regulations.
Therefore, these reportable segments may change in the future.
We derive our revenues primarily from health insurance premiums. Refer to Part II, Item 8 of this Form 10-K, Notes to Consolidated
Financial Statements, Note 2, “Significant Accounting Policies,” and Note 20, “Segment Information,” for revenue information by
state health plan, and segment revenue, profit and total asset information, respectively.
Health Plans. The Health Plans segment consists of operational health plans in 11 states and the Commonwealth of Puerto Rico, 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 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. As
of December 31, 2015, the components of our membership by program, are indicated in the following chart.
Molina Medicaid Solutions. The 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
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. The Molina
Medicaid Solutions segment supports state Medicaid agency administrative needs, reduces the variability in our earnings resulting
from fluctuations in medical care costs, improves our operating profit margin percentages, and improves our cash flow by adding a
business for which there are no restrictions on dividend payments.
Other. Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do
not meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP),
as well as corporate amounts not allocated to other reportable segments.
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.
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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 each year for policies effective January 1st
of the following year. We develop our premium rates based on our estimates of projected member utilization, medical unit costs,
member risk acuity, and administrative costs, with the intent of realizing a target pretax percentage profit margin. 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.
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• 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 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.”
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•
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. 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 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.
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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.
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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.
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 term of our most recently implemented Molina Medicaid Solutions contract in New Jersey is 10
years in total, consisting of 2.5 years allocated for the delivery of DDI services, followed by 7.5 years for the performance of BPO
services. In most of these engagements option years are offered which span 2-3 years. The terms of some of our other established
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 more recent 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.
Other. Substantially all of Pathways’ revenue is derived from contracts with state or local government agencies and government
intermediaries, the majority of which are negotiated fee-for-service arrangements. A significant number of these contracts allow the
payer to terminate the contract immediately for cause, such as for our failure to meet our contract obligations. Additionally, these
contracts typically permit the payer to terminate the contract at any time prior to its stated expiration date without cause, at will
and without penalty to the payer, either upon the expiration of a short notice period, typically 30 days, or immediately, in the event
federal or state appropriations supporting the programs serviced by the contract are reduced or eliminated.
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.
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
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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 19, “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.
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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.
Federal and State Self-Referral Prohibitions. We may be subject to federal and state statutes banning payments for referrals of
patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship. Section 1877
of the Social Security Act, also known as the “Stark Law,” prohibits physicians from making a “referral” for “designated health
services” for Medicare (and in many cases Medicaid) patients from entities or facilities in which such physicians directly or
indirectly hold a “financial relationship.” A financial relationship can take the form of a direct or indirect ownership, investment or
compensation arrangement. A referral includes the request by a physician for, or ordering of, or the certifying or re-certifying the
need for, any designated health services.
Certain services that we provide may be identified as “designated health services” for purposes of the Stark Law. We cannot provide
assurance that future regulatory changes will not result in other services we provide becoming subject to the Stark Law’s ownership,
investment or compensation prohibitions in the future.
Many states, including some states where we do business, have adopted similar or broader prohibitions against payments that are
intended to induce referrals of clients. Moreover, many states where we operate have laws similar to the Stark Law prohibiting
physician self-referrals. We contract with a significant number of human services providers and practitioners, including therapists,
physicians and psychiatrists, and arrange for these individuals or entities to provide services to our clients. While we believe that
these contracts are in compliance with the Stark Law, no assurance can be made that such contracts will not be considered in
violation of the Stark Law.
For-profit ownership. Certain of the agencies for which we provide services restrict our ability to contract directly as a for-profit
organization. Instead, these agencies contract directly with a not-for-profit organization and in certain cases we negotiate to provide
administrative and management services to the not-for-profit providers. The extent to which other agencies impose such requirements
may affect our ability to continue to provide the full range of services that we provide or limit the organizations with which we can
contract directly to provide services.
Corporate practice of medicine and fee splitting. Some states in which we operate prohibit general business entities, such as us, from
“practicing medicine,” which definition varies from state to state and can include employing physicians, professional therapists and
other mental health professionals, as well as engaging in fee-splitting arrangements with these health care providers. Among other
things, we currently contract with professional therapists to provide intensive home based counseling and with nurse practitioners
to perform comprehensive health assessments. We believe that we have structured our operations appropriately, however, we could
be alleged or found to be in violation of some or all of these laws. If a state determines that some portion of our business violates
these laws, it may seek to have us discontinue those portions or subject us to penalties, fines, certain license requirements or other
measures. Any determination that we have acted improperly in this regard may result in liability to us. In addition, agreements
between the corporation and the professional may be considered void and unenforceable.
Professional licensure and other requirements. Many of our employees are subject to federal and state laws and regulations governing
the ethics and practice of their professions. In addition, professionals who are eligible to participate in Medicare and Medicaid as
individual providers must not have been excluded from participation in government programs at any time. Our ability to provide
services depends upon the ability of our personnel to meet individual licensure and other requirements.
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Intellectual Property
OTHER INFORMATION
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, 2015, we had approximately 21,000 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
Molina Healthcare, Inc. is a C corporation under Delaware law incorporated in 2002. 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
J. Mario Molina, M.D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
John C. Molina, J.D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Terry P. Bayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Joseph W. White . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jeff D. Barlow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Age
57
51
65
57
53
Position
President and Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Chief Accounting Officer
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.
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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, and changes to health care regulatory laws,
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 enacted comprehensive changes to the
U.S. health care system, elements of which have been phased in at various stages over the past several years. 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 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. To coordinate care for those who qualify to receive both Medicare
and Medicaid services (the “dual eligible”), and to deliver services to these individuals in a more financially efficient
manner, some 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). We operate MMPs in six states. Our MMPs in California, Illinois, and Ohio offered coverage beginning in
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2014; our MMPs in South Carolina and Texas offered coverage beginning in the first quarter of 2015; and our MMP in
Michigan offered coverage beginning in the second quarter of 2015. At December 31, 2015, our membership included
approximately 51,000 integrated MMP members.
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 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 participated in
Medicaid expansion. At December 31, 2015, our membership included approximately 557,000 Medicaid expansion
members, or 16% 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, Puerto Rico
and South Carolina. At December 31, 2015, our membership included approximately 205,000 Marketplace members,
with approximately 133,000, or 65%, of those members in Florida. All of the risk factors described above with regard
to the duals demonstration programs apply equally to our participation in the insurance marketplaces.
• Risk associated with implementing regulations. There are many parts of the ACA that 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.
Changes to health care regulatory laws under the ACA, including the recently proposed Medicaid managed care rule, could have
a material adverse effect on our business, financial condition, cash flows, or results of operations.
The health care regulatory law landscape is constantly changing. For example, on May 26, 2015, CMS posted a new proposed
rule to the Federal Register regarding Medicaid programs and CHIP, Medicaid managed care, CHIP delivered in managed care,
Medicaid and CHIP comprehensive quality strategies, and revisions related to third party liability that, if implemented, would,
among other things, impose a medical loss ratio of 85% for Medicaid and CHIP programs, establish a Medicaid managed care
quality rating system like the five-star system for Medicare Advantage plans, and expand health plans’ responsibilities in program
integrity efforts. It is difficult to predict what final rules may be adopted and implemented by CMS, and if the final rule would result
in any 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 of
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89.1%, for the year ended December 31, 2015 had been one percentage point higher, or 90.1%, our net income from continuing
operations for the year ended December 31, 2015 would have been approximately $1.08 per diluted share rather than our actual
income from continuing operations of $2.58 per diluted share, a decrease of approximately 58%.
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.
The Commonwealth of Puerto Rico may become unable to pay the premiums of our Puerto Rico health plan.
The government of Puerto Rico currently faces major fiscal and liquidity challenges. The government recently warned that it may
lack sufficient resources to fund all necessary governmental programs and services as well as meet debt service obligations for
fiscal year 2016. The extreme financial difficulties faced by the Commonwealth may make it impossible for ASES, the Puerto Rico
Medicaid agency, to pay our Puerto Rico health plan under the terms of the parties’ Medicaid contract. As of December 31, 2015,
our Puerto Rico health plan served approximately 348,000 members, and had recognized premium revenue of approximately $192
million in the fourth quarter of 2015, or approximately $64 million per month. It is the practice of the Commonwealth to pay us for
eligible members only after those members have been assigned to us, and our plan has sent electronic confirmation of the receipt of
eligibility. Particularly in the early stages of our contract with Puerto Rico, the plan’s confirmation of eligibility of certain members
was not accepted by the Commonwealth as a result of various technical issues. The plan has continued to pay for medical services
for all members in question, but the Commonwealth is withholding payment of approximately $12 million of premium revenue
related to those members. We believe we have a valid claim to all of the premiums withheld and we are in discussions with the
Commonwealth regarding this matter. A default by ASES on its payment obligations under our Medicaid contract, or a determination
by ASES to terminate our contract based on insufficient funds available, could result in our having paid, or in our having to pay,
provider claims in amounts for which we are not paid reimbursement, and could make it unfeasible for the Puerto Rico health plan
to continue to operate. A default by ASES or termination of our Puerto Rico Medicaid contract 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
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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 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.
Large-scale medical emergencies in one or more states in which we operate our health plans could significantly increase
utilization rates and medical costs.
Large-scale medical emergencies can take many forms and be associated with widespread illness or medical conditions. For
example, natural disasters, such as a major earthquake in Los Angeles or Cascadia, or a major hurricane in Florida or South Carolina,
could have a significant impact on the health of a large number of our covered members. Other conditions that could impact our
members include an influenza epidemic, or newly emergent mosquito-borne illnesses, such as the Zika virus, the West Nile virus,
or the Chikungunya virus, conditions for which vaccines may not exist, are not effective, or have not been widely administered.
In addition, federal and state law enforcement officials have issued warnings about potential terrorist activity involving biological
or other weapons of mass destruction. All of these conditions, and others, could have a significant impact on the health of the
population of wide-spread areas. We seek to set our IBNP reserves appropriately to account for anticipatable spikes in utilization,
such as for the flu season. However, if one of our health plan states were to experience a large-scale natural disaster, a viral epidemic
or pandemic, a significant terrorism attack, or some other large-scale event affecting the health of a large number of our members,
our covered medical expenses in that state would rise, which could have a material adverse effect on our business, cash flows,
financial condition, and results of operations, or, in the event of extreme circumstances, could threaten our viability.
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. If we are
unable to renew, successfully re-bid, or compete for any of our government contracts, or if any of our contracts are terminated or
renewed on less favorable terms, our business, financial condition, cash flows, or results of operations could be adversely affected.
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.
If we sustain a cyber-attack 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, vandalize our systems, 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
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vulnerabilities. Our systems are also susceptible to human error. 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. While we currently expend significant resources and have implemented solutions, processes
and procedures to protect against cyber-attacks and security breaches, we may need to expend significant additional resources in
the future to continue to protect against potential security breaches or to address problems caused by such attacks or any breach of
our systems. 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.
The ACA includes certain provisions that change the way drug rebates are handled for drug claims filled by Medicaid managed care
plans. Retroactive to March 23, 2010, state Medicaid programs are now required to collect federal rebates on all Medicaid-covered
outpatient drugs dispensed or administered to Medicaid managed care enrollees (excluding certain drugs that are already discounted),
and pharmaceutical manufacturers are required to pay specified rebates directly to the state Medicaid programs for those claims. This
has impacted the level of rebates received by managed care plans from the manufacturers for Medicaid managed care enrollees. Many
manufacturers have renegotiated or discontinued their rebate contracts with Medicaid managed care plans and pharmacy benefits
managers to offset these new rebates paid directly to state Medicaid programs. As a result, the drug rebate amounts paid to managed
care plans like ours continue to remain at levels that are much lower than prior to 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, and commenced operations with our Puerto Rico health plan
in April 2015. If we are unable to continue to operate in any of those jurisdictions, or if our current operations in any portion of the
jurisdictions we are in are significantly curtailed, our revenues could decrease materially. Our reliance on operations in a limited
number of jurisdictions 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
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factors in those jurisdictions. Our inability to continue to operate in any of the jurisdictions 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.
A large portion of our premium revenues are subject to risks related to medical cost expenditure floors and corridors, administrative
cost and profit ceilings, premium stabilization programs, and cost-plus and performance-based reimbursement programs.
A substantial portion of our premium revenue is subject to contract provisions pertaining to medical cost floors and corridors,
administrative cost and profit ceilings, cost-plus reimbursement, premium stabilization programs, and profit-sharing arrangements.
Many of these contract provisions are complex, or are poorly or ambiguously drafted, and thus are potentially subject to differing
interpretations by ourselves and the relevant government agency with whom we contract. In the event the applicable government
agency disagrees with our interpretation or implementation of a particular contract provisions at issue, we could be required
to adjust the amount of our obligations under these provisions and/or make a payment or payments to the government agency.
Any interpretation of these contract provisions at variance with our interpretation and implementation of the provision, or that is
inconsistent with our revenue recognition accounting treatment, could have a material adverse effect on our business, financial
condition, cash flows, or results of operations.
In addition, many of our contracts also contain provisions pertaining to at-risk premiums that require us to meet certain quality
performance measures to earn all of our contract revenues. In the event we are unsuccessful in achieving the stated performance
measure, we 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.
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 or commonwealth 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 or commonwealth, 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 or commonwealth will also result in increased net worth requirements. In such
circumstances, we may not be able to fund on a timely basis or at all the increased net worth requirements with our available cash
resources. The expenses associated with starting up a health plan in a new state or commonwealth, or expanding a health plan in
an existing state or commonwealth 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.
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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.
Centene’s acquisition of Health Net could affect the Los Angeles county subcontract of our California health plan.
Our California health plan operates in Los Angeles County, California as a subcontractor to Health Net, which holds a direct Medi-
Cal contract with the state of California. Health Net has entered into a merger agreement with Centene Corporation, with the merger
expected to close in early 2016. We currently do not expect there to be any material change to our Los Angeles county subcontract
in connection with Centene’s acquisition of Health Net. However, if Centene seeks to modify our subcontract or otherwise refuses
to perform under the contract, our business, financial condition, cash flows, or results of operations may be adversely affected.
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. 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:
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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
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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.
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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 that 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 federal and state anti-kickback statutes, prohibited referrals, and the federal False Claims
Act, which permit agencies and enforcement authorities to institute a suit against us for violations and, in some cases, to seek treble
damages, criminal and civil fines, penalties, and assessments. Violations of these laws can also result in exclusion, debarment,
temporary or permanent suspension from participation in government health care programs, or the institution of corporate integrity
agreements. 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. Fraud, waste
and abuse prohibitions encompass a wide range of operating activities, including kickbacks or other inducements for referral
of members or for the coverage of products (such as prescription drugs) by a plan, billing for unnecessary medical services by
a provider, improper marketing, and the violation of patient privacy rights. Companies involved in public health care programs
such as Medicaid and Medicare are required to maintain compliance programs to detect and deter fraud, waste and abuse, and are
often the subject of fraud, waste and abuse investigations and audits. The regulations and contractual requirements applicable to
participants in these public-sector programs are complex and subject to change. The federal government has taken the position that
claims presented in violation of the federal anti-kickback statute may be considered a violation of the federal False Claims Act. In
addition, under the federal civil monetary penalty statute, the U.S. Department of Health and Human Services (HHS), Office of
Inspector General has the authority to impose civil penalties against any person who, among other things, knowingly presents, or
causes to be presented, certain false or otherwise improper claims. 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 one qui tam
action where the federal government has declined to intervene: United States of America, ex rel., Anita Silingo v. Mobile Medical
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Examination Services, Inc., et al. Other qui tam actions may have been filed against us of which we are presently unaware, or other
qui tam actions may be filed against us in the future. 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.
HHS 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 published rules requiring the use of standardized code sets and
unique identifiers for providers. These new standardized code sets, known as ICD-10, require substantial investments from health
care organizations, including us. We implemented ICD-10 effective as of October 1, 2015. Use of the ICD-10 code sets 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
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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. We received $125 million in dividends
from our regulated health plan subsidiaries during 2015. We did not receive any dividends from our regulated health plan subsidiaries
during 2014, because significant growth across all of our health plans necessitated that the plans retain their cash to meet increasing
net worth requirements. The aggregate additional amounts our health plan subsidiaries could have paid us at December 31, 2015 and
2014, without approval of the regulatory authorities, were approximately $121 million and $96 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 the senior notes or the revolving credit facility.
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Unforeseen changes in pharmaceutical regulations or market conditions may impact our revenues and adversely affect our
results of operations.
A significant category of our health care costs relate to pharmaceutical products and services. Evolving regulations and state and
federal mandates regarding coverage may impact the ability of our health plans to continue to receive existing price discounts on
pharmaceutical products for our members. Other factors affecting our pharmaceutical costs include, but are not limited to, the
price of pharmaceuticals, geographic variation in utilization of new and existing pharmaceuticals, and changes in discounts. The
unpredictable nature of these factors may have a material adverse effect on our business, financial condition, cash flows, or results
of operations.
Our use and disclosure of individually identifiable information, including health information, is subject to federal and state
privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we
hold could result in significant liability or reputational harm.
State and federal laws and regulations, including HIPAA and the Gramm-Leach-Bliley Act, govern the collection, dissemination,
use, privacy, confidentiality, security, availability, and integrity of individually identifiable information, including protected health
information, or PHI. HIPAA establishes basic national privacy and security standards for protection of PHI by covered entities,
including health plans such as ours. HIPAA requires covered entities like us to develop and maintain policies and procedures for PHI
that is used or disclosed, and to adopt administrative, physical, and technical safeguards to protect PHI. HIPAA also implemented
the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain
electronic health care transactions, including activities associated with the billing and collection of health care claims.
Mandatory penalties for HIPAA violations range from $100 to $50,000 per violation, and up to $1.5 million per violation of
the same standard per calendar year. A single breach incident can result in violations of multiple standards, resulting in possible
penalties potentially in excess of $1.5 million. If a person knowingly or intentionally obtains or discloses PHI in violation of HIPAA
requirements, criminal penalties may also be imposed. HIPAA authorizes state attorneys general to file suit under HIPAA on behalf
of state residents. Courts can award damages, costs, and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA
does not create a private right of action allowing individuals to sue us in civil court for HIPAA violations, its standards have been
used as the basis for a duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities for compliance
with the HIPAA Privacy and Security Standards. Investigations of violations that indicate willful neglect, for which penalties are
now mandatory, are statutorily required. It also tasks HHS with establishing a methodology whereby harmed individuals who were
the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty fine paid by the violator.
HIPAA further requires covered entities to notify affected individuals “without unreasonable delay and in no case later than 60
calendar days after discovery of the breach” if their unsecured PHI is subject to an unauthorized access, use, or disclosure. If a
breach affects 500 patients or more, it must be reported to HHS and local media without unreasonable delay, and HHS will post the
name of the breaching entity on its public website. If a breach affects fewer than 500 individuals, the covered entity must log it and
notify HHS at least annually. We have experienced HIPAA breaches in the past, including breaches affecting over 500 individuals.
New health information standards, whether implemented pursuant to HIPAA, congressional action, or otherwise, could have a
significant effect on the manner in which we must handle health care related data, and the cost of complying with standards could
be significant. If we do not comply with existing or new laws and regulations related to PHI, we could be subject to criminal or civil
sanctions. Any security breach involving the misappropriation, loss, or other unauthorized disclosure or use of confidential member
information, whether by us or a third party, such as our vendors, could subject us to civil and criminal penalties, divert management’s
time and energy, and have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Risks Related to the Operation of Our Molina Medicaid Solutions 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 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. If we are unable to continue to operate in any of those six jurisdiction, or if our current operations
in any of those jurisdictions 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.
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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. 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,
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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 of contracts, including those with respect to 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.
Our business may be adversely affected by the transition from traditional fee-for-service to Medicaid managed care.
In order to save on costs, a number of state Medicaid programs are expected to pursue the transition from a fee-for-service focus of
their Medicaid programs to a Medicaid managed care focus. A shift in Medicaid payment models from fee-for-service to managed
care will require a concomitant shift in the focus of MMIS. In connection with such a transition, MMIS must also make a transition
from a system built around claims adjudication to one that performs analytics and can be used to manage Medicaid population
health outcomes. In the event Molina Medicaid Solutions is unable to accomplish this transition, our business, financial condition,
cash flows, or results of operations may be adversely affected.
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
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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,
health care regulatory law-based litigation, 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
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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 New York Stock Exchange, SEC, or other regulatory authorities which would require
additional financial and management resources.
Changes in accounting may affect our results of operations.
U.S. generally accepted accounting principles (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 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
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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 health care environment, we must focus on building
employee capabilities to help ensure that we can meet upcoming challenges and opportunities. If we are unsuccessful in recruiting,
retaining, managing, and enabling such personnel and are unable to meet upcoming challenges and opportunities, our operations
could be negatively impacted.
We are subject to risks associated with outsourcing services and functions to third parties.
We contract with independent third party vendors and service providers who provide services to us and our subsidiaries or to
whom we delegate selected functions. Our arrangements with third party vendors and service providers may make our operations
vulnerable if those third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security
and confidentiality of our information and data. In addition, we may have disagreements with third party vendors and service
providers regarding relative responsibilities for any such failures under applicable business associate agreements or other applicable
outsourcing agreements. Further, we may not be adequately indemnified against all possible losses through the terms and conditions
of our contracts with third party vendors and service providers. Our outsourcing arrangements could be adversely impacted by
changes in vendors’ or service providers’ operations or financial condition or other matters outside of our control. If we fail to
adequately monitor and regulate the performance of our third party vendors and service providers, we could be subject to additional
risk. Violations of, or noncompliance with, laws and/or regulations governing our business or noncompliance with contract terms by
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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, 2015, goodwill was $519 million, and intangible assets, net, were $122 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, a 24,000 square-foot community clinic in Pomona,
California, and 40 properties in Pennsylvania, which are primarily residential housing facilities. 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.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability
to react to changes in the economy or our industry, expose us to interest rate risk to the extent of any variable rate debt, and
prevent us from meeting our our outstanding indebtedness.
We have a significant amount of indebtedness. As of December 31, 2015, our total indebtedness was approximately $1,609 million,
including lease financing obligations. As of December 31, 2015, we also had $244 million available for borrowing under our
revolving credit facility. Our substantial indebtedness could have significant consequences, including:
•
•
increasing our vulnerability to adverse economic, industry, or competitive developments;
requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and
interest on our indebtedness, therefore reducing our ability to use our cash flows to fund operations, make capital
expenditures, and pursue future business opportunities;
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•
exposing us to the risk of increased interest rates to the extent of any future borrowings, including borrowings under
the revolving credit facility, at variable rates of interest;
• making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the revolving
credit facility and our outstanding senior notes, and any failure to comply with the obligations of any of our debt
instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the
indenture governing our outstanding senior notes and the agreements governing such other indebtedness;
•
•
•
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, product and service
development, debt service requirements, acquisitions, and general corporate or other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a
competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able
to take advantage of opportunities that our substantial indebtedness may prevent us from exploiting.
Despite our high indebtedness level, we and our subsidiaries are able to incur substantial additional amounts of debt, including
secured debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indentures governing
our outstanding senior notes and the credit agreement governing the revolving credit facility contain restrictions on the incurrence
of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain
circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. As of
December 31, 2015, we had approximately $244 million available for additional borrowing under our revolving credit facility. In
addition, the indentures governing our outstanding senior notes and the credit agreement governing our revolving credit facility do
not prevent us from incurring obligations that do not constitute prohibited indebtedness thereunder. If new debt is added to our and
our subsidiaries’ existing debt levels, the related risks that we now face would increase.
The terms of our debt impose, and will impose, restrictions on us that may affect our ability to successfully operate our business
and our ability to make payments on our outstanding senior notes.
The indentures governing our outstanding senior notes and the credit agreement governing the revolving credit facility contain
various covenants that could materially and adversely affect our ability to finance our future operations or capital needs and to
engage in other business activities that may be in our best interest. These covenants limit our ability to, among other things:
•
•
incur additional indebtedness or issue certain preferred equity;
pay dividends on, repurchase, or make distributions in respect of our capital stock, prepay, redeem, or repurchase
certain debt or make other restricted payments;
• make certain investments;
•
•
•
•
•
•
create certain liens;
sell assets, including capital stock of restricted subsidiaries;
enter into agreements restricting our restricted subsidiaries’ ability to pay dividends to us;
consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
designate our restricted subsidiaries as unrestricted subsidiaries.
All of these covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these
covenants may be affected by events beyond our control, such as prevailing economic conditions and changes in regulations, and
if such events occur, we cannot be sure that we will be able to comply. A breach of these covenants could result in a default under
the indentures for our outstanding senior notes and/or the credit agreement governing the revolving credit facility including, as a
result of cross default provisions and, in the case of the revolving credit facility permit the lenders to cease making loans to us. If
there were an event of default under the indentures governing our outstanding senior notes and/or the credit agreement governing
32
the revolving credit facility, holders of such defaulted debt could cause all amounts borrowed under these instruments to be due and
payable immediately. Our assets or cash flow may not be sufficient to repay borrowings under our outstanding debt instruments in
the event of a default thereunder.
In addition, the restrictive covenants in the credit agreement governing the revolving credit facility require us to maintain specified
financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests will depend on our
ongoing financial and operating performance, which, in turn, will be subject to economic conditions and to financial, market, and
competitive factors, many of which are beyond our control.
If our operating performance declines, we may be required to obtain waivers from the lenders under the revolving credit facility,
from the holders of our outstanding senior notes or from the holders of other obligations, to avoid defaults thereunder. If we are
not able to obtain such waivers, our creditors could exercise their rights upon default, and we could be forced into bankruptcy
or liquidation.
We may not have the funds necessary to pay the amounts due upon conversion or required repurchase of our outstanding notes,
and our indebtedness may contain limitations on our ability to pay the amounts due upon conversion or required repurchase.
In February 2013, we issued $550.0 million aggregate principal amount of 1.125% cash convertible senior notes due January 15,
2020, unless earlier repurchased or converted. We refer to these notes as our 1.125% Notes. In September 2014, we issued $301.6
million aggregate principal amount of 1.625% convertible senior notes due August 14, 2044, unless earlier repurchased, redeemed,
or converted. We refer to these notes as our 1.625% Notes. As of December 31, 2015, the aggregate outstanding principal amount of
our 1.125% Notes and our 1.625% Notes was $550 million and $302 million, respectively. Both our 1.125% Notes and our 1.625%
Notes are convertible into cash prior to their respective maturity dates under certain circumstances, one of which relates to the
closing price of our common stock over a specified period. We refer to this conversion trigger as the stock price trigger. The 1.125%
Notes met the stock price trigger in the quarter ended December 31, 2015, and are convertible to cash through at least March 31,
2016. Because the 1.125% Notes may be converted into cash within 12 months, the $448 million carrying amount is reported in
current portion of long-term debt as of December 31, 2015. In addition, holders of our 1.625% Notes may convert their notes into
cash during any calendar quarter (and only during such calendar quarter) if the last reported sales price of our 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 $75.51 per share. The last reported sale price of our common
stock as reported on the New York Stock Exchange on February 23, 2016 was $62.28 per share. As of December 31, 2015, our
1.625% Notes were not convertible. If conversion requests are received, the settlement of the notes must be paid primarily in cash
pursuant to the terms of the relevant indentures.
For economic reasons related to the trading market for our 1.125% Notes, we believe that the amount of the notes that may be converted
over the next twelve months, if any, will not be significant. However, if the trading market for our 1.125% Notes becomes closed or
restricted due to market turmoil or other reasons such that the notes cannot be traded, or if the trading price of our 1.125% Notes, which
normally trade at a marginal premium to the underlying composite stock-and-interest economic value, no longer includes that marginal
premium, holders of our 1.125% Notes may elect to convert the notes to cash. As of December 31, 2015, we had sufficient available
cash, combined with borrowing capacity available under our revolving credit facility, to fund such conversions.
In addition, in the event of a change in control or the termination in trading of our stock, each holder of our 1.125% Notes and our
1.625% Notes would have the right to require us to purchase some or all of their notes at a purchase price in cash equal to 100% of
the principal amount of the notes, plus any accrued and unpaid interest.
In the event of conversions or required repurchases, we may not have enough available cash or be able to obtain financing at the time
we are required to comply with our conversion or repurchase obligations. In addition, our ability to comply with these obligations
may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. The indentures for the 1.125%
Notes and the 1.625% Notes provide that it would be an event of default if we do not make the cash payments due upon conversion
or required repurchase of the notes. The occurrence of an event of default under one or both of these indentures may also constitute
an event of default under our revolving credit facility and under our other indebtedness we may have outstanding at such time. Any
such default could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Our borrowings under the revolving credit facility are at variable rates of interest and expose us to interest rate risk. If interest rates
increase, our debt service obligations on the variable rate indebtedness could increase even though the amount borrowed remained
the same, and our net income could decrease. The applicable margin with respect to the loan under the revolving credit facility is
33
a percentage per annum equal to a reference rate plus the applicable margin. In order to manage our exposure to interest rate risk,
in the future we may enter into derivative financial instruments, typically interest rate swaps and caps, involving the exchange of
floating for fixed rate interest payments. If we are unable to enter into interest rate swaps, it may adversely affect our cash flow and
may impact our ability to make required principal and interest payments on our indebtedness.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy
our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating
performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors
beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the
principal, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay
investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. Our
ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such
time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants,
which could further restrict our business operations. The terms of existing or future debt instruments, including the revolving credit
facility, and the indentures governing our outstanding senior notes, may restrict us from adopting some of these alternatives. In
addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely
result in a reduction of our credit rating, which would harm our ability to incur additional indebtedness. These alternative measures
may not be successful and may not permit us to meet our scheduled debt service obligations.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing
costs and reduce our access to capital.
Our debt currently has a non-investment grade rating, and there can be no assurance that any rating assigned by the rating agencies
to our debt or our corporate rating will remain for any given period of time or that a rating will not be lowered or withdrawn entirely
by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse
changes, so warrant. A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies would likely increase
our future borrowing costs and reduce our access to capital, which could have a materially adverse impact on our financial condition
and results of operations.
Risks Related to Our Common Stock
Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our
common stock to decline.
We are 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 26% of our capital stock as of December 31, 2015. 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
34
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, 2015,
approximately 56,000,000 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, 2015, the Health Plans segment leased a total of 84 facilities, the Molina Medicaid Solutions segment leased
a total of 12 facilities and the Other segment leased a total of 215 facilities. We own a 186,000 square-foot office building in Troy,
Michigan and a 24,000 square-foot mixed use (office and clinic) facility in Pomona, California under our Health Plans segment.
We own a 26,700 square-foot data center in Albuquerque, New Mexico and 40 properties in Pennsylvania, which are primarily
residential housing facilities, under our Other 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.
35
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.
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. The District Court dismissed this action as to Molina without leave to
amend as to some allegations and with leave to amend as to other allegations. On October 22, 2015, the Relator filed a third amended
complaint. 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.
36
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 23, 2016, 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:
2015
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$
$
$
$
$
$
$
$
67.58
73.98
82.37
70.82
39.21
46.17
48.03
54.57
$
$
$
$
$
$
$
$
49.37
57.35
65.72
55.49
32.41
32.86
39.23
40.79
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. Additionally, the indentures governing our outstanding senior notes and the credit agreement governing the revolving
credit facility contain various covenants that limit our ability to pay dividends on our common stock.
Any future determination to pay dividends will be at the discretion of our board of directors 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.
37
Stock Repurchase Programs
Securities Repurchases and Repurchase Programs. Effective as of December 16, 2015, our board of directors authorized the
repurchase of up to $50 million in aggregate of our common stock or senior notes. This newly authorized repurchase program
extends through December 31, 2016.
Purchases of common stock made by or on behalf of the Company during the quarter ended December 31, 2015, 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)
94
576
104,222
104,892
$
$
$
$
66.79
62.00
59.15
59.17
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)
50,000,000
50,000,000
50,000,000
— $
— $
— $
—
(1) During the quarter we withheld 104,892 shares of common stock under our 2011 Equity Incentive Plan to settle our employees’ income tax obligations.
(2) Effective as of February 25, 2015, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock. This repurchase
program expired December 31, 2015.
38
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, 2010 to December 31, 2015. The comparison assumes $100 was invested on December 31, 2010, 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 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).
Name
Molina Healthcare, Inc. . . . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
$ 100.00
100.00
100.00
2011
$ 120.27
102.11
110.25
2012
$ 145.75
118.45
131.73
2013
$ 187.16
156.82
155.98
2014
$ 288.31
178.29
197.59
2015
$ 323.86
180.75
189.81
December 31,
39
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, 2015 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 millions, except per-share data. The data under the caption “Operating Statistics, Continuing
Operations” has not been audited.
2015(1)
2014
2013
2012
2011
Year Ended December 31,
Statements of Income Data:
Revenue:
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,241
Service revenue(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
253
397
Premium tax revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
264
Health insurer fee revenue . . . . . . . . . . . . . . . . . . . . . . .
18
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
14,178
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 (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of tax
expense (benefit)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic net income per share:(3)
Income from continuing operations . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . .
Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted net income per share:(3)
Income from continuing operations . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . . . . . .
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,794
193
1,146
397
157
104
13,791
387
66
(1)
65
322
179
143
—
143
2.75
—
2.75
2.58
—
2.58
52
56
40
$
$
$
$
$
$
$
$
$
$
$
$
9,023
210
294
120
8
12
9,667
8,076
157
765
294
89
93
9,474
193
57
1
58
135
73
62
—
62
1.34
(0.01)
1.33
1.30
(0.01)
1.29
47
48
6,179
205
172
—
7
26
6,589
5,380
161
666
172
—
73
6,452
137
52
4
56
81
36
45
8
53
0.98
0.18
1.16
0.96
0.17
1.13
46
47
$
$
$
$
$
$
$
$
$
$
$
$
5,544
188
159
—
5
18
5,914
4,991
141
519
159
—
63
5,873
41
17
1
18
23
10
13
(3)
10
0.28
(0.07)
0.21
0.27
(0.06)
0.21
46
47
4,212
160
155
—
5
8
4,540
3,664
144
393
155
—
48
4,404
136
16
—
16
120
43
77
(56)
21
1.69
(1.24)
0.45
1.67
(1.22)
0.45
46
46
2015(1)
2014
2013
2012
2011
Year Ended December 31,
Operating Statistics, Continuing Operations:(3)
Medical care ratio(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense ratio(5) . . . . . . . . . . . . .
Net profit margin(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Members(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,533,000
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total assets(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, including current maturities(7) (8) . . . . . . . . .
Total liabilities(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,329
6,576
1,609
5,019
1,557
89.1%
8.1%
1.0%
89.5%
7.9%
0.6%
87.1%
10.1%
0.7%
90.0%
8.8%
0.2%
87.0%
8.7%
1.7%
2,623,000
1,931,000
1,797,000
1,618,000
$
1,539
4,435
887
3,425
1,010
$
936
2,988
770
2,095
893
$
796
1,901
261
1,119
782
$
494
1,631
216
876
755
(1) Service revenue and cost of service revenue include revenue and costs generated by our Pathways subsidiary, which was acquired on November 1, 2015.
(2)
Income (loss) from discontinued operations is presented net of income tax expense (benefit), which was insignificant in 2015 and 2014, and $(10), and $(1),
and $1, in 2013, 2012 and 2011, respectively.
(3) Source data for calculations in thousands.
(4) Medical care ratio represents medical care costs as a percentage of premium revenue. The medical care ratio is a key operating indicator used to measure
our performance in delivering efficient and cost effective health care services. Changes in the medical care ratio from period to period result from changes
in Medicaid funding by the states, 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.
(5) Computed as a percentage of total revenue.
(6) Number of members at end of period.
(7) We have reclassified certain amounts in prior periods to conform to the 2015 presentation. Specifically, deferred issuance costs relating to our senior notes
are now reported as a direct deduction of the applicable debt liabilities. Additionally, aggregate deferred income taxes are now reported as non-current. Both
reclassifications are a result of recently adopted accounting pronouncements. See Item 8 in this Form 10-K, “Financial Statements and Supplementary Data,”
for further discussion.
(8)
Includes senior notes, lease financing obligations, and other long-term debt.
41
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 people 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 government agencies in their
administration of the Medicaid program. We have three reportable segments. These segments include our Health Plans and Molina
Medicaid Solutions segments, which comprise the vast majority of our operations, and our Other segment. As of December 31, 2015,
we changed our reporting structure as a result of the Pathways acquisition in November 2015, which is reported in Other.
Our Health Plans segment consists of health plans in 11 states and the Commonwealth of Puerto Rico, and includes our direct
delivery business. As of December 31, 2015, these health plans served over 3.5 million members eligible for Medicaid, Medicare,
and other government-sponsored health care programs for low-income families and individuals. Additionally, we serve Health
Insurance Marketplace members, most of whom receive 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 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.
Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do not meet
the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as
corporate amounts not allocated to other reportable segments.
Refer to Part II, Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,”
for a comprehensive description of our Health Plans and Molina Medicaid Solutions revenues and costs, and how we recognize
them.We report revenue and costs attributable to Pathways as service revenue and cost of service revenue, respectively.
Beginning in 2013, after our Medicaid contract with the state of Missouri expired, we have reported the results relating to the
Missouri health plan as discontinued operations for all periods presented. The following discussion and analysis, with the exception
of cash flow information, is presented in the context of continuing operations unless otherwise noted.
Fiscal Year 2015 Financial Highlights
• Earnings per diluted share nearly doubled in 2015 when compared with 2014, while net income more than doubled.
Substantial increases in revenue, along with improved operating efficiency, were responsible for our improved
performance. Our after-tax margin increased to 1.0% in 2015 from 0.6% in 2014.
•
Strong enrollment growth across all of our programs, combined with a 5% increase in premium revenue per member,
generated over $4 billion, or 47%, more premium revenue in 2015 compared with 2014.
• Medical care costs as a percentage of premium revenue (the “medical care ratio”) decreased to 89.1% in 2015, from
89.5% in 2014.
• General and administrative expenses as a percentage of revenue (the “general and administrative expense ratio”)
increased slightly to 8.1% in 2015, versus 7.9% in 2014, primarily as a result of dramatic growth in our Marketplace
membership. Excluding Marketplace broker and exchange fees from both years, the general and administrative
expense ratio decreased to 7.5% in 2015 from 7.9% in 2014.
• Debt and equity financing transactions generated net cash of $1,062 million.
42
Market Updates—Health Plans
Medicare-Medicaid Plans. To coordinate care for those who qualify to receive both Medicare and Medicaid services (the “dual
eligible”), and to deliver services to these individuals in a more financially efficient manner, some 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). We operate MMPs in six states. Our MMPs in California,
Illinois, and Ohio offered coverage beginning in 2014; our MMPs in South Carolina and Texas offered coverage beginning in the
first quarter of 2015; and our MMP in Michigan offered coverage beginning in the second quarter of 2015. At December 31, 2015,
our membership included approximately 51,000 integrated MMP members.
Florida. On November 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related
to operation of the Medicaid business, of Integral Health Plan, Inc.
On August 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the
operation of the Medicaid business, of Preferred Medical Plan, Inc.
Illinois. On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related
to the Medicaid business of, Accountable Care Chicago, LLC, also known as MyCare Chicago. We assumed approximately 58,000
Medicaid members in this acquisition.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the
Medicaid business, of Loyola Physician Partners, LLC. We assumed approximately 21,000 Medicaid members in this acquisition.
On November 30, 2015, we announced that our Illinois health plan entered into an agreement to assume the membership and certain
Medicaid assets of Better Health Network, LLC (Better Health). As of November 30, 2015, Better Health served approximately
40,000 members in the Medicaid Family Health program in Cook County. Subject to regulatory approvals and the satisfaction of
other closing conditions, we expect the transaction to close during the first half of 2016.
Michigan. On January 1, 2016, our Michigan health plan closed on its acquisition of the Medicaid and MIChild membership, and
certain Medicaid and MIChild assets, of HAP Midwest Health Plan, Inc. We assumed approximately 81,000 Medicaid and MIChild
members in this acquisition.
In October 2015, the Michigan Department of Health and Human Services announced that Molina Healthcare of Michigan was
recommended to serve the state’s Medicaid members under Michigan’s Comprehensive Health Plan, which commenced on January
1, 2016. The new contract has a five-year term with three one-year extensions, and covers Regions 2 through 6, and 8 through 10 of
the state, representing an expansion into 18 additional counties compared with the previous Michigan Medicaid contract.
On September 1, 2015, our Michigan health plan closed on its acquisition of the Medicaid and MIChild contracts, and certain
provider agreements, of HealthPlus of Michigan and its subsidiary, HealthPlus Partners, Inc.
43
Puerto Rico. Effective April 1, 2015, our Puerto Rico health plan served its first members. As of December 31, 2015, our Puerto
Rico plan enrollment amounted to approximately 348,000 members.
Washington. In November 2015, our Washington health plan was selected by the Washington State Health Care Authority (HCA) to
negotiate and enter into managed care contracts for the Southwest region of the state’s Apple Health Fully Integrated Managed Care
Program. The start date is scheduled for April 1, 2016.
On January 1, 2016, our Washington health plan closed on its acquisition of the Medicaid membership and certain Medicaid assets
of Columbia United Providers, Inc. We assumed approximately 57,000 Medicaid members in this acquisition.
Market Update—Molina Medicaid Solutions
New Jersey. On April 9, 2015, the state of New Jersey announced its selection of Molina Medicaid Solutions to design and operate
that state’s new Medicaid management information system (MMIS). The new contract was effective May 1, 2015, and has a term
of 10 years with three one-year renewal options. Molina Medicaid Solutions was the state’s incumbent MMIS provider, and was
awarded the new contract as a result of Molina Medicaid Solutions’ submission in response to the state of New Jersey’s request for
proposals.
Market Update—Other
Pathways. On November 1, 2015, we acquired all of the outstanding ownership interests in Pathways Health and Community
Support LLC (Pathways), formerly known as Providence Human Services, LLC. Pathways is one of the largest national providers
of accessible, outcome-based behavioral/mental health and social services with operations in 23 states and the District of Columbia.
44
Financial Performance Summary
The following table summarizes our financial and operating performance from continuing operations for the years ended
December 31, 2015, 2014, and 2013. All dollar amounts are presented in millions, except per-share data.
Year Ended
December 31,
Year Ended
December 31,
2015
2014
% Change
2014
2013
% Change
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 (income) expense, net . . . . . . . . . . . . . . . . .
Total other expenses, net . . . . . . . . . . . . . . . .
Income from continuing operations before
income tax expense . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . $
Diluted net income per share, continuing operations(1) . $
Diluted weighted average shares outstanding . . . . . . . .
13,241
253
397
264
18
5
14,178
11,794
193
1,146
397
157
104
13,791
387
66
(1)
65
322
179
143
2.58
56
Non-GAAP Measures:(2)
Adjusted net income per share,
continuing operations(1)(3) . . . . . . . . . . . . . . . . . . . $
$
EBITDA
3.11
508
$
$
$
$
$
9,023
210
294
120
8
12
9,667
8,076
157
765
294
89
93
9,474
193
57
1
58
135
73
62
1.30
48
1.93
305
Operating Statistics:(1)
Medical care ratio(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense ratio(6) . . . . . . . . .
Premium tax ratio(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net profit margin(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89.1%
76.4%
8.1%
2.9%
55.5%
1.0%
89.5%
74.6%
7.9%
3.2%
53.8%
0.6%
(1) Source data for calculations of per-share amounts and ratios in thousands.
(2) See reconciliation of non-GAAP financial measures to U.S. GAAP below.
46.0%
2.4
70.9
—
14.3
(53.8)
46.7
50.1
(2.5)
14.9
70.9
—
27.4
46.8
40.9
9.6
(75.0)
3.6
66.7
102.8
37.8%
35.4%
2.1%
24.5%
35.6%
46.7% $
20.5
35.0
120.0
125.0
(58.3)
46.7
46.0
22.9
49.8
35.0
76.4
11.8
45.6
100.5
15.8
(200.0)
12.1
138.5
145.2
130.6% $
98.5% $
16.7%
9,023
210
294
120
8
12
9,667
8,076
157
765
294
89
93
9,474
193
57
1
58
135
73
62
1.30
48
61.1% $
66.6% $
1.93
305
$
$
$
$
$
6,179
205
172
—
7
26
6,589
5,380
161
666
172
—
73
6,452
137
52
4
56
81
36
45
0.96
47
1.55
225
89.5%
74.6%
7.9%
3.2%
53.8%
0.6%
87.1%
79.0%
10.1%
2.7%
44.8%
0.7%
(3) Effective January 1, 2016, we will no longer exclude amortization of convertible notes and lease financing obligations from our presentation of adjusted net
income and adjusted net income per share. We made this change because various capital transactions that we completed in 2015 reduced our relative reliance
on convertible notes and lease financing as sources of capital. We believe that this change will enhance the comparability of these non-GAAP measures with
the corresponding non-GAAP measures used by our competitors.
(4) 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.
(5) Service revenue ratio represents cost of service revenue as a percentage of service revenue.
(6) Computed as a percentage of total revenue.
45
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Puerto Rico(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending Membership by Program:
Temporary Assistance for Needy Families (TANF), CHIP(3) . . . . . . . . . . . . . . . . . . . .
Medicaid Expansion(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aged, Blind or Disabled (ABD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketplace(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare-Medicaid Plan (MMP) – Integrated(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Special Needs Plans (Medicare) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2015
2014
2013
620,000
440,000
98,000
328,000
231,000
327,000
348,000
99,000
260,000
102,000
582,000
98,000
3,533,000
2,312,000
557,000
366,000
205,000
51,000
42,000
3,533,000
531,000
164,000
100,000
242,000
212,000
347,000
—
118,000
245,000
83,000
497,000
84,000
2,623,000
1,809,000
385,000
347,000
15,000
18,000
49,000
2,623,000
368,000
89,000
4,000
213,000
168,000
255,000
—
—
252,000
86,000
403,000
93,000
1,931,000
1,603,000
—
289,000
—
—
39,000
1,931,000
(1) Our Puerto Rico health plan began serving members effective April 1, 2015.
(2) 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.
(3) CHIP stands for Children’s Health Insurance Program.
(4) Medicaid expansion membership phased in, and the Marketplace became available for consumers to access coverage, beginning January 1, 2014.
(5) MMP members who receive both Medicaid and Medicare coverage from Molina Healthcare.
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.
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. The increases in EBITDA
for both 2015 over 2014, and 2014 over 2013, were due primarily to increased net income and income taxes. The increases for both
of these items are described below in Results of Operations, in the components of net income.
46
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Year Ended December 31,
2015
2014
2013
$
143
(In millions)
62
$
$
53
Depreciation, and amortization of intangible assets and capitalized software . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
120
66
179
508
$
114
57
72
305
$
94
52
26
225
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. The
increases in adjusted net income and adjusted net income per diluted share for both 2015 over 2014, and 2014 over 2013, were due
primarily to increased net income. Such increases are described below in Results of Operations, in the components of net income.
Year Ended December 31,
2015
2014
2013
Net income, continuing operations . . . . . . . . . . . .
Adjustments, net of tax:
Amortization of convertible senior notes and
lease financing obligations . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . .
Adjusted net income per diluted share,
$
143
$
(In millions, except diluted per-share amounts)
2.58
1.30
62
$
$
$
45
$
0.96
19
11
0.33
0.20
17
13
0.36
0.27
14
13
0.31
0.28
continuing operations(1)(2) . . . . . . . . . . . . . . . .
$
173
$
3.11
$
92
$
1.93
$
72
$
1.55
(1) Beginning in the first quarter of 2015, we revised the calculation of adjusted net income, continuing operations. We no longer subtract “depreciation, and
amortization of capitalized software” and “share-based compensation” from net income, continuing operations to arrive at adjusted net income, continuing
operations. We have made this change to better reflect how we evaluate financial performance, make financing and business decisions, and forecast and plans
for future periods. All periods presented conform to this presentation.
(2) Effective January 1, 2016, we will no longer exclude amortization of convertible notes and lease financing obligations from our presentation of adjusted net
income and adjusted net income per share. We made this change because various capital transactions that we completed in 2015 reduced our relative reliance
on convertible notes and lease financing as sources of capital. We believe that this change will enhance the comparability of these non-GAAP measures with
the corresponding non-GAAP measures used by our competitors.
Results of Operations, Continuing Operations
As described above, as of December 31, 2015, we changed our reporting structure as a result of the Pathways acquisition in
November 2015. The following table presents gross margin as the appropriate earnings measure for our reportable segments, based
on how our chief operating decision maker currently reviews results, assesses performance, and allocates resources.
Gross margin for our Health Plans segment is referred to as “Medical margin,” and for our Molina Medicaid Solutions and Other
segments, as “Service margin.” Medical margin represents the actual dollars earned by the Health Plans segment after medical costs
are deducted from premium revenue. The medical care ratio represents the amount of medical care costs as a percentage of premium
revenue. One of the key metrics used to assess the performance of the Health Plans segment is the medical care ratio; therefore, the
underlying medical margin is the most important measure of earnings reviewed by the chief operating decision maker. The service
margin is equal to service revenue minus cost of service revenue.
47
Year Ended December 31,
2015
2014
2013
(In millions)
Health Plans:
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,241
11,794
1,447
$
Molina Medicaid Solutions:
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other:
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
195
140
55
58
53
5
$
$
$
$
$
$
9,023
8,076
947
210
157
53
$
$
$
$
— $
—
— $
6,179
5,380
799
205
161
44
—
—
—
Health Plans Segment
Premium Revenue. 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.
2015 Compared with 2014
In 2015, a 42% increase in membership and a 5% increase in revenue PMPM resulted in increased premium revenue of 47%, or over
$4.2 billion, when compared with 2014.
Enrollment growth was primarily due to increased Medicaid expansion, Marketplace and integrated Medicare-Medicaid Plan
(MMP) enrollment, and the start-up of the Puerto Rico health plan in April 2015.
2014 Compared with 2013
In 2014, premium revenue increased 46% over 2013, due to a 28% increase in membership, and an 18% increase in revenue PMPM.
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.
Premiums by Program. 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, 2015. The “Consolidated” column represents the weighted-average amounts for our
total membership by program.
TANF, CHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicaid Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ABD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MMP – Integrated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PMPM Premiums
$
Low
120.00
310.00
470.00
180.00
1,170.00
900.00
$
High
280.00
500.00
1,470.00
400.00
3,220.00
1,110.00
Consolidated
180.00
$
410.00
970.00
250.00
2,030.00
1,040.00
48
Medical Care Costs. 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, Note 11, “Medical Claims and Benefits Payable,”
for further information on how we estimate such liabilities.
2015 Compared with 2014
Our medical margin increased nearly 53% in 2015 over 2014, and our consolidated medical care ratio decreased to 89.1% in 2015
from 89.5% in 2014.
2014 Compared with 2013
Although medical margin increased nearly 20% in 2014 over 2013, our consolidated medical care ratio 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 program
cannot be offset against losses in other programs.
Medical Care Costs by Category. The following table provides the details of consolidated medical care costs by category for the
periods indicated (dollars in millions except PMPM amounts):
2015
Amount
PMPM
Fee for service . . . . . . . . $
Pharmacy . . . . . . . . . . . .
Capitation . . . . . . . . . . .
Direct delivery . . . . . . .
Other . . . . . . . . . . . . . . .
8,572 $ 218.35
41.01
1,610
25.02
982
3.26
128
12.79
502
$ 11,794 $ 300.43
Year Ended December 31,
2014
2013
% of
Total
72.7% $
13.7
8.3
1.1
4.2
100.0% $
Amount
PMPM
5,673 $ 202.87
45.54
1,273
26.77
748
96
3.44
10.22
286
8,076 $ 288.84
% of
Total
70.2% $
15.8
9.3
1.2
3.5
100.0% $
Amount
PMPM
3,612 $ 160.43
41.54
26.83
2.14
8.05
5,380 $ 238.99
935
604
48
181
% of
Total
67.1%
17.4
11.2
0.9
3.4
100.0 %
Financial Performance by Program. The following table presents the components of premium revenue and medical care costs
by program.
Year Ended December 31, 2015(1)
Member
Months(2)
Premium Revenue
Total
PMPM
Medical Care Costs
PMPM
Total
MCR(3)
Medical
Margin
TANF and CHIP . . . . . . . . . . . . . . . . . . . . . . . . .
Medicaid Expansion . . . . . . . . . . . . . . . . . . . . . .
ABD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MMP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.5 $
5.9
4.3
2.6
0.5
0.5
4,122 $ 161.50
330.18
1,931
887.27
3,784
185.85
481
1,863.93
974
982.50
502
39.3 $ 13,241 $ 337.28 $ 11,794 $ 300.43
4,483 $ 175.64 $
2,389
4,124
652
1,063
530
408.51
966.83
251.96
2,034.51
1,038.15
92.0% $
80.8
91.8
73.8
91.6
94.6
89.1% $
361
458
340
171
89
28
1,447
(1) Year ended December 31, 2014 and 2013 data not presented due to lack of comparability.
(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.
49
Financial Performance by State Health Plan. The following tables summarize member months, premium revenue, medical care
costs, medical care ratio, and medical margin by state health plan for the periods indicated (PMPM amounts are in whole dollars;
member months and other dollar amounts are in millions):
Member
Months
Year Ended December 31, 2015
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Puerto Rico(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina(1) . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.1 $
4.1
1.2
3.4
2.8
4.1
3.2
1.3
3.1
1.2
6.6
1.2
—
1,926 $ 272.22
261.49
1,081
289.85
303.72
367
328.93
268.27
903
317.15
398.98
1,106
446.27
421.61
1,718
499.34
158.80
505
178.31
213.30
278
267.25
573.32
1,809
621.37
259.32
300
286.22
222.36
1,470
242.36
176.01
215
213.48
—
116
—
39.3 $ 13,241 $ 337.28 $ 11,794 $ 300.43
2,200 $ 310.89 $
1,199
397
1,067
1,237
2,034
567
348
1,961
331
1,602
261
37
87.6% $
90.2
92.3
84.6
89.4
84.4
89.1
79.8
92.3
90.6
91.7
82.4
—
89.1% $
274
118
30
164
131
316
62
70
152
31
132
46
(79)
1,447
California . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Puerto Rico(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina(1) . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Member
Months
Year Ended December 31, 2014
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
5.6 $
1.1
0.3
2.8
2.5
3.7
—
1.5
3.0
1.0
5.5
1.0
—
28.0 $
1,523 $ 270.51 $
439
153
781
1,076
1,553
—
381
1,318
310
1,305
156
28
397.79
498.48
278.68
435.17
425.47
—
260.72
442.32
310.64
236.27
150.87
—
9,023 $ 322.68 $
419
141
661
996
1,335
—
323
1,197
285
1,219
136
95
1,269 $ 225.37
379.95
456.88
235.81
402.92
365.87
—
220.89
401.81
286.43
220.75
130.91
—
8,076 $ 288.84
83.3% $
95.5
91.7
84.6
92.6
86.0
—
84.7
90.8
92.2
93.4
86.8
—
89.5% $
254
20
12
120
80
218
—
58
121
25
86
20
(67)
947
50
California . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Puerto Rico(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina(1) . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Member
Months
4.2 $
1.0
—
2.6
1.5
3.0
—
—
3.2
1.0
4.9
1.1
—
22.5 $
Year Ended December 31, 2013
Premium Revenue
Medical Care Costs
Total
PMPM
750 $ 177.10 $
265
8
676
447
1,099
—
—
1,291
311
1,168
143
21
272.23
1,201.34
261.91
299.36
365.44
—
—
406.27
299.05
236.47
135.40
—
6,179 $ 274.48 $
Total
PMPM
MCR
667 $ 157.46
237.57
231
1,164.10
8
221.09
571
257.62
384
307.53
925
—
—
—
—
350.84
1,115
249.51
259
208.10
1,028
107.91
114
—
78
5,380 $ 238.99
88.9% $
87.3
96.9
84.4
86.1
84.2
—
—
86.4
83.4
88.0
79.7
—
87.1% $
Medical
Margin
83
34
—
105
63
174
—
—
176
52
140
29
(57)
799
(1) Our Puerto Rico health plan began serving members effective April 1, 2015. 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) “Other” medical care costs include primarily medically related administrative costs of the parent company, and direct delivery costs.
Individual Health Plan Analysis
2015 Compared with 2014
California. Premium revenue grew $677 million, or 44%, in 2015 compared with 2014, the result of higher membership. Overall,
enrollment on a member-month basis increased 31% in 2015 compared with 2014. Increased premium revenue was also driven
by a 15% increase in premium revenue PMPM, which was the result of the higher relative premium revenue PMPM among those
programs experiencing enrollment growth (Medicaid expansion and MMP); and the addition of long-term care benefits to some of
the California health plan’s Medicaid membership. The medical care ratio increased to 87.6% in 2015, from 83.3% in 2014. During
2014, the plan benefited from the recognition of approximately $23 million in premium revenue and medical margin that related to
2013, as a result of certain programmatic changes implemented by the state of California. Absent this benefit, the medical care ratio
of the California plan would have been 84.6% in 2014.
Florida. Premium revenue grew to $1,199 million in 2015, from $439 million in 2014, due to increased Marketplace membership.
The medical care ratio decreased to 90.2% in 2015, from 95.5% in 2014, due to the lower medical care ratio of the Marketplace
membership more than offsetting an increase in the medical care ratio for the Medicaid program.
Illinois. Premium revenue grew to $397 million in 2015, from $153 million in 2014, due to significant membership growth in late
2014. The medical care ratio increased to 92.3% in 2015, from 91.7% in 2014.
Michigan. Premium revenue grew $286 million, or 37%, in 2015 compared with 2014, due to increased Medicaid expansion
membership and the startup of the MMP program. The medical care ratio of 84.6% for 2015 was unchanged from 2014.
New Mexico. Premium revenue grew $161 million, or 15%, in 2015 compared with 2014, due to substantial increases in membership
in all Medicaid programs. The medical care ratio decreased to 89.4% in 2015, from 92.6% in 2014, due to improved profitability for
the ABD and Medicaid expansion programs.
Ohio. Premium revenue grew $481 million, or 31%, in 2015 compared with 2014, due to growth in membership within the Medicaid
expansion, and MMP programs. The medical care ratio decreased to 84.4% in 2015, from 86.0% in 2014, due to lower medical care
ratios in these newer programs, as well as ABD.
Puerto Rico. The Puerto Rico health plan began serving members on April 1, 2015, and finished the year with a medical care ratio
of 89.1%. See further discussion below, under Financial Condition, regarding the Commonwealth of Puerto Rico.
51
South Carolina. The medical care ratio decreased to 79.8% in 2015, from 84.7% in 2014. We believe that medical care ratios below
80% are not sustainable over time, and that the performance of the South Carolina health plan in 2014 is more representative of its
likely long-term performance than are its financial results for 2015.
Texas. Premium revenue grew $643 million, or 49%, in 2015 compared with 2014, primarily due to the addition of ABD members
receiving nursing facility benefits effective March 1, 2015, and the start-up of the Texas MMP program on that date. The medical
care ratio increased to 92.3% in 2015, from 90.8% in 2014, primarily as a result of lower percentage margins on premiums to
support nursing home services. As previously disclosed, we are unable to recognize certain quality related revenue in Texas because
we do not have historical information, clear definitions, and clarity around minimum standards.
Utah. The medical care ratio of the Utah health plan decreased to 90.6% in 2015, from 92.2% in 2014, primarily due to improved
financial performance of the plan’s Medicare program.
Washington. Premium revenue grew $297 million, or 23%, in 2015 when compared with 2014, primarily due to growth in Medicaid
expansion membership. The medical care ratio decreased to 91.7% in 2015, from 93.4% in 2014, as a lower medical care ratio for
the ABD program more than offset a higher medical care ratio in the TANF and Medicaid expansion programs.
Wisconsin. Premium revenue grew $105 million, or 67%, in 2015 compared with 2014 as a result of increased Marketplace
enrollment. The medical care ratio decreased to 82.4% in 2015, from 86.8% in 2014, primarily as a result of improvement in the
financial performance of the Wisconsin health plan’s Medicaid program.
2014 Compared with 2013
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 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 plan benefited from the recognition of approximately $23
million in premium revenue and medical margin that related to 2013 as a result of certain programmatic changes implemented by
the state of California. In 2013, the 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 plan served its first MMP members in 2014.
Florida. Due to the re-procurement undertaken by the Florida Agency for Health Care Administration 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 plan for the year ended December 31, 2014, when compared with 2013, profitability
fell in 2014. 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 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.
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.
52
South Carolina. The South Carolina health plan began serving members on 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 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. Removing quality revenue and profit-sharing adjustments would have resulted in a medical care ratio 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 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. The plan added approximately 102,000
Medicaid expansion members in 2014. The plan received a blended rate increase of approximately 3% effective January 1, 2015.
For the 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.
Molina Medicaid Solutions Segment
2015 Compared with 2014
Service revenue declined $15 million in 2015 compared with 2014, primarily due to an extension of the Idaho contract under which
we are now amortizing certain deferred revenues over a longer term. Service margin was consistent between 2015 and 2014, with
2015 showing a $2 million increase.
2014 Compared with 2013
Service margin improved $9 million for the year ended December 31, 2014, compared with 2013, primarily the result of increased
revenues due to higher Medicaid transaction volumes and lower cost of services overall.
Other Segment
Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do not
meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP),
as well as corporate amounts not allocated to other reportable segments. The Other segment service margin for the year ended
December 31, 2015, was insignificant.
Consolidated Expenses
General and Administrative Expenses. General and administrative expenses increased slightly to 8.1% of revenue in 2015, from
7.9% in 2014, primarily the result of dramatic growth in our Marketplace membership. Excluding Marketplace broker and exchange
fees from both years, the general and administrative expense ratio decreased to 7.5% in 2015 from 7.9% in 2014.
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. The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue)
decreased to 2.9% in 2015, from 3.2% in 2014. This decrease was primarily due to the current year increase in MMP revenues,
which are not subject to premium taxes.
The premium tax ratio increased to 3.2% in 2014, from 2.7% in 2013. In June 2014, the state of Michigan instituted a 6% use tax
on medical premiums. That state 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.
53
Health Insurer Fee (HIF) Revenue and Expenses. For our Medicaid program, actuarial standards require that we be reimbursed by
state Medicaid agencies for both the expense associated with the HIF and the absence of tax deductibility for that expense. During
2015, we secured full reimbursement for our expenses under the HIF (including the absence of tax deductibility) and as a result
HIF revenue, as a percentage of premium revenue, increased to 2.0% in 2015, from 1.3% in 2014. During 2015, we recognized
approximately $20 million of HIF premium revenue meant to reimburse us for the cost of HIF expense recognized in 2014. Health
insurer fee expenses, as a percentage of premium revenue, were 1.2% in 2015, compared with 1.0% in 2014.
In addition, both HIF revenue and expenses increased over the prior year proportionally to the increase in the total HIF tax base,
which is assessed to all insurers. This base increased to $11.3 billion in 2015, from $8.0 billion in 2014. Refer to “Liquidity and
Capital Resources—Financial Condition” below, for further 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 . . . . . . . . . . . . . . . . .
Amortization recorded as reduction of service revenue . . . . . . . . . . . . . . . .
Amortization of capitalized software recorded as cost of service revenue . .
Depreciation and amortization reported in statement of cash flows . . . . . . .
Depreciation, and amortization of capitalized software,
continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets, continuing operations . . . . . . . . . . . . . . .
Depreciation and amortization, continuing operations . . . . . . . . . . . . . . . . .
Amortization recorded as reduction of service revenue . . . . . . . . . . . . . . . .
Amortization of capitalized software recorded as cost of service revenue . .
Depreciation and amortization reported in statement of cash flows . . . . . . .
Year Ended December 31,
2015
2014
Amount
% of Total
Revenue
Amount
% of Total
Revenue
(Dollar amounts in millions)
87
17
104
1
21
126
0.6% $
0.1
0.7
—
0.1
0.8% $
75
18
93
3
38
134
0.8%
0.2
1.0
—
0.4
1.4%
Year Ended December 31,
2014
2013
Amount
% of Total
Revenue
Amount
% of Total
Revenue
(Dollar amounts in millions)
75
18
93
3
38
134
0.8% $
0.2
1.0
—
0.4
1.4% $
55
18
73
3
18
94
0.8%
0.3
1.1
—
0.3
1.4%
$
$
$
$
Interest Expense. Interest expense increased to $66 million for the year ended December 31, 2015, compared with $57 million for
the year ended December 31, 2014. The increase was due primarily to our issuance of $700 million aggregate principal amount of
senior notes (5.375% Notes) due November 15, 2022, in the fourth quarter of 2015. For further details regarding this transaction,
please refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 12, “Debt.”
Interest expense increased to $57 million for the year ended December 31, 2014, compared with $52 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 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, “Debt.”
Interest expense includes non-cash interest expense relating to the amortization of the discount on our long-term debt obligations,
which amounted to $30 million, $27 million and $23 million for the years ended December 31, 2015, 2014, and 2013, respectively.
We expect interest expense to continue to increase in the future due to interest on the 5.375% Notes which were issued in
November 2015.
54
Income Taxes. The provision for income taxes in continuing operations is recorded at an effective rate of 55.5% for the year ended
December 31, 2015, compared with 53.8% for the year ended December 31, 2014. The effective tax rate for 2015 is higher than
2014 primarily as a result of certain discrete tax benefits recorded in 2014 that were not recurring in 2015.
The provision for income taxes in continuing operations was 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.
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 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 and a portion of our cash equivalents. Our portfolio managers
must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels. As of
December 31, 2015, a substantial portion of our cash was invested in a portfolio of highly liquid money market securities, and our
investments consisted primarily of investment-grade debt securities. All of our investments are classified as current assets, except
for our restricted investments, 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 $18 million for the year ended December 31, 2015, compared with $8 million for the year ended
December 31, 2014, primarily due to the increase in invested assets. Our annualized portfolio yields for the year ended December
31, 2015 was 0.5%, and for both years ended December 31, 2014 and 2013, was 0.4%.
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 unregulated parent company in the form
of dividends, when and as permitted by applicable regulations, for general corporate use. We received $125 million in dividends
from our regulated health plan subsidiaries, and $17 million in dividends from our unregulated subsidiaries during 2015. We did
not receive any dividends from our regulated 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 cash to meet increasing net worth requirements.
See further discussion in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note 19, “Commitments and
Contingencies,” under the subheading “Regulatory Capital and Dividend Restrictions,” and Note 22, “Condensed Financial
Information of Registrant,” under “Note C - Dividends and Capital Contributions.”
55
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 . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . . . .
$
$
1,125
(1,420)
1,085
790
$
$
1,060
(536)
79
603
(In millions)
190
$
(543)
493
140
$
2015
2014
2013
2014 to 2015
Change
2013 to 2014
Change
$
$
65
(884)
1,006
187
$
$
870
7
(414)
463
Year Ended December 31,
Operating Activities. Cash provided by operating activities was $1,125 million in 2015 compared with $1,060 million in 2014,
an increase of $65 million. This increase was due primarily to increased net income of $81 million, and collection of premiums
receivable at our California health plan in the first quarter of 2015. These sources of cash were partially offset by:
• A decrease in amounts due to government agencies of $268 million, primarily due to a fourth quarter 2015 Medicaid
expansion-related payment to the state of Washington’s Medicaid authority of $247 million. Changes in this account
relate primarily to Health Plans segment programs that contain medical cost floors or medical cost corridors. Under
such programs, 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; and
• The change in medical claims and benefits payable, which resulted in the use of $49 million, primarily because
membership and related medical costs grew at a higher rate in 2014 than in 2015, resulting in a lower year-over-year
change in 2015.
In 2014, cash provided by operating activities was $1,060 million compared with $190 million for 2013, an increase of $870 million.
This increase was primarily due to a $442 million increase in amounts due to government agencies because of a significant increase
in amounts accrued for medical cost floor contract provisions, primarily associated with our Medicaid expansion membership. In
addition, medical claims and benefits payable increased $356 million due to significant membership growth in 2014.
Investing Activities. Cash used in investing activities increased to $1,420 million in 2015, compared with $536 million in 2014, an
increase of $884 million. This increase was due in part to higher purchases of investments, net of sales and maturities, amounting
to $477 million, a result of cash generated from 2015 financing activities, described below.
In addition, cash paid for business acquisitions increased $406 million. As described in Item 8 of this Form 10-K, Notes to
Consolidated Financial Statements, Note 1 ,”Basis of Presentation,” we closed several business acquisitions in 2015. Additionally,
we announced several Health Plans acquisitions in 2015 that did not close until January 1, 2016. Because the closing dates for these
acquisitions fell on January 1, 2016, a holiday, approximately $101 million was recorded to prepaid expenses and other assets as of
December 31, 2015, for purchase price amounts funded in December 2015. Such amounts are reported in investing activities in the
accompanying consolidated statements of cash flows.
In 2014, cash used in investing activities was $536 million, comparable with $543 million in 2013.
Financing Activities. Cash provided by financing activities was $1,085 million in 2015, primarily due to net proceeds from our
fiscal 2015 offerings of 5.375% Notes, amounting to $689 million, and common stock, amounting to $373 million. In 2014, cash
provided by financing activities was $79 million, which included primarily $123 million net proceeds from our fiscal 2014 offering
of 1.625% Notes, partially offset by $50 million paid to settle contingent consideration liabilities associated with our 2013 business
acquisitions. In 2013, net proceeds from our 1.125% Notes offering and lease financing transactions provided $623 million, which
was partially offset by $53 million used to purchase treasury stock and $88 million to repay debt.
56
Financial Condition
We believe that our cash resources and internally generated funds will be sufficient to support our operations, regulatory requirements,
and capital expenditures for at least the next 12 months.
On a consolidated basis, at December 31, 2015, our working capital was $1,484 million compared with $1,028 million at
December 31, 2014. At December 31, 2015, our cash and investments amounted to $4,241 million, compared with $2,666 million
of cash and investments at December 31, 2014.
Regulatory Capital. 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 $1,229 million at December 31, 2015, and
$859 million at December 31, 2014. 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 $612 million and $203 million as of December 31, 2015, and 2014, respectively.
Debt Ratings. Our 5.375% Notes are rated “BB” by Standard & Poor’s, and “Ba3” by Moody’s Investor Service, Inc. A significant
downgrade in our ratings could adversely affect our borrowing capacity and costs.
Health Insurer Fee. Effective January 1, 2014, the ACA requires most health plans to pay a fee based on premium revenue (the
Health Insurer Fee, or HIF). The HIF is not tax deductible. Actuarial standards require that states reimburse us for the HIF we
incur related to Medicaid revenue, in addition to paying us a “tax gross up” to compensate us for incremental income taxes we pay
because the HIF is not tax deductible. During 2015, we secured full reimbursement for our expenses under the HIF.
The following table provides the details of our HIF revenue reimbursement by health plan to date in 2015 (in millions):
HIF Reimbursement Revenue, Gross(1)
Year Ended December 31, 2015
Recognized
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Total
Necessary
for Full
Reimbursement
2015 HIF:
California . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal, Medicaid . . . . . . . . . . . . . .
Marketplace . . . . . . . . . . . . . . . . . . . . . . .
Medicare . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
2
1
—
7
12
3
6
—
11
1
43
—
6
49
57
$
17
2
1
—
8
12
3
6
—
11
1
61
—
4
65
$
6
2
1
21
8
12
3
6
4
6
1
70
1
4
75
$
8
2
1
7
7
12
3
5
2
9
2
58
1
5
64
31
8
4
28
30
48
12
23
6
37
5
232
2
19
253
$
$
31
8
4
28
30
48
12
23
6
37
5
232
2
19
253
HIF Reimbursement Revenue, Gross(1)
Year Ended December 31, 2015
Recognized
2014 HIF:
California . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized in:
Health insurer fee revenue . . . . . . . . . . . .
Premium tax revenue . . . . . . . . . . . . . . . .
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Total
—
—
—
49
48
1
49
$
$
$
12
—
—
77
74
3
77
$
$
$
—
7
1
83
81
2
83
$
$
$
—
—
—
64
61
3
64
$
$
$
12
7
1
273
264
9
273
$
$
$
Necessary
for Full
Reimbursement
(1) Amounts in the table include our estimate of the full economic impact of the excise tax including premium tax and the income tax effect.
Future Sources and Uses of Liquidity
Shelf Registration Statement. We have a shelf registration statement on file with the Securities and Exchange Commission to register
an unlimited amount of any combination of debt or equity securities in one or more offerings. Specific information regarding the
terms and securities being offered will be provided at the time of an offering. Proceeds from future offerings are expected to be used
for general corporate purposes, including, but not limited to, the repayment of debt, investments in or extensions of credit to our
subsidiaries and the financing of possible acquisitions or business expansion.
Credit Facility. In June 2015, we entered into an unsecured $250 million revolving credit facility (Credit Facility). Borrowings under
the Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), plus
in each case the applicable margin. The Credit Facility has a term of five years and all amounts outstanding will be due and payable
on June 12, 2020. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we
may increase the Credit Facility to up to $350 million. Our ability to borrow under the Credit Facility is subject to compliance with
certain covenants. As of December 31, 2015, outstanding letters of credit amounting to $6 million reduced the borrowing capacity
to $244 million, and no amounts were outstanding under the Credit Facility.
Announced Acquisitions. As described in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 1, “Basis of
Presentation,” we announced several Health Plans acquisitions in 2015 that did not close until January 1, 2016. Because the closing
dates for these acquisitions fell on January 1, 2016, a holiday, approximately $101 million was recorded to prepaid expenses and
other assets as of December 31, 2015, for purchase price amounts funded in December 2015. Such amounts are reported in investing
activities in the accompanying consolidated statements of cash flows. The total aggregate purchase price for these acquisitions
amounted to approximately $115 million.
Convertible Senior Notes. In February 2013, we issued $550 million aggregate principal amount of 1.125% cash convertible senior
notes due January 15, 2020, unless earlier repurchased or converted. We refer to these notes as our 1.125% Notes. In September
2014, we issued $302 million aggregate principal amount of 1.625% convertible senior notes due August 14, 2044, unless earlier
repurchased, redeemed, or converted. We refer to these notes as our 1.625% Notes. As of December 31, 2015, the aggregate
outstanding principal amount of our 1.125% Notes and our 1.625% Notes was $550 million and $302 million, respectively. Both our
1.125% Notes and our 1.625% Notes are convertible into cash prior to their respective maturity dates under certain circumstances,
one of which relates to the closing price of our common stock over a specified period. We refer to this conversion trigger as the
stock price trigger. The 1.125% Notes met the stock price trigger in the quarter ended December 31, 2015, and are convertible to
cash through at least March 31, 2016. Because the 1.125% Notes may be converted into cash within 12 months, the $448 million
carrying amount is reported in current portion of long-term debt as of December 31, 2015. In addition, holders of our 1.625% Notes
may convert their notes into cash during any calendar quarter (and only during such calendar quarter) if the last reported sales price
of our 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 $75.51 per share. The last reported
58
sale price of our common stock as reported on the New York Stock Exchange on February 23, 2016 was $62.28 per share. As of
December 31, 2015, our 1.625% Notes were not convertible. If conversion requests are received, the settlement of the notes must
be paid primarily in cash pursuant to the terms of the relevant indentures.
For economic reasons related to the trading market for our 1.125% Notes, we believe that the amount of the notes that may be converted
over the next twelve months, if any, will not be significant. However, if the trading market for our 1.125% Notes becomes closed or
restricted due to market turmoil or other reasons such that the notes cannot be traded, or if the trading price of our 1.125% Notes,
which normally trade at a marginal premium to the underlying composite stock-and-interest economic value, no longer includes that
marginal premium, holders of our 1.125% Notes may elect to convert the notes to cash. As of December 31, 2015, we had sufficient
available cash, combined with borrowing capacity available under our Credit Facility, to fund such conversions.
States’ Budgets. From time to time the states in which our health plans operate may delay premium payments. For example, the state
of Illinois is currently operating without a budget for its fiscal year ending June 30, 2016. As of December 31, 2015, our Illinois
health plan served approximately 98,000 members, and recognized premium revenue of approximately $397 million for the year
ended December 31, 2015. As of February 23, 2016, Illinois is current with its premium payments.
In another example, the Commonwealth of Puerto Rico has reported that it may lack sufficient resources to fund all necessary
governmental programs including health care-related programs, as well as meet its debt obligations for its fiscal year ending June 30,
2016. Our Puerto Rico health plan became operational on April 1, 2015. As of December 31, 2015, the plan served approximately
348,000 members and recognized premium revenue of approximately $192 million in the fourth quarter of 2015, or approximately
$64 million per month. As of February 23, 2016, the Commonwealth continues to pay us weekly for current membership.
It is the practice of the Commonwealth to pay us for eligible members only after those members have been assigned to us, and our
plan has sent electronic confirmation of the receipt of eligibility. Particularly in the early stages of our contract with Puerto Rico, the
plan’s confirmation of eligibility of certain members was not accepted by the Commonwealth as a result of various technical issues.
The plan has continued to pay for medical services for all members in question, but the Commonwealth is withholding payment of
approximately $12 million of premium revenue related to those members. We believe we have a valid claim to all of the premiums
withheld and we are in discussions with the Commonwealth regarding this matter.
It has been our practice in the past, and will remain so in the future, to continue to serve our members and pay health care providers
for services rendered in circumstances where state (or Commonwealth) governments are temporarily unable to pay us, so long as
we continue to believe that such state (or Commonwealth) governments will ultimately pay us.
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.”
59
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,
2015
2014
2013
$
$
1,191
88
140
266
1,685
(In millions)
871
$
71
28
231
1,201
$
$
$
424
45
20
181
670
(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, 2015, 2014 and 2013,
we recorded non-risk provider payables relating to such intermediary arrangements of approximately $167 million, $119 million and $151 million, respectively.
The determination of our liability for medical claims and 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 medical claims and 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 $1,191 million of our total medical claims and benefits payable of $1,685 million as of
December 31, 2015.
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 hypothetical change in our estimate of claims liability as of December 31, 2015 that would have
resulted had we changed our completion factors for the fifth through the twelfth months preceding December 31, 2015, by the
percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. Dollar amounts are
in millions.
60
Increase (Decrease) in Estimated Completion Factors
Increase (Decrease) in
Medical Claims and
Benefits Payable
(6)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(4)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
348
232
116
(116)
(232)
(348)
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 hypothetical change in our estimate of claims liability as of December 31, 2015 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 millions.
(Decrease) Increase in Trended Per member Per Month Cost Estimates
(Decrease) Increase in
Medical Claims and
Benefits Payable
(6)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(4)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(202)
(135)
(67)
67
135
202
The following per-share amounts are based on a combined federal and state statutory tax rate of 37%, and 56 million diluted shares
outstanding for the year ended December 31, 2015. Assuming a hypothetical 1% change in completion factors from those used in
our calculation of IBNP at December 31, 2015, net income for the year ended December 31, 2015 would increase or decrease by
approximately $37 million, or $0.66 per diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used
in our calculation of IBNP at December 31, 2015, net income for the year ended December 31, 2015 would increase or decrease by
approximately $21 million, or $0.38 per diluted share. The corresponding figures for a 5% change in completion factors and PMPM
cost estimates would be $183 million, or $3.29 per diluted share, and $106 million, or $1.91 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 $37 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, changes to state-controlled fee schedules upon which a large proportion of our provider payments
61
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.
62
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.
2015
Year ended December 31,
2014
(Dollars in millions, except
per-member amounts)
2013
$
1,201
$
670
$
495
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of medical care costs related to:
Current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior periods(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,935
(141)
11,794
Change in non-risk provider payables . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . .
10,448
910
11,358
1,685
11.8%
1.1%
1.2%
48
3,533,000
380,800
816
0.11
230.91
40,173,300
46,211
$
$
$
$
$
$
$
$
Commitments and Contingencies
8,123
(46)
8,077
(32)
7,064
450
7,514
1,201
6.9%
0.5%
0.6%
49
2,623,000
307,700
719
0.12
273.92
27,597,000
30,316
$
$
$
$
5,434
(53)
5,381
111
4,932
385
5,317
670
10.7%
0.9%
1.0%
43
1,931,000
145,800
277
0.08
143.19
21,317,500
21,415
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, Note 19 ,”Commitments and Contingencies.”
Contractual Obligations
In the table below, we present our contractual obligations as of December 31, 2015. Some of the amounts 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.
Additionally, we have a variety of other contractual agreements related to acquiring services used in our operations. However, we
believe these other agreements do not contain material noncancelable commitments.
63
Total(1)
2016
2017-2018
2019-2020
2021 and
Beyond
Medical claims and benefits payable . . . . . . . . . . . . . . . . . . . . .
Principal amount of senior notes(2) . . . . . . . . . . . . . . . . . . . . . . .
Amounts due government agencies . . . . . . . . . . . . . . . . . . . . . .
Interest on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,685
1,552
729
424
403
232
15
5,040
$
$
1,685
—
729
49
15
49
11
2,538
$
— $
—
—
97
32
88
4
221
$
— $
550
—
91
33
56
—
730
$
—
1,002
—
187
323
39
—
1,551
(In millions)
$
(1) As of December 31, 2015, we have recorded approximately $9 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 5.375% Senior Notes due 2022, 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, Note 12, “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.
64
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 Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
66
67
68
69
70
71
73
65
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, 2015
and 2014, 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, 2015. 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, 2015 and 2014, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2015, 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, 2015, 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, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 26, 2016
66
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes refundable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, equipment, and capitalized software, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts due government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing obligations - related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity:
Common stock, $0.001 par value; 150 shares authorized; outstanding: 56 shares at
December 31, 2015 and 50 shares at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock, $0.001 par value; 20 shares authorized, no shares issued and outstanding
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See accompanying notes.
67
December 31,
2015
2014
(Amounts in millions,
except per-share data)
$
$
$
$
2,329
1,801
597
13
192
374
5,306
393
81
122
519
109
—
18
28
6,576
1,685
729
362
223
—
449
374
3,822
962
198
—
—
37
5,019
—
—
803
(4)
758
1,557
6,576
$
$
$
$
1,539
1,019
596
—
49
—
3,203
341
54
89
272
102
329
15
30
4,435
1,201
527
242
196
9
—
—
2,175
690
157
40
329
34
3,425
—
—
396
(1)
615
1,010
4,435
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2015
2014
2013
(In millions, except per-share data)
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 (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income tax expense . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax expense (benefit) of $0, $0, and
$(10), 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
$
$
13,241
253
397
264
18
5
14,178
11,794
193
1,146
397
157
104
13,791
387
66
(1)
65
322
179
143
—
143
2.75
—
2.75
2.58
—
2.58
52
56
$
$
$
$
$
$
9,023
210
294
120
8
12
9,667
8,076
157
765
294
89
93
9,474
193
57
1
58
135
73
62
—
62
1.34
(0.01)
1.33
1.30
(0.01)
1.29
47
48
6,179
205
172
—
7
26
6,589
5,380
161
666
172
—
73
6,452
137
52
4
56
81
36
45
8
53
0.98
0.18
1.16
0.96
0.17
1.13
46
47
See accompanying notes.
68
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
Unrealized investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Year Ended December 31,
2015
2014
2013
(In millions)
62
$
—
—
—
62
$
143
(5)
2
(3)
140
$
$
53
(1)
—
(1)
52
See accompanying notes.
69
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
(In millions)
$
— $
—
(1)
—
—
—
—
—
(1)
—
—
—
—
(1)
—
(3)
—
—
—
(4)
$
500
53
—
—
—
—
—
—
553
62
—
—
—
615
143
—
—
—
$
(3)
—
—
(53)
56
—
—
—
—
—
—
—
—
—
—
—
—
—
$
782
53
(1)
(53)
—
79
31
2
893
62
22
30
3
1,010
143
(3)
373
26
—
758
$
—
8
$ — $ 1,557
Balance at January 1, 2013 . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . .
Balance at December 31, 2013 . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
Convertible senior notes transactions,
including issuance costs . . . . . . . . . .
Share-based compensation . . . . . . . . . . .
Tax benefit from share-based
compensation . . . . . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net . . . . . . . .
Common stock offering, including
issuance costs . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . .
Tax benefit from share-based
compensation . . . . . . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . .
47
—
—
(2)
—
—
1
—
46
—
2
2
—
50
—
—
6
—
—
56
$ — $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ — $
285
—
—
—
(56)
79
31
2
341
—
22
30
3
396
—
—
373
26
8
803
See accompanying notes.
70
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 . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects from acquisitions:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical claims and benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts due government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash paid in business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Proceeds from senior notes offerings, net of issuance costs . . . . . . . . . . . . . . . . . . .
Proceeds from common stock offering, net of issuance costs . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
2014
2013
(In millions)
$
143
$
62
$
53
126
(7)
23
30
19
56
(35)
482
202
84
24
(22)
1,125
(1,923)
1,126
(132)
(6)
(450)
(35)
(1,420)
689
373
—
—
—
—
—
—
—
18
—
5
1,085
790
1,539
2,329
$
$
134
(2)
22
27
7
(298)
(20)
531
470
11
74
42
1,060
(953)
633
(115)
(34)
(44)
(23)
(536)
123
—
—
—
—
(50)
—
—
—
14
(10)
2
79
603
936
1,539
$
94
(32)
29
23
18
(149)
(23)
175
28
33
(20)
(39)
190
(770)
400
(98)
(19)
(62)
6
(543)
538
—
159
(149)
75
—
(53)
(48)
(40)
9
—
2
493
140
796
936
See accompanying notes.
71
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Year Ended December 31,
2015
2014
2013
(Amounts in millions)
Supplemental cash flow information:
Cash paid during the period for:
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule of non-cash investing and financing activities:
Senior notes exchange transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in non-cash lease financing obligation - related party . . . . . . . . . . . . . . . . .
Common stock used for stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Details of business combinations:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of contingent consideration liabilities incurred . . . . . . . . . . . . . . . . . . . .
Payable to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts advanced for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash paid in business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Details of change in fair value of derivatives, net:
Gain on 1.125% Notes Call Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on 1.125% Notes Conversion Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on 1.125% Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of derivatives, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
197
38
$
$
30
29
$
$
— $
— $
— $
$
(15)
177
$
— $
$
14
$
(9)
(389)
41
—
—
(102)
(450)
$
$
(52)
—
—
8
—
(44)
$
$
$
45
(45)
—
— $
$
143
(143)
—
— $
95
35
—
56
27
(8)
(122)
—
60
—
—
(62)
37
(37)
(4)
(4)
See accompanying notes.
72
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality health care to people 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 government agencies in their
administration of the Medicaid program. We have three reportable segments. These segments include our Health Plans and Molina
Medicaid Solutions segments, which comprise the vast majority of our operations, and our Other segment. As of December 31, 2015,
we changed our reporting structure as a result of the Pathways acquisition in November 2015, which is reported in Other. See Note
20, “Segment Information,” for further details.
Our Health Plans segment consists of health plans in 11 states and the Commonwealth of Puerto Rico, and includes our direct
delivery business. As of December 31, 2015, these health plans served over 3.5 million members eligible for Medicaid, Medicare,
and other government-sponsored health care programs for low-income families and individuals. Additionally, we serve Health
Insurance Marketplace members, most of whom receive 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 operation of primary care clinics in several states in which we operate.
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.
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.
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.
Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do not meet
the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as
corporate amounts not allocated to other reportable segments.
Market Update—Other
Pathways. On November 1, 2015, we acquired all of the outstanding ownership interests in Pathways Health and Community
Support LLC (Pathways), formerly known as Providence Human Services, LLC. Pathways is one of the largest national providers
of accessible, outcome-based behavioral/mental health and social services with operations in 23 states and the District of Columbia.
See Note 4, “Business Combinations,” for further information.
Market Updates—Health Plans
Medicare-Medicaid Plans. To coordinate care for those who qualify to receive both Medicare and Medicaid services (the “dual
eligible”), and to deliver services to these individuals in a more financially efficient manner, some 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). We operate MMPs in six states. Our MMPs in California,
Illinois, and Ohio offered coverage beginning in 2014; our MMPs in South Carolina and Texas offered coverage beginning in the
first quarter of 2015; and our MMP in Michigan offered coverage beginning in the second quarter of 2015. At December 31, 2015,
our membership included approximately 51,000 integrated MMP members.
Florida. On November 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related
to operation of the Medicaid business, of Integral Health Plan, Inc. See Note 4, “Business Combinations,” for further information.
73
On August 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the
operation of the Medicaid business, of Preferred Medical Plan, Inc. See Note 4, “Business Combinations,” for further information.
Illinois. On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related
to the Medicaid business of, Accountable Care Chicago, LLC, also known as MyCare Chicago. We assumed approximately 58,000
Medicaid members in this acquisition.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the
Medicaid business, of Loyola Physician Partners, LLC. We assumed approximately 21,000 Medicaid members in this acquisition.
On November 30, 2015, we announced that our Illinois health plan entered into an agreement to assume the membership and certain
Medicaid assets of Better Health Network, LLC (Better Health). As of November 30, 2015, Better Health served approximately
40,000 members in the Medicaid Family Health program in Cook County. Subject to regulatory approvals and the satisfaction of
other closing conditions, we expect the transaction to close during the first half of 2016.
Michigan. On January 1, 2016, our Michigan health plan closed on its acquisition of the Medicaid and MIChild membership, and
certain Medicaid and MIChild assets, of HAP Midwest Health Plan, Inc. We assumed approximately 81,000 Medicaid and MIChild
members in this acquisition.
In October 2015, the Michigan Department of Health and Human Services announced that Molina Healthcare of Michigan was
recommended to serve the state’s Medicaid members under Michigan’s Comprehensive Health Plan, which commenced on January
1, 2016. The new contract has a five-year term with three one-year extensions, and covers Regions 2 through 6, and 8 through 10 of
the state, representing an expansion into 18 additional counties compared with the previous Michigan Medicaid contract.
On September 1, 2015, our Michigan health plan closed on its acquisition of the Medicaid and MIChild contracts, and certain
provider agreements, of HealthPlus of Michigan and its subsidiary, HealthPlus Partners, Inc. See Note 4, “Business Combinations,”
for further information.
Puerto Rico. Effective April 1, 2015, our Puerto Rico health plan served its first members. As of December 31, 2015, our Puerto
Rico plan enrollment amounted to approximately 348,000 members.
Washington. In November 2015, our Washington health plan was selected by the Washington State Health Care Authority (HCA) to
negotiate and enter into managed care contracts for the Southwest region of the state’s Apple Health Fully Integrated Managed Care
Program. Molina Healthcare of Washington was selected by HCA pursuant to the request for proposal HCA issued in August 2015.
The start date for the new contract is scheduled for April 1, 2016.
On January 1, 2016, our Washington health plan closed on its acquisition of the Medicaid membership and certain Medicaid assets
of Columbia United Providers, Inc. We assumed approximately 57,000 Medicaid members in this acquisition.
Market Update—Molina Medicaid Solutions
New Jersey. On April 9, 2015, the state of New Jersey announced its selection of Molina Medicaid Solutions to design and operate
that state’s new Medicaid management information system (MMIS). The new contract was effective May 1, 2015, and has a term
of 10 years with three one-year renewal options. Molina Medicaid Solutions was the state’s incumbent MMIS provider, and was
awarded the new contract as a result of Molina Medicaid Solutions’ submission in response to the state of New Jersey’s request
for proposals.
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 18, “Variable Interest Entities (VIEs),” 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.
74
Presentation and Reclassifications
Beginning in 2013, after our Medicaid contract with the state of Missouri expired, we have 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 $10 million, which is also
included in discontinued operations in the consolidated statements of income. The Missouri health plan’s premium revenues were
insignificant for all periods presented.
We have reclassified certain amounts in the 2014 consolidated balance sheet to conform to the 2015 presentation relating
to the presentation of deferred taxes and debt issuance costs. Both reclassifications are a result of recently adopted accounting
pronouncements. See Note 2, “Significant Accounting Policies,” for further information.
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. Estimates also affect the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal
areas requiring the use of estimates include:
• The determination of medical claims and benefits payable of our Health Plans segment;
• 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;
• Molina Medicaid Solutions segment revenue and cost recognition;
•
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.
75
Our investment policy requires that all of our investments have final maturities of 10 years or less (excluding 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. 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, 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.”
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 . . . . . . . . . . . . . . . . . . . . . . .
Amortization recorded as reduction of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of capitalized software recorded as cost of service revenue . . . . . . . . . . . .
Depreciation and amortization reported in the statement of cash flows . . . . . . . . . .
$
$
Year Ended December 31,
2015
2014
2013
(In millions)
75
$
18
93
3
38
134
$
$
$
87
17
104
1
21
126
55
18
73
3
18
94
76
Long-Lived Assets, including Intangible Assets
Long-lived assets consist primarily of property, equipment, capitalized software and intangible assets. Finite-lived, separately-
identified intangible assets acquired in business combinations 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 fair value and are then
amortized on a straight-line basis over their expected useful lives, generally between two and 15 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, 2015, 2014, and 2013.
Goodwill
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.
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 with 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, 2015, 2014, and 2013.
Business Combinations
Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at
their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over
the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and
assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain
and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we
record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion
of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first,
any subsequent adjustments are recorded to our consolidated statements of income. Refer to Note 4, “Business Combinations,” for
further details regarding our 2015 acquisitions.
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 fair value. The use of these funds is limited to specific purposes as required by
regulation in the various states in which we operate, 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.”
77
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, 2015 and 2014.
Premium Revenue - Health Plans
Premium revenue is generated primarily from our Medicaid, Medicare and Marketplace contracts, including agreements with other
managed care organizations for which we operate as a subcontractor. Premium revenue is generally received based on per member
per month (PMPM) rates established in advance of the periods covered. These premium revenues are recognized in the month that
members are entitled to receive health care services, and premiums collected in advance are deferred. The state Medicaid programs
and the federal Medicare program periodically adjust premium. Additionally, many of our contracts contain provisions that may
adjust or limit revenue or profit, as described below. Consequently, we recognize premium revenue as it is earned under such
provisions.
The following table summarizes premium revenue from continuing operations for the periods indicated:
2015
2014
2013
Amount
% of Total
Amount
% of Total
Amount
% of Total
Year Ended December 31,
16.9% $
(Dollars in millions)
1,523
439
153
781
1,076
1,553
—
381
1,318
310
1,305
156
28
9,023
4.9
1.7
8.7
11.9
17.2
—
4.2
14.6
3.4
14.5
1.7
0.3
100.0% $
750
265
8
676
447
1,099
—
—
1,291
311
1,168
143
21
6,179
12.1%
4.3
0.1
11.0
7.2
17.8
—
—
20.9
5.0
18.9
2.3
0.4
100.0%
California . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct delivery . . . . . . . . . . . . . . . . . . . . . . .
$
2,200
1,199
397
1,067
1,237
2,034
567
348
1,961
331
1,602
261
37
$ 13,241
16.6% $
9.0
3.0
8.1
9.3
15.4
4.3
2.6
14.8
2.5
12.1
2.0
0.3
100.0% $
78
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
Medicaid
Medical Cost Floors (Minimums), Medical Cost Corridors, and Administrative Cost Ceilings (Maximums): A portion of certain
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 $224 million and $392 million at
December 31, 2015 and December 31, 2014, respectively, to amounts due government agencies. Approximately $208 million of the
liability accrued at December 31, 2015 relates to our participation in Medicaid expansion programs.
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined
maximum threshold. We had $3 million recorded at December 31, 2015 relating to such provisions. No such receivables were
recorded at December 31, 2014.
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 retain, we recorded a liability of $10 million at
December 31, 2015. The amount recorded at December 31, 2014 was insignificant.
Retroactive Premium Adjustments: In New Mexico, when members are retroactively enrolled into our health plan we earn revenue
only to the extent of the actual medical costs incurred by us for services provided during those retroactive periods, plus a small
percentage of that medical cost for administration and profit. This cost plus arrangement for members retroactively enrolled in
our health plan first became effective July 1, 2014 (retroactive to January 1, 2014). We are paid normal monthly capitation rates
for the retroactive eligibility periods, and the difference between those capitation rates and the amounts due us on a cost plus basis
are periodically settled with the state. To date, no such settlement has been made with the state. Our New Mexico contract is not
specific as to the definition of retroactive membership, and the amount we owe the state (or that the state owes us) for the difference
between capitation received and amounts due us under the cost plus arrangement varies widely depending upon the definition of
retroactive membership.
In August 2015 the state provided us with a request for payment under the terms of this contract provision for the period January
1, 2014 through December 31, 2014. That request was based upon definitions of retroactive membership that were at odds with
our interpretations of that term. The New Mexico health plan reduced revenue by approximately $24 million in 2015 as a result of
aligning more closely our definition of retroactive membership with the state’s definition. Using the state’s definition of retroactive
membership, however, we estimate that the state will ultimately seek repayment of an amount that ranges from $15 million to $20
million higher than what we have accrued. We do not believe that any reasonable definition of retroactive membership supports
the state’s position, and expect to resolve this matter with payment of the amount we have accrued at December 31, 2015. We are
currently engaged in discussions with the state regarding the appropriate amount, if any, owed to the state under this contract term.
Medicare
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 increase or decrease based upon member medical conditions for up to two years after
the original year of service. 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 payable of $4 million and a net receivable of $8 million for
anticipated Medicare risk adjustment premiums at December 31, 2015 and December 31, 2014, respectively.
Marketplace
Premium Stabilization Programs: The Affordable Care Act (ACA) established Marketplace premium stabilization programs
effective January 1, 2014. These programs, commonly referred to as the “3R’s,” include a permanent risk adjustment program, a
transitional reinsurance program, and a temporary risk corridor program.
•
Permanent risk adjustment program: Under this permanent program, our health plans’ risk scores are compared to the
overall average risk score for the relevant state and market pool. Generally, our health plans will pay into the pool if
their risk scores are below the average risk score, and will receive funds from the pool if their risk scores are above
79
the average risk score. We estimate our ultimate premium based on insurance policy year-to-date experience, and
recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our
consolidated statements of income.
• Transitional reinsurance program: This program is designed to provide reimbursement to insurers for high cost
members. Our health plans pay an annual contribution on a per-member basis, and are eligible for recoveries if claims
for individual members exceed a specified threshold, up to a maximum amount. This three-year program will end
on December 31, 2016. We recognize the assessments to fund the transitional reinsurance program as a reduction to
premium revenue in our consolidated statements of income. We recognize recoveries under the reinsurance program
as a reduction to medical care costs in our consolidated statements of income.
• Temporary risk corridor program: This program is intended to limit gains and losses of insurers by comparing allowable
costs to a target amount as defined by the U.S. Department of Health and Human Services (HHS). Variances from the
target amount exceeding certain thresholds may result in amounts due to or receivables due from HHS. This three-year
program will end on December 31, 2016. Due to uncertainties as to the amount of federal funding available to support
the risk corridor program, we do not recognize amounts receivable under this program. All liabilities are recognized
as incurred. We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize
estimated premiums relating to the risk corridor program as an adjustment to premium revenue in our consolidated
statements of income.
Additionally, the ACA established a minimum annual medical loss ratio (Minimum MLR) of 80% for the Marketplace. The medical
loss ratio represents medical costs as a percentage of premium revenue. What constitutes medical costs and premium revenue are
specifically defined by federal regulations. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace
policyholders. Each of the 3R programs is taken into consideration when computing the Minimum MLR. We recognize estimated
rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income.
We record receivables or payables related to the 3R programs and the Minimum MLR when the amounts are reasonably estimable
as described above, and, for receivables, collection is reasonably assured.
Our receivables (payables) for each of these programs, as of the dates indicated, were as follows (in millions):
Risk adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk corridor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum MLR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015
(214)
$
36
(10)
(3)
December 31, 2014
(5)
$
5
—
—
Quality Incentives
At several of our 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, 2015 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, 2015.
Year Ended December 31,
2015
2014
2013
Maximum available quality incentive premium - current period . . . . . . . . . . . . . . . . . . . . . . .
$
118
(In millions)
$
90
Amount of quality incentive premium revenue recognized in current period:
Earned current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earned prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
66
13
79
$
$
40
4
44
$
$
$
63
46
9
55
Total premium revenue recognized for state health plans with quality incentive premiums . .
$ 11,107
$ 7,084
$ 2,980
80
Medical Care Costs - Health Plans
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, 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, 2015, 2014, and 2013, medically related administrative costs were $398 million, $263 million, and
$153 million, respectively.
The following table provides the details of our consolidated medical care costs from continuing operations for the periods indicated
(dollars in millions, except PMPM amounts):
Year Ended December 31,
2015
PMPM
$218.35
41.01
25.02
3.26
12.79
$300.43
% of
Total
Amount
72.7% $5,673
1,273
13.7
748
8.3
96
1.1
286
4.2
100.0% $8,076
2014
PMPM
$202.87
45.54
26.77
3.44
10.22
$288.84
% of
Total
Amount
70.2% $3,612
935
15.8
604
9.3
1.2
48
181
3.5
100.0% $5,380
2013
PMPM
$160.43
41.54
26.83
2.14
8.05
$238.99
% of
Total
67.1%
17.4
11.2
0.9
3.4
100.0%
Amount
$ 8,572
1,610
982
128
502
$11,794
Fee-for-service . . . . . . . . .
Pharmacy . . . . . . . . . . . . . .
Capitation . . . . . . . . . . . . .
Direct delivery . . . . . . . . .
Other . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . .
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 claims reserve, as reported in our balance sheet,
represents our best estimate of the total amount of claims we will ultimately pay with respect to claims that we have incurred
as of the balance sheet date. We estimate our IBNP monthly using actuarial methods based on a number of factors. For further
information, see Note 11, “Medical Claims and Benefits Payable.”
81
We report reinsurance premiums as a reduction to premium revenue, while related reinsurance recoveries are reported as a reduction
to medical care costs. We limit our risk of catastrophic losses by maintaining high deductible reinsurance coverage. Such reinsurance
coverage does not relieve us of our primary obligation to our policyholders. 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 ACA imposes an annual fee, or excise tax, on health insurers for each
calendar year. The 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 or payment 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, 2015 or 2014.
Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions
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.
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).
82
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 and Puerto Rico taxes, nondeductible expenses under the Affordable Care Act
Health Insurer Fee (HIF), 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 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.”
83
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, 2015 and 2014, our investments with PFM amounted to approximately $605 million and
$321 million, respectively. Our investments and a portion of our cash equivalents are managed by professional portfolio managers
operating under documented investment guidelines. Our portfolio managers must obtain our prior approval before selling investments
where the loss position of those investments exceeds certain levels. Our investments consist primarily 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 because our payors consist 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 primarily as a direct contractor with the states (or Commonwealth), 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 Not Yet Adopted
Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ASU
2016-02, Leases. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to
recognize most leases on their balance sheets and making targeted changes to lessor accounting. The ASU is effective for us
beginning in the first quarter of 2019, and requires a modified retrospective transition approach. Early adoption is permitted; we are
currently evaluating the potential effects of the adoption to our financial statements.
Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities, which will require public business entities to use the exit price notion when measuring the fair value of
financial instruments for disclosure purposes. Also, entities will have to assess the realizability of a deferred tax asset related to an
available for sale debt security in combination with the entity’s other deferred tax assets. Effective for us in the first quarter of 2018,
ASU 2016-01 is applied prospectively with a cumulative-effect adjustment to beginning retained earnings as of the beginning of the
first reporting period in which the guidance is adopted. Early adoption is permitted in regards to certain provisions of the standard;
we are evaluating the potential effects of the adoption to our financial statements.
Revenue Recognition. In July 2015, the FASB affirmed its proposal to defer the effective date of ASU 2014-09, Revenue from
Contracts with Customers, for all entities by one year. As a result, public business entities will apply the new revenue standard
to annual reporting periods beginning after December 15, 2017, and for interim reporting periods within annual reporting periods
beginning after December 15, 2017. We intend to adopt this standard on January 1, 2018. We are currently evaluating our plan for
adoption and its impact to our revenue recognition policies, procedures and control framework, and the resulting impact to our
consolidated financial position, results of operations and cash flows.
Short-Duration Contracts. In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, which will
require additional disclosure on the liability for unpaid claims and claim adjustment expenses. We intend to adopt this standard
effective for our annual report for the year ending December 31, 2016, and for interim periods thereafter. It requires additional
disclosure only and will not have a significant impact to our consolidated financial statements.
84
Software Licenses. In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement, which will require customers to determine whether a cloud computing arrangement includes the license of software
by applying the same guidance cloud service providers use to make this determination. The ASU also eliminates the existing
requirement for customers to account for software licenses they acquire by analogizing to the guidance on leases. This ASU will
be effective for us in the first quarter of 2016, and is applied either prospectively or retrospectively. We are evaluating the potential
effects of adoption to our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute
of Certified Public Accountants, and the SEC did not have, or are not believed by management to have, a material impact on our
present or future consolidated financial statements.
Recent Accounting Pronouncements Adopted
Income Taxes. In the fourth quarter of 2015, we early adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes,
which requires deferred tax assets and liabilities to be classified as non-current, in a classified statement of financial position. We
have applied the guidance retrospectively to all periods presented. Such retrospective adoption had an insignificant impact to our
consolidated balance sheets, and had no impact to our consolidated statements of income, stockholders’ equity, and cash flows.
Business Combinations. In the fourth quarter of 2015, we early adopted ASU 2015-16, Simplifying the Accounting for Measurement-
Period Adjustments, which requires acquirers to recognize adjustments to provisional amounts identified during the measurement
period (a reasonable time period after the acquisition date) in the reporting period in which such adjustment amounts are determined.
For the year ended December 31, 2015, there was no impact to our consolidated financial statements.
Debt Issuance Costs. In the fourth quarter of 2015, we early adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance
Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of such debt liability, consistent with debt discounts. In a subsequent Staff Announcement, the
SEC announced that it would not object to the deferral and presentation of debt issuance costs relating to line-of-credit arrangements
as an asset. We have applied the guidance retrospectively to all periods presented. Such retrospective adoption had an insignificant
impact to our consolidated balance sheets, and had no impact to our consolidated statements of income, stockholders’ equity, and
cash flows.
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:
Issued:
Common stock offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator for basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities:
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible senior notes(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.125% Warrants(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator for diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . .
Potentially dilutive common shares excluded from calculations(2):
1.125% Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2015
2014
2013
(In millions)
46
—
1
—
47
—
1
—
48
13
49
3
—
—
52
1
1
2
56
—
47
—
—
(1)
46
1
—
—
47
12
(1) For more information regarding the convertible senior notes, including the 1.625% Notes, 3.75% Notes, and 3.75% Exchange, refer to Note 12, “Debt.” For
more information regarding the 1.125% Warrants, refer to Note 13, “Derivatives.”
(2) The dilutive effect of all potentially dilutive common shares is calculated using the treasury-stock method. Certain potentially dilutive common shares issuable
are not included in the computation of diluted net income per share because to do so would be anti-dilutive. For the years ended December 31, 2014 and 2013,
the 1.125% Warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price of our common stock.
85
4. Business Combinations
During 2015, we closed on business combinations in both the Health Plans and Other segments. For all of these transactions we
applied the acquisition method of accounting, where the total purchase price was allocated, or preliminarily allocated, to tangible
and intangible assets acquired, and liabilities assumed based on their respective fair values. For Health Plans acquisitions, in
general, only intangible assets are acquired. All of the 2015 acquisitions were funded using available cash.
Health Plans
Consistent with our strategy to grow in our existing markets, we closed the following Health Plans acquisitions in 2015:
Florida. On November 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related
to operation of the Medicaid business, of Integral Health Plan, Inc. The final purchase price was $67 million, and the Florida health
plan added approximately 101,000 members in the Northwest and Southwest regions of Florida as a result of this transaction. On
the closing date, we withheld 10%, or approximately $7 million, of the purchase price to establish an indemnification amount
held as security for the seller’s indemnification obligations under the purchase agreement. We have recorded the indemnification
amount to restricted assets, which will be settled in November 2016. If we do not have any claims against the seller on or before the
settlement date, we will pay the full withhold amount to the seller. As of December 31, 2015, we had not made any claims against
the withhold amount.
On August 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the
operation of the Medicaid business, of Preferred Medical Plan, Inc. The final purchase price was $8 million, and the Florida health
plan added approximately 23,000 members as a result of this transaction.
Michigan. On September 1, 2015, our Michigan health plan closed on its acquisition of the Medicaid and MIChild contracts, and
certain provider agreements, of HealthPlus of Michigan and its subsidiary, HealthPlus Partners, Inc. The purchase price was $47
million, and the Michigan health plan added approximately 68,000 members as a result of this transaction.
For the Health Plans acquisitions closed in 2015, we recorded goodwill amounting to $90 million in the aggregate, 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. The entire amount recorded as goodwill is deductible for income tax purposes. Refer to
the table below for a summary of the intangible assets identified, and their economic lives.
Announced Acquisitions. As described in Note 1, “Basis of Presentation,” we announced several Health Plans acquisitions in
2015 that did not close until January 1, 2016. Because the closing dates for these acquisitions fell on January 1, 2016, a holiday,
approximately $101 million was recorded to prepaid expenses and other assets as of December 31, 2015, for purchase price amounts
funded in December 2015. Such amounts are reported in investing activities in the accompanying consolidated statements of cash
flows. The total aggregate purchase price for these acquisitions amounted to approximately $115 million, which will be allocated
among goodwill and intangible assets. The initial accounting for these transactions is incomplete.
Transaction costs associated with the Health Plans acquisitions were insignificant.
Other
Pathways. Consistent with our strategy to acquire and develop new products and capabilities, on November 1, 2015, we acquired all
of the outstanding ownership interests in Pathways Health and Community Support LLC (Pathways), formerly known as Providence
Human Services, LLC. Pathways is one of the largest national providers of accessible, outcome-based behavioral/mental health and
social services with operations in 23 states and the District of Columbia.
86
The following table summarizes the preliminary values of the assets acquired and liabilities assumed at the date of acquisition.
November 1, 2015
(In millions)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Medical claims and benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
20
52
4
14
19
155
1
(2)
(23)
(2)
(7)
231
As of December 31, 2015, the purchase price allocation for the acquisition was preliminary and subject to completion. Adjustments
to the current fair value estimates in the above table may occur as the process conducted for various valuations and assessments is
finalized, including tax assets and liabilities. Goodwill is calculated as the excess of the consideration transferred over the net assets
recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually
identified and separately recognized, including expected medical cost synergies to be achieved, and the workforce acquired. Such
synergies include the achievement of better outcomes for our members through more effective care coordination and integration,
and our retention of the net profit margin captured by the mental health provider. The workforce acquired is a significant component
of goodwill because it represents primarily the patient-facing employees, now employed by us, who provide the behavioral/mental
health and social services. Approximately 10% of the goodwill recorded at December 31, 2015, is deductible for income tax
purposes. This percentage may increase if certain tax elections are completed in 2016.
The gross contractual amount of receivables, at the acquisition date, was approximately $61 million. At the acquisition date, the best
estimate of contractual cash flows not expected to be collected was approximately $9 million.
In connection with this acquisition, we incurred approximately $3 million in transaction costs, which are recorded in general and
administrative expenses.
The following table presents the intangible assets identified, by segment. The weighted-average amortization period for the Health
Plans identified intangible assets, in the aggregate, is 6.4 years. The weighted-average amortization period for the Other identified
intangible assets, in the aggregate, is 4.2 years.
Intangible asset type
Health Plans:
Contract rights - member list . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provider network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other:
Contract licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract rights - member list . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value
Life
(years)
(In millions)
$
$
23
9
5
14
51
5
10
2
5
87
5. Fair Value Measurements
We consider the carrying amounts of cash and cash equivalents and other current assets and current liabilities (not including
derivatives and current portion of long-term debt) 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 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 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
Level 3 financial instruments are valued using unobservable inputs that represent management’s best estimate of what market
participants would use in pricing the financial instrument at the measurement date. Our Level 3 financial instruments include
the following:
Derivative financial instruments. Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125%
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, 2015 included the price of our common stock, the 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, “Derivatives,” the 1.125% Call Option asset and the
1.125% 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. The changes in Level 3 instruments for the year ended December 31, 2015 were insignificant.
Our financial instruments measured at fair value on a recurring basis at December 31, 2015, were as follows:
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-sponsored enterprise securities (GSEs) . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal - current investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.125% Call Option derivative asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured at fair value on a recurring basis . . . . . . .
1.125% Conversion Option derivative liability . . . . . . . . . . . . . . . . . . . .
Total liabilities measured at fair value on a recurring basis . . . .
Total
Level 1
Level 2
Level 3
$
$
$
$
1,184
211
185
80
78
63
1,801
374
2,175
374
374
$
$
$
$
(In millions)
— $
211
—
—
78
—
289
—
289
$
1,184
—
185
80
—
63
1,512
—
1,512
$
$
— $
— $
— $
— $
—
—
—
—
—
—
—
374
374
374
374
88
Our financial instruments measured at fair value on a recurring basis at December 31, 2014, were as follows:
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GSEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal - current investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.125% Call Option derivative asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured at fair value on a recurring basis . . . . . . .
1.125% Conversion Option derivative liability . . . . . . . . . . . . . . . . . . . .
Total liabilities measured at fair value on a recurring basis . . . .
Fair Value Measurements – Disclosure Only
Total
Level 1
Level 2
Level 3
$
$
$
$
641
122
127
69
60
1,019
329
1,348
329
329
$
$
$
$
(In millions)
— $
122
—
—
60
182
—
182
$
641
—
127
69
—
837
—
837
$
$
— $
— $
— $
— $
—
—
—
—
—
—
329
329
329
329
The carrying amounts and estimated fair values of our 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. As described in Note 2, “Significant
Accounting Policies,” the carrying amount of debt has been reduced by deferred issuance costs for all periods presented.
December 31, 2015
December 31, 2014
Carrying
Amount
Total Fair
Value
Carrying
Amount
Total Fair
Value
(In millions)
5.375% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.125% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.625% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
689
448
273
700
865
365
6. Investments
The following tables summarize our investments as of the dates indicated:
$
1,410
$
1,930
$
$
— $
—
767
337
$
1,104
426
264
690
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GSEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$
$
1,189
212
186
80
78
63
1,808
$
$
December 31, 2015
Gross
Unrealized
Gains
Losses
(In millions)
— $
—
—
—
—
—
— $
5
1
1
—
—
—
7
Estimated
Fair Value
$
$
1,184
211
185
80
78
63
1,801
89
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GSEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$
$
643
122
127
69
60
1,021
$
$
December 31, 2014
Gross
Unrealized
Gains
Losses
(In millions)
— $
—
—
—
—
— $
2
—
—
—
—
2
Estimated
Fair Value
$
$
641
122
127
69
60
1,019
The contractual maturities of our investments as of December 31, 2015 are summarized below:
Amortized
Cost
Estimated
Fair Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
(In millions)
830
967
11
1,808
$
829
962
10
1,801
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 years ended December 31, 2015, 2014 and
2013 were insignificant.
We have determined that unrealized gains and losses at December 31, 2015 and 2014 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, 2015.
In a Continuous Loss Position
for Less than 12 Months
In a Continuous Loss Position
for 12 Months or More
Estimated
Fair
Value
Unrealized
Losses
Total
Number of
Positions
Estimated
Fair
Value
(Dollars in millions)
Unrealized
Losses
Total
Number of
Positions
Corporate debt securities . . . . . . . . . . . . . . . . . .
GSEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . .
$
$
825
182
128
53
53
55
1,296
$
$
4
1
1
—
—
—
6
588
77
181
218
32
47
1,143
$
$
119
—
5
—
—
—
124
$
$
1
—
—
—
—
—
1
87
—
12
—
—
—
99
90
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
Estimated
Fair
Value
Unrealized
Losses
Total
Number of
Positions
Estimated
Fair
Value
(Dollars in millions)
Unrealized
Losses
Total
Number of
Positions
$
$
379
75
54
13
19
540
$
$
1
—
—
—
—
1
265
22
64
52
13
416
$
$
29
3
11
—
—
43
$
$
1
—
—
—
—
1
10
3
13
—
—
26
Corporate debt securities . . . . . . . . . . . . . . . . . .
GSEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . .
7. Receivables
Receivables consist primarily of amounts due from government Medicaid agencies, which may be subject to potential retroactive
adjustments. Because all of our receivable amounts are readily determinable and substantially all of our creditors are governmental
authorities, our allowance for doubtful accounts is immaterial. The information below is presented by segment.
December 31,
2015
2014
$
(In millions)
104
22
35
39
51
66
33
6
56
18
53
22
6
511
37
49
597
$
311
2
32
20
50
45
—
4
29
6
43
8
11
561
35
—
596
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct delivery and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Health Plans segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Molina Medicaid Solutions segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
91
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,
2015
2014
$
(In millions)
16
153
250
336
755
(167)
(195)
(362)
393
$
15
195
141
267
618
(129)
(148)
(277)
341
Depreciation recognized for building and improvements, and furniture and equipment was $49 million, $35 million, and $27 million
for the years ended December 31, 2015, 2014 and 2013, respectively. Amortization of capitalized software was $52 million, $59
million, and $46 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Molina Center. We acquired the Molina Center in December 2011. Subsequently, in June 2013 we entered into a sale-leaseback
transaction for the Molina Center. Due to our continuing involvement with the leased property, the sale did not qualify for sales
recognition and we remain the “accounting owner” of the property. See Note 12, “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:
Future minimum rentals . . . . . . . . .
$
4
4
(In millions)
2
4
2
1
$
17
2016
2017
2018
2019
2020
Thereafter
Total
9. Goodwill and Intangible Assets
The following table provides the details of identified intangible assets, by major class, for the periods indicated:
Cost
Accumulated
Amortization
(In millions)
Net
Balance
Intangible assets:
Contract rights and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provider networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets:
Contract rights and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provider networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
224
25
24
27
300
182
25
24
18
249
$
$
$
$
120
23
24
11
178
105
23
23
9
160
$
$
$
$
104
2
—
16
122
77
2
1
9
89
92
Based on the balances of our identifiable intangible assets as of December 31, 2015, we estimate that our intangible asset amortization
will be $25 million in 2016, $25 million in 2017, $22 million in 2018, $18 million in 2019, and $13 million in 2020. For a
presentation of our goodwill and intangible assets by reportable segment, refer to Note 20, “Segment Information.”
The following table presents the balances of goodwill as of December 31, 2015 and 2014:
Acquisitions by Segment
December 31,
2014
Health Plans
Other
December 31,
2015
Goodwill, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment losses . . . . . . . . . . . . . . . . . . . . . . .
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
330
(58)
272
$
$
$
(In millions)
90
—
90
$
157
—
157
$
$
577
(58)
519
The changes in the carrying amounts of goodwill and intangible assets, at cost, in 2015 were 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
government authorities in certificates of deposit and U.S. treasury securities. We also maintain restricted investments as protection
against the insolvency of certain capitated providers. In connection with a Molina Medicaid Solutions segment state contract, we
maintained restricted investments as collateral for a letter of credit as of December 31, 2014. The following table presents the
balances of restricted investments:
December 31,
2015
2014
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Health Plans segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Molina Medicaid Solutions segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
(In millions)
34
1
43
12
10
—
4
4
1
—
109
—
109
$
29
1
35
13
5
6
3
4
—
1
97
5
102
The contractual maturities of our held-to-maturity restricted investments as of December 31, 2015 are summarized below.
Amortized
Cost
Estimated
Fair Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
93
$
(In millions)
100
9
109
$
100
9
109
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,
2015
2014
2013
$
$
1,191
88
140
266
1,685
(In millions)
871
$
71
28
231
1,201
$
$
$
424
45
20
181
670
“Other” medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on
behalf of various government agencies without assuming financial risk. Such receipts and payments do not impact our consolidated
statements of income. Non-risk provider payables amounted to $167 million, $119 million and $151 million, as of December 31, 2015,
2014 and 2013, respectively.
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.
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of medical care costs related to:
Current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
2014
2013
(Dollars in millions)
$
1,201
$
670
$
495
11,935
(141)
11,794
8,123
(46)
8,077
5,434
(53)
5,381
Change in non-risk provider payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
(32)
111
Payments for medical care costs related to:
Current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,448
910
11,358
1,685
$
7,064
450
7,514
1,201
4,932
385
5,317
670
$
$
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 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.
94
The use of a consistent methodology in estimating our liability for medical claims and 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 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 2015,
2014, and 2013 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.
2015
We believe that the most significant factors that will determine the accuracy of our IBNP estimates at December 31, 2015 are:
• A new version of diagnosis codes was required for all claims with dates of service October 1, 2015 and later. As a
result, payment was delayed for a significant number of claims due to the use of diagnosis codes that were no longer
valid. Due to the resulting variability in the ratio of paid to billed amounts, the reserves are subject to more than the
usual amount of uncertainty.
• At our Illinois, Puerto Rico and Wisconsin health plans, we overpaid certain provider and outpatient facility claims due
to a system configuration error. For this reason, the reserves are subject to more than the usual amount of uncertainty.
• Our Michigan health plan added approximately 68,000 new members under an acquisition in the third quarter of 2015.
Because these new members may have different utilization patterns than our legacy members, the reserves are subject
to more than the usual amount of uncertainty.
• Our Puerto Rico health plan started operations on April 1, 2015. Because we lack sufficient historical claims data, our
reserves as of December 31, 2015 are based on a combination of claims payment experience and the expected claims
in the pricing assumptions. For this reason, the reserves are subject to more than the usual amount of uncertainty.
We recognized favorable prior period claims development in the amount of $141 million for the year ended December 31, 2015.
This amount represents our estimate as of December 31, 2015, of the extent to which our initial estimate of medical claims and
benefits payable at December 31, 2014 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 and California health plans, approximately 61,000 and 100,000 members, respectively, were enrolled in
the new Medicaid expansion program during 2014. Also in Ohio, approximately 17,000 members were enrolled in the
new MMP program in 2014. Because we lacked sufficient historical claims data, we initially estimated the reserves
for these new members based upon a number of factors that included pricing assumptions provided by the state; our
expectations regarding pent up demand; our beliefs about the speed at which new members would utilize health care
services; and other factors. Our actual costs were ultimately less than expected.
• At our New Mexico health plan, the state implemented a retroactive increase to the provider fee schedules in mid-2014.
As a result, many claims that were previously settled were reopened, and subject to, additional payment. Because our
reserving methodology is most accurate when claims payment patterns are consistent and predictable, the payment
of additional amounts on claims that in some cases had been settled more than six months before added a substantial
degree of complexity to our liability estimation process. Due to the difficulties in addressing that added complexity,
liabilities recorded as of December 31, 2014, were in excess of amounts ultimately paid.
• At our Washington health plan, in 2015 we collected amounts related to certain claims paid in 2013. Such collections
were not anticipated in our reserves as of December 31, 2014.
95
2014
We recognized favorable prior period claims development in the amount of $46 million for the year ended December 31, 2014. This
amount represented 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 was ultimately 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. Because
we lacked sufficient historical claims data, we initially estimated the reserves for these new members based upon a
number of factors that included pricing assumptions provided by the state; our expectations regarding pent up demand;
our beliefs about the speed at which new members would utilize health care services; and other factors. Our actual
costs were ultimately less than expected.
• 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.
2013
We recognized favorable prior period claims development in the amount of $53 million for the year ended December 31, 2013. This
amount represented 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. Because we lacked sufficient historical claims data, we initially estimated the
reserves for these new members based upon a number of factors. Our actual costs were ultimately less than expected.
• 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.
12. Debt
As of December 31, 2015, contractual maturities of debt for the years ending December 31 are as follows (in millions):
Total
2016
2017
2018
2019
2020
5.375% Notes . . . . . . . . . . . .
1.125% Convertible Notes . .
1.625% Convertible Notes(1) .
Other . . . . . . . . . . . . . . . . . . .
$
$
700
550
302
1
1,553
$
$
— $
—
—
1
1
$
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
—
—
— $
— $
550
—
—
550
$
Thereafter
700
—
302
—
1,002
(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.
96
Substantially all of our debt is held at the parent, which is reported in the Other segment. The principal amounts, unamortized
discount (net of premium related to 1.625% Notes), unamortized issuance costs, and net carrying amounts of debt were as follows:
Principal
Balance
Unamortized
Discount
Unamortized
Issuance
Costs
Net Carrying
Amount
December 31, 2015:
5.375% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.125% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.625% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014:
1.125% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.625% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
700
550
302
1
1,553
550
302
852
Interest cost recognized for the period relating to:
Contractual interest coupon rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of the discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In millions)
— $
95
25
—
120
$
115
33
148
$
$
11
7
4
—
22
9
5
14
$
$
$
$
689
448
273
1
1,411
426
264
690
Years Ended December 31,
2015
2014
2013
(In millions)
17
29
46
$
$
13
26
39
$
$
13
22
35
$
$
$
$
$
$
5.375% Senior Notes due 2022. On November 10, 2015, we completed the private offering of $700 million aggregate principal
amount of senior notes (5.375% Notes) due November 15, 2022, unless earlier redeemed. Interest is payable semiannually in arrears
on May 15 and November 15, beginning on May 15, 2016. The 5.375% Notes are not convertible into our common stock or any
other securities.
The 5.375% Notes are guaranteed by certain of our wholly owned subsidiaries. The 5.375% Notes and the guarantees are effectively
subordinated to all existing and future secured debt of us and our guarantors to the extent of the assets securing such debt. In
addition, the 5.375% Notes and the guarantees are structurally subordinated to all indebtedness and other liabilities and preferred
stock of our subsidiaries that do not guarantee the 5.375% Notes.
We may redeem some or all of the 5.375% Notes at any time, and prior to August 15, 2022, at a price equal to 100% of the principal
amount redeemed plus accrued and unpaid interest thereon, plus a “make-whole” premium. Thereafter, we may redeem some or
all of the 5.375% Notes at a price equal to 100% of the principal amount redeemed plus accrued and unpaid interest thereon. The
5.375% Notes contain customary non-financial covenants and change of control provisions.
In connection with the issuance and sale of the 5.375% Notes, we entered into a registration rights agreement. Under this agreement,
we will use commercially reasonable efforts to register substantially identical notes (the Exchange Notes) with the SEC in 2016.
We will then offer such freely tradable Exchange Notes in exchange for the 5.375% Notes. We will pay additional interest on the
5.375% Notes if the Exchange Notes offering is not completed timely.
Credit Facility. In June 2015, we entered into an unsecured $250 million revolving credit facility (Credit Facility). The Credit
Facility has a term of five years and all amounts outstanding will be due and payable on June 12, 2020. Subject to obtaining
commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up
to $350 million. As of December 31, 2015, outstanding letters of credit amounting to $6 million reduced the borrowing capacity to
$244 million, and no amounts were outstanding under the Credit Facility.
Borrowings under the Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered
Rate (LIBOR), plus in each case the applicable margin. In addition to interest payable on the principal amount of indebtedness
outstanding from time to time under the Credit Facility, we are required to pay a quarterly commitment fee.
97
Although the Credit Facility is not secured by any of our assets, certain of our wholly owned subsidiaries have jointly and severally
guaranteed our obligations under the Credit Facility.
The Credit Facility contains customary non-financial and financial covenants, including a minimum fixed charge coverage ratio, a
maximum debt-to-EBITDA ratio and minimum statutory net worth. At December 31, 2015, we were in compliance with all financial
covenants under the Credit Facility.
1.125% Cash Convertible Senior Notes due 2020. In February 2013, we issued $550 million aggregate principal amount of 1.125%
cash convertible senior notes (1.125% Notes) due January 15, 2020, unless earlier repurchased or converted. Interest is payable
semiannually in arrears on January 15 and July 15.
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. 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. 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 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.
The 1.125% Notes met the stock price trigger in the quarter ended December 31, 2015, and are convertible into cash through at
least March 31, 2016. Because the 1.125% Notes may be converted to cash within 12 months, the $448 million carrying amount is
reported in current portion of long-term debt as of December 31, 2015.
The 1.125% Notes contain an embedded cash conversion option (the 1.125% 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% Conversion Option settles or expires. The initial fair value liability of the 1.125% 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 of approximately
6%. As of December 31, 2015, the 1.125% Notes have a remaining amortization period of 4.0 years. The 1.125% Notes’ if-
converted value exceeded their principal amount by approximately $332 million and $93 million as of December 31, 2015 and
December 31, 2014, respectively.
1.625% Convertible Senior Notes due 2044. In September 2014, we issued $125 million principal amount of 1.625% convertible
senior notes (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 below, the aggregate principal amount issued under the 1.625%
Notes was $302 million.
98
Interest is payable semiannually in arrears on February 15 and August 15. 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 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, 2015, 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 are net share settled and 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 December 31, 2015, the 1.625% Notes have a remaining amortization period
of 2.6 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 exceeded their principal amount by approximately $10 million as of December 31, 2015, and did
not exceed their principal amount as of December 31, 2014. At December 31, 2015 and December 31, 2014, the equity component
of the 1.625% Notes, including the impact of deferred taxes, was $23 million.
99
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
$177 million aggregate principal amount of the 3.75% Notes for $177 million principal amount of 1.625% convertible senior
notes due 2044, approximately 2 million shares of our common stock, and payment of accrued interest on the exchanged 3.75%
Notes; additionally, we issued approximately 81,000 shares of common stock for services rendered in connection with the 3.75%
Exchange. We did not receive any proceeds from the 3.75% Exchange.
3.75% Notes. As described above, we entered into the 3.75% Exchange transaction in August 2014, under which we exchanged
$177 million of the outstanding principal amount of the 3.75% Notes for the 1.625% Notes. The remaining $10 million principal
amount was repaid in full in October 2014.
Lease Financing Obligations. In 2013, we entered into a sale-leaseback transaction for 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 sales recognition 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 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 $13 million for both years ended December 31, 2015 and 2014.
As described and defined in further detail in Note 17, “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 $36 million to property, equipment and capitalized software, net, in
the accompanying consolidated balance sheet as of December 31, 2015, which represents the total cost incurred by the Landlord
for the construction of the buildings, net of accumulated depreciation. As of December 31, 2015 and December 31, 2014, the
aggregate amount recorded to lease financing obligations, including the current portion, amounted to $40 million and $41 million,
respectively. 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 was $4 million and $3 million for the year ended December 31,
2015 and 2014, 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, and was $1 million for both years ended December 31, 2015 and 2014. For information regarding
the future minimum lease obligation, refer to Note 19, “Commitments and Contingencies.”
13. Derivatives
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 . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet Location
Current assets: Derivative asset
Non-current assets: Derivative asset
Derivative liability:
1.125% Conversion Option . . . . . . . . . . . . . . . . . .
Current liabilities: Derivative liability
Non-current liabilities: Derivative liability
December 31,
2015
2014
(In millions)
$
$
$
$
$
374
— $
$
374
— $
—
329
—
329
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.
100
1.125% Notes Call Spread Overlay. Concurrent with the issuance of the 1.125% Notes in 2013, 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 in excess of the principal amount of the notes 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% 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% Conversion Option, refer to
Note 5, “Fair Value Measurements.”
As of December 31, 2015, the 1.125% Call Option and the 1.125% Conversion Option were classified as a current asset and
current liability, respectively, because the 1.125% Notes may be converted within 12 months of December 31, 2015, as described
in Note 12, “Debt.”
14. Income Taxes
The provision for income taxes for continuing operations consisted of the following:
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
2014
2013
(In millions)
$
$
172
8
6
186
(10)
4
(1)
(7)
179
$
$
72
3
—
75
—
(2)
—
(2)
73
$
$
67
—
—
67
(25)
(6)
—
(31)
36
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 fair value of 1.125% Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
35.0%
2.4
0.9
17.0
0.6
—
(0.4)
55.5%
2014
35.0%
0.4
(0.1)
22.9
(4.1)
—
(0.3)
53.8%
2013
35.0%
(0.5)
(3.7)
—
9.6
2.4
2.0
44.8%
101
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, foreign, 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 2015, 2014, and 2013, excess tax benefits from share-based compensation amounted to $8 million, $3 million, and $2 million,
respectively. These amounts were recorded as a decrease to income taxes payable and an increase to additional paid-in capital.
Deferred tax assets and liabilities are classified as non-current. Significant components of our deferred tax assets and liabilities as
of December 31, 2015 and 2014 were as follows:
December 31,
2015
2014
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued medical costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax assets, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basis in debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax asset - long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
(In millions)
37
14
5
7
2
21
35
8
8
(9)
128
(9)
(83)
(18)
(110)
18
$
13
4
4
3
1
22
34
10
8
(6)
93
(6)
(57)
(15)
(78)
15
At December 31, 2015, we had state net operating loss carryforwards of $180 million, which begin expiring in 2016.
At December 31, 2015, we had California enterprise zone tax credit carryovers of $11 million, which will begin to expire in 2024,
and foreign tax credit carryovers of $1 million, which expire in 2025.
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, 2015, $9 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 and foreign tax credit carryforwards. Therefore, we increased our valuation
allowance by $3 million, from $6 million at December 31, 2014, to $9 million as of December 31, 2015.
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
United States, Puerto Rico, and numerous state jurisdictions. Significant judgment is required in evaluating our tax positions and
determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for
which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether,
and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be
challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts
and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and
changes to reserves that are considered appropriate.
102
The roll forward of our unrecognized tax benefits is as follows:
Gross unrecognized tax benefits at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in tax positions for current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in tax positions for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases in tax positions for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross unrecognized tax benefits at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Year Ended December 31,
2015
2014
2013
(In millions)
(8)
$
—
(1)
—
6
(3)
$
$
$
(3)
(1)
(5)
—
—
(9)
(11)
—
(2)
5
—
(8)
The total amount of unrecognized tax benefits at December 31, 2015, 2014 and 2013 that, if recognized, would affect the effective
tax rates is $7 million, $2 million and $6 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 $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, 2015, and 2014 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 Puerto Rico and certain state and local jurisdictions, with the
major state jurisdictions being California, Utah, and Michigan, for the years 2010 through 2014.
15. Stockholders’ Equity
Stockholders’ equity increased $547 million during the year ended December 31, 2015. The increase was primarily due to the common
stock offering described below, net income of $143 million, and $34 million related to share-based compensation transactions.
Common Stock Offering. In June 2015, we completed an underwritten public offering of 5,750,000 shares of our common stock,
including the over-allotment option. Net of issuance costs, proceeds from the offering amounted to $373 million, or $64.90 per
share, resulting in an increase to additional paid-in capital. We are using the proceeds to finance working capital needs, acquisitions,
capital expenditures, and other general corporate activities.
1.125% Warrants. In connection with the 1.125% Notes Call Spread Overlay transaction described in Note 13, “Derivatives,” in
2013, 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 (beginning on April 15, 2020) 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
the extent that the market value per share of our common stock exceeds the applicable strike price of the 1.125% Warrants. Refer
to Note 3, “Net Income per Share,” for dilution information for the periods presented. We will not receive any additional proceeds
if the 1.125% Warrants are exercised.
Securities Repurchase Programs. Effective as of December 16, 2015, our board of directors authorized the repurchase of up
to $50 million in aggregate of our common stock or senior notes. This newly authorized repurchase program extends through
December 31, 2016.
In February 2015, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock. We did
not repurchase any shares under this program, which expired December 31, 2015.
Stock Incentive Plans. At December 31, 2015, 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 restricted shares and units, performance shares and units, stock options and stock bonuses
to the company’s officers, employees, directors, consultants, advisers, and other service providers. The 2011 Plan provides for the
issuance of up to 4.5 million shares of common stock.
103
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.
In connection with our stock plans, we issued approximately 830,000 shares of common stock, net of shares used to settle employees’
income tax obligations, in the year ended December 31, 2015.
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:
2015
Year Ended December 31,
2014
(In millions)
2013
Restricted stock and performance awards . . . . . . . . . .
Employee stock purchase plan and stock options . . . .
Pretax
Charges
19
4
23
$
$
$
Net-of-Tax
Amount
13
3
16
$
Pretax
Charges
19
3
22
$
$
$
Net-of-Tax
Amount
12
2
14
$
Pretax
Charges
26
3
29
$
$
$
Net-of-Tax
Amount
23
2
25
$
As of December 31, 2015, there was $25 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 1.6 years. This unrecognized compensation cost assumes an estimated forfeiture rate of 6.5% for non-executive employees
as of December 31, 2015. As of December 31, 2015, the unrecognized compensation expense related to unvested stock options
was insignificant.
Restricted stock. Restricted and performance stock activity for the year ended December 31, 2015 is summarized below:
Unvested balance as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted - restricted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted - performance shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested - restricted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested - performance shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Grant Date
Fair Value
33.55
64.56
63.90
34.58
30.80
37.51
46.68
$
Shares
1,282,072
273,710
162,827
(371,489)
(264,604)
(47,759)
1,034,757
The total fair value of restricted and performance share awards granted during the years ended December 31, 2015, 2014, and 2013
was $28 million, $25 million, and $33 million, respectively. The total fair value of restricted share awards, including those with
performance or market conditions which vested during the years ended December 31, 2015, 2014, and 2013 was $39 million, $24
million, and $22 million, respectively.
In 2015, our named executive officers were granted approximately 163,000 restricted shares with performance and market
conditions. The grant date fair value for the awards with market conditions were determined based on a Monte Carlo Simulation
which projected Total Stockholder Return (TSR) over the performance period using correlations and volatilities of our ISS peer
groups. The weighted-average grant date fair value per share of the 2015 performance awards based on three-year TSR was $49.43,
determined using additional inputs as follows: risk-free interest rate of 0.8%, dividend yield of 0%, and expected life of 2.8 years.
As of December 31, 2015, there were approximately 377,000 unvested restricted shares outstanding which contained one or more
performance measures. In the event the vesting conditions are not achieved, the awards will lapse. Based on our assessment as of
December 31, 2015, we expect the performance conditions relating to approximately 199,000 of these outstanding restricted share
awards to be met in full.
104
In 2015, we reversed approximately $3 million in share-based compensation expense recognized from grant date through March 31,
2015, related to 178,000 of the awards granted in 2014, due to management’s determination in the second quarter of 2015 that the
achievement of the underlying performance conditions was not probable.
In December 2015, approximately 229,000 restricted stock awards with performance conditions, granted in 2013, vested due to
achievement of the total revenue metric as defined in the terms of the grant.
Employee Stock Purchase Plan. 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, 2015, 2014, and 2013, the inputs to this model were as follows: risk-free interest rates of approximately
0.1%; expected volatilities ranging from approximately 30% to 50%, dividend yields of 0%, and an average expected life of 0.5
years. We issued approximately 301,900, 327,200 and 299,600 shares of our common stock under the ESPP during the years
ended December 31, 2015, 2014, and 2013, respectively. The 2011 ESPP provides for the issuance of up to three million shares of
common stock.
Stock Options. No stock options were granted in 2015 and 2014, and stock options outstanding as of December 31, 2015 were
insignificant. The 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. We estimated the fair value of each stock option award using the Black-Scholes option pricing model, with the
following inputs: risk-free interest rate of 1.4%, expected volatility of 41.3%, dividend yield of 0%, and expected life of 7 years.
The total intrinsic value of options exercised during the years ended December 31, 2015, 2014, and 2013 was $6 million, $2 million,
and $1 million, respectively.
16. Employee Benefits
We sponsor defined contribution 401(k) plans that cover 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) plans
totaled $27 million, $21 million and $13 million in the years ended December 31, 2015, 2014, and 2013, 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. Related Party Transactions
Prior to December 22, 2015, we were the lessee under a lease with 6th & Pine Development, LLC (the Landlord) for two office
buildings. The principal members of the Landlord were John C. Molina, our chief financial officer and a director of Molina Healthcare,
Inc., and his wife. In addition, in connection with the development of the buildings being leased, John C. Molina pledged certain
of his common stock holdings in Molina Healthcare, Inc. 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. On December 22, 2015, the Landlord assigned
the lease to an unrelated third party. There were no significant changes to the lease other than the assignment to the new owner.
As a result of the assignment, as of December 31, 2015, amounts previously reported as lease financing obligations - related party
were reported in lease financing obligations on the accompanying consolidated balance sheets. For information regarding the lease
financing obligation associated with this lease, refer to Note 12, “Debt.”
Our California health plan has entered into a provider agreement with Pacific Healthcare IPA (Pacific), which is 50% owned by the
brother-in-law of Dr. J. Mario Molina and John C. Molina. Under the terms of this provider agreement, the California health plan
paid Pacific approximately $1 million in each of 2015 and 2014 for medical care provided to health plan members. Payments in
2013 were insignificant.
Refer to Note 18, “Variable Interest Entities (VIEs),” for a discussion of the Joseph M. Molina, M.D. Professional Corporations.
105
18. Variable Interest Entities (VIEs)
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 primary 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
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 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 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, 2015, JMMPC had total assets of $17 million, and total liabilities of $17 million. As of
December 31, 2014, JMMPC had total assets of $31 million, and total liabilities of $31 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, employee benefits and medical care costs associated with JMMPC’s specialty referral activities. 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 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 2011, as a result of a series of simultaneous financing transactions, Wells Fargo contributed capital of $6 million to the Investment
Fund, and Molina Healthcare, Inc. loaned the principal amount of $16 million to the Investment Fund. The Investment Fund then
contributed the proceeds to certain CDEs, which, in turn, loaned the proceeds of $21 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 $6 million. Additionally, financing costs incurred in structuring the
arrangement amounting to $1 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.
106
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.
Because we are the primary beneficiary of the VIE, we have included it in our consolidated financial statements. Wells Fargo’s
contribution of $6 million is included in cash at December 31, 2015 and December 31, 2014 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.
19. Commitments and Contingencies
Certain Leasing Transactions. As described in Note 12, “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 2025. 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:
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease Financing
Obligations
$
$
15
16
16
16
17
323
403
Operating
Leases
(In millions)
49
47
41
32
24
39
232
$
$
$
$
Total
64
63
57
48
41
362
635
Rental expense related to operating leases amounted to $44 million, $32 million, and $25 million for the years ended December
31, 2015, 2014, and 2013, respectively. The amounts reported in “Lease Financing Obligations” above represent our contractual
lease commitments for the properties described in Note 12, “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.
107
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 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 equity compensation, 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 time-based equity compensation, and a cash payment for health and welfare benefits.
Payment of the severance benefits described above 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.
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. 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.
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. The District Court dismissed
this action as to Molina without leave to amend as to some allegations and with leave to amend as to other allegations. On October
22, 2015, the Relator filed a third amended complaint. 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.
Hospital Management Contract. During the fourth quarter of 2015, we recorded a contract settlement charge of approximately $15
million as a result of our termination of a hospital management agreement.
Professional Liability Insurance. We carry medical professional liability insurance for health care services rendered in the primary
care 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.
108
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.
States’ Budgets. From time to time the states in which our health plans operate may delay premium payments. For example, the state
of Illinois is currently operating without a budget for its fiscal year ending June 30, 2016. As of December 31, 2015, our Illinois
health plan served approximately 98,000 members, and recognized premium revenue of approximately $397 million for the year
ended December 31, 2015. As of February 23, 2016, Illinois is current with its premium payments.
In another example, the Commonwealth of Puerto Rico has reported that it may lack sufficient resources to fund all necessary
governmental programs including health care-related programs, as well as meet its debt obligations for its fiscal year ending June 30,
2016. Our Puerto Rico health plan became operational on April 1, 2015. As of December 31, 2015, the plan served approximately
348,000 members and recognized premium revenue of approximately $192 million in the fourth quarter of 2015, or approximately
$64 million per month. As of February 23, 2016, the Commonwealth continues to pay us weekly for current membership.
It is the practice of the Commonwealth to pay us for eligible members only after those members have been assigned to us, and our
plan has sent electronic confirmation of the receipt of eligibility. Particularly in the early stages of our contract with Puerto Rico, the
plan’s confirmation of eligibility of certain members was not accepted by the Commonwealth as a result of various technical issues.
The plan has continued to pay for medical services for all members in question, but the Commonwealth is withholding payment of
approximately $12 million of premium revenue related to those members. We believe we have a valid claim to all of the premiums
withheld and we are in discussions with the Commonwealth regarding this matter.
It has been our practice in the past, and will remain so in the future, to continue to serve our members and pay health care providers
for services rendered in circumstances where state (or Commonwealth) governments are temporarily unable to pay us, so long as
we continue to believe that such state (or Commonwealth) governments will ultimately pay us.
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 $1,229
million at December 31, 2015, and $859 million at December 31, 2014. 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 $612 million and $203 million as of December 31, 2015, and 2014, 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 (RBC) rules which may vary from state to state. All of the states
in which our health plans operate, except California and Florida, have adopted these rules. 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, 2015, our health plans had aggregate statutory capital and surplus of approximately $1,350 million compared
with the required minimum aggregate statutory capital and surplus of approximately $776 million. All of our health plans were
in compliance with the minimum capital requirements at December 31, 2015. 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.
109
20. Segment Information
We have three reportable segments. These segments include our Health Plans and Molina Medicaid Solutions segments, which
comprise the vast majority of our operations, and our Other segment. As of December 31, 2015, we changed our reporting structure
as a result of the Pathways acquisition in November 2015, which is reported in Other.
Our reportable segments are consistent with how we currently manage the business and view the markets we serve. The Health Plans
segment consists of our health plans and our direct delivery business. Our health plans represent operating segments that have been
aggregated for reporting purposes because they share similar economic characteristics. The Molina Medicaid Solutions segment
provides MMIS design, development, implementation; business process outsourcing solutions; hosting services; and information
technology support services to state Medicaid agencies. Our Other segment includes other businesses, such as our Pathways
behavioral health and social services provider, that do not meet the quantitative thresholds for a reportable segment as defined by
U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments.
The following table presents gross margin as the appropriate earnings measure for our reportable segments, based on how our chief
operating decision maker currently reviews results, assesses performance, and allocates resources.
Gross margin for our Health Plans segment is referred to as “Medical margin,” and for our Molina Medicaid Solutions and Other
segments, as “Service margin.” Medical margin represents the actual dollars earned by the Health Plans segment after medical costs
are deducted from premium revenue. The medical care ratio represents the amount of medical care costs as a percentage of premium
revenue. One of the key metrics used to assess the performance of the Health Plans segment is the medical care ratio; therefore, the
underlying medical margin is the most important measure of earnings reviewed by the chief operating decision maker. The service
margin is equal to service revenue minus cost of service revenue. We previously reported our segment results to the operating
income level, where we reported the cost of all centralized services within our most significant segment, the Health Plans segment.
The accounting policies of the segments are the same as those described in Note 2, “Significant Accounting Policies.”
Health Plans
Molina Medicaid
Solutions
Other
Consolidated
(In millions)
2015
Total revenue(1)
Gross margin
Depreciation and amortization(2)
Goodwill, and intangible assets, net
Total assets
2014
Total revenue(1)
Gross margin
Depreciation and amortization(2)
Goodwill, and intangible assets, net
Total assets
2013
Total revenue(1)
Gross margin
Depreciation and amortization(2)
Goodwill, and intangible assets, net
Total assets
$
13,917
$
195
$
66
$
1,447
95
393
4,707
9,449
947
83
286
3,355
6,376
799
60
249
1,921
55
25
73
213
210
53
46
75
185
205
44
28
81
176
5
6
175
1,656
8
—
5
—
895
8
—
6
—
891
14,178
1,507
126
641
6,576
9,667
1,000
134
361
4,435
6,589
843
94
330
2,988
(1) Total revenues consists primarily of premium revenue for the Health Plans segment, and service revenue for the Molina Medicaid Solutions and Other segments.
(2) Depreciation and amortization reported in accompanying consolidated statements of cash flows.
110
The following table reconciles gross margin by segment to consolidated income from continuing operations before income
tax expense:
Gross margin:
Health Plans
Molina Medicaid Solutions
Other
Other operating revenues(1)
Other operating expenses(2)
Operating income
Other expenses, net
Income from continuing operations before income tax expense
Year Ended December 31,
2015
2014
2013
(In millions)
$
$
1,447
55
5
684
1,804
387
65
322
$
$
947
53
—
434
1,241
193
58
135
$
$
799
44
—
205
911
137
56
81
(1) Other operating revenues include premium tax revenue, health insurer fee revenue, investment income and other revenue.
(2) Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fee expenses and depreciation and amortization.
21. Quarterly Results of Operations (Unaudited)
The following table summarizes quarterly unaudited results of operations for the years ended December 31, 2015 and 2014.
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2015
For The Quarter Ended
June 30,
2015
September
30, 2015
December 31,
2015
(In millions, except per-share data)
2,971
52
82
28
28
0.58
0.56
$
$
$
3,304
47
116
39
39
0.78
0.72
$
$
$
3,377
47
113
46
46
0.84
0.77
$
$
$
3,589
107
76
30
30
0.54
0.52
March 31,
2014
For The Quarter Ended
June 30,
2014
September
30, 2014
December 31,
2014
(In millions, except per-share data)
1,940
54
24
4
4
0.10
0.09
$
$
$
2,167
50
32
8
8
0.17
0.16
$
$
$
2,317
52
40
16
16
0.34
0.33
$
$
$
2,599
54
97
34
34
0.70
0.69
$
$
$
$
$
$
(1) The dilutive effect of all potentially dilutive common shares is calculated using the treasury-stock method. Certain potentially dilutive common shares issuable
are not included in the computation of diluted net income per share because to do so would be anti-dilutive. For the year ended December 31, 2014, the 1.125%
Warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price of our common stock.
111
22. Condensed Financial Information of Registrant
The condensed balance sheets as of December 31, 2015 and 2014, and the related condensed statements of income, comprehensive
income and cash flows for each of the three years in the period ended December 31, 2015 for our parent company Molina Healthcare,
Inc. (the Registrant), are presented below.
Condensed Balance Sheets
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes refundable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing obligations - related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity:
Common stock, $0.001 par value; 150 shares authorized; outstanding:
56 shares at December 31, 2015 and 50 shares at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock, $0.001 par value; 20 shares authorized, no shares issued and outstanding . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2015
2014
(Amounts in millions, except
per-share data)
$
$
$
$
360
252
7
86
46
374
1,125
267
61
2,205
23
—
36
3,717
157
449
374
980
962
198
—
—
20
2,160
—
—
803
(4)
758
1,557
3,717
$
$
$
$
75
126
13
18
33
—
265
265
65
1,377
11
329
43
2,355
107
—
—
107
690
157
40
329
22
1,345
—
—
396
(1)
615
1,010
2,355
112
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 (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Condensed Statements of Comprehensive Income
Year Ended December 31,
2015
2014
2013
(In millions)
928
3
931
55
797
82
934
(3)
66
—
(69)
(21)
(48)
191
143
$
$
704
2
706
46
583
73
702
4
57
1
(54)
(27)
(27)
89
62
$
$
599
3
602
38
504
51
593
9
51
4
(46)
(16)
(30)
83
53
Year Ended December 31,
2015
2014
2013
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
$
143
(In millions)
62
$
Unrealized investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(5)
2
(3)
140
$
—
—
—
62
$
$
53
(1)
—
(1)
52
113
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in amounts due to/from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Proceeds from senior notes offerings, net of issuance costs . . . . . . . . . . . . . . . . . . .
Proceeds from common stock offering, net of issuance costs . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Condensed Financial Information of Registrant
Note A - Basis of Presentation
Year Ended December 31,
2015
2014
2013
(In millions)
$
113
$
74
$
63
(770)
142
(244)
118
(91)
(68)
—
(913)
689
373
—
—
—
—
—
—
18
—
5
1,085
285
75
360
$
(292)
—
(129)
263
(94)
16
8
(228)
123
—
—
—
—
—
—
—
14
(11)
3
129
(25)
100
75
$
(166)
24
(363)
98
(77)
(6)
(6)
(496)
538
—
159
(149)
75
(53)
(47)
(40)
9
—
2
494
61
39
100
$
The Registrant was incorporated in 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 three other state health plans. 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.
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 2015, 2014, and 2013 for these services amounted
to $914 million, $692 million, and $592 million, respectively, and are included in operating revenue.
114
During 2013, the Registrant used a portion of the proceeds from the sale of the Molina Center, described in Note 12, “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
When the Registrant receives dividends from its subsidiaries, such amounts are recorded as a reduction to the investments in the
respective subsidiaries.
For all periods presented, 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 17, “Related Party Transactions.”
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, 2015. 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).
115
Our management’s evaluation did not include an assessment of the effectiveness of internal control over financial reporting at
Pathways Health and Community Support LLC (Pathways), which was acquired on November 1, 2015. The total assets and net assets
of Pathways included in our consolidated balance sheets at December 31, 2015, were $276 million and $231 million, respectively.
Total revenue and net loss of Pathways included in our consolidated results of operations for the year ended December 31, 2015,
were $57 million and $4 million, respectively. Our management has not had sufficient time to make an assessment of this subsidiary’s
internal control over financial reporting.
Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as
of December 31, 2015, based on the 2013 framework 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, 2015, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
116
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, 2015,
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.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment
of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Pathways
Health and Community Support LLC (Pathways), which is included in the 2015 consolidated financial statements of Molina
Healthcare, Inc. and constituted $276 million and $231 million of total and net assets, respectively, as of December 31, 2015, and
$57 million and $4 million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial
reporting of Molina Healthcare, Inc. also did not include an evaluation of the internal control over financial reporting of Pathways.
In our opinion, Molina Healthcare, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, 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, 2015 and 2014, 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, 2015 and our report dated February 26, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 26, 2016
117
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 2016 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 2016 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 2016
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, 2015)
Plan Category
Equity compensation plans approved by security holders . . . . . .
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
(a)
121,711(1)
Weighted
Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
(b)
$
25.40
Number of Securities
Remaining Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding Securities
Reflected in Column (a))
(c)
4,058,668(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.
(2)
Includes shares remaining available to issue under the 2011 Equity Incentive Plan, and the 2011 Employee Stock Purchase Plan.
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 2016 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 2016 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 17, “Related
Party Transactions,” and Note 18, “Variable Interest Entities (VIEs),” under the subheading “Joseph M. Molina M.D.,
Professional Corporations.”
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 2016 Annual Meeting of Stockholders, and such required information is incorporated herein
by reference.
118
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.
119
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, 2016.
SIGNATURES
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.
Chairman of the Board, Chief Executive Officer, and President
(Principal Executive Officer)
February 26, 2016
/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/ Richard M. Schapiro
Richard M. Schapiro
/s/ Dale B. Wolf
Dale B. Wolf
Director, Chief Financial Officer, and Treasurer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
120
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
INDEX TO EXHIBITS
The following exhibits, which are furnished with this annual report or incorporated herein by reference, are filed as part of this
annual report.
The agreements included or incorporated by reference as exhibits to this Annual Report on Form 10-K may contain representations
and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the
benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but
rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified
in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement;
(iii) may apply contract standards of “materiality” that are different from “materiality” under the applicable securities laws; and
(iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement. The
Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering
whether additional specific disclosures of material information regarding material contractual provisions are required to make the
statements in this Annual Report on Form 10-K not misleading.
Number
2.1
2.2
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Description
Method of Filing
Membership Interest Purchase Agreement, dated as of
September 3, 2015, by and among The Providence Service
Corporation, Ross Innovative Employment Solutions Corp.,
and Molina Healthcare, Inc.
Amendment to Membership Interest Purchase Agreement,
dated as of October 30, 2015, by and among The Providence
Service Corporation, Ross Innovative Employment Solutions
Corp., and Molina Pathways, LLC, as assignee of all rights
and obligations of Molina Healthcare, Inc.
Certificate of Incorporation
Certificate of Amendment to Certificate of Incorporation
Filed as Exhibit 2.1 to registrant’s Form 8-K filed
September 8, 2015.
Filed herewith.
Filed as Exhibit 3.2 to registrant’s Registration
Statement on Form S-1 filed December 30, 2002.
Filed as Exhibit 3.1 to registrant’s Form 8-K filed
July 24, 2013.
Third Amended and Restated Bylaws of Molina
Healthcare, Inc.
Filed as Exhibit 3.1 to registrant’s Form 10-Q filed
July 30, 2014.
Indenture, dated as of February 15, 2013, by and between
Molina Healthcare, Inc. and U.S. Bank, National Association
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
February 15, 2013.
Form of 1.125% Cash Convertible Senior Note due 2020
Included in Exhibit 4.1 to registrant’s Form 8-K
filed February 15, 2013.
Indenture, dated as of September 5, 2014, by and between
Molina Healthcare, Inc. and U.S. Bank National Association
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
September 8, 2014.
Form of 1.625% Convertible Senior Note due 2044
Form of 1.625% Convertible Senior Notes Due 2044
Note Purchase Agreement, dated as of September 11, 2014, by
and between Molina Healthcare, Inc. and certain institutional
investors
First Supplemental Indenture, dated as of September 16, 2014,
by and between Molina Healthcare, Inc. and the U.S. Bank
National Association
Form of 1.625% Convertible Senior Note due 2044
Included in Exhibit 4.1 to registrant’s Form 8-K
filed September 8, 2014.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
September 12, 2014.
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
September 17, 2014.
Included in Exhibit 4.1 to registrant’s Form 8-K
filed September 17, 2014.
121
Number
4.8
Description
Method of Filing
Indenture dated November 10, 2015, by and among Molina
Healthcare, Inc., the guarantor parties thereto and U.S. Bank
National Association, as Trustee.
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
November 10, 2015.
4.9
Form of 5.375% Senior Notes due 2022.
4.10
4.11
4.12
Form of Guarantee pursuant to Indenture dated
November 10, 2015, by and among Molina Healthcare,
Inc., the guarantor parties thereto and U.S. Bank National
Association, as Trustee.
Registration Rights Agreement dated November 10, 2015,
by and among Molina Healthcare, Inc., the guarantor
parties thereto and SunTrust Robinson Humphrey, Inc., as
representative of the Initial Purchasers (as defined therein).
First Supplemental Indenture, dated February 18, 2016, by
and among Molina Healthcare, Inc., the guarantor parties
thereto and U.S. Bank National Association, as trustee.
*10.1
2002 Equity Incentive Plan
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
November 10, 2015.
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
November 10, 2015.
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
November 10, 2015.
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
February 18, 2016.
Filed as Exhibit 10.13 to registrant’s Form S-1
filed December 30, 2002.
*10.2
*10.3
*10.4
Molina Healthcare, Inc. Amended and Restated Deferred
Compensation Plan (2013)
Filed as Exhibit 10.5 to registrant’s Form 10-K
filed February 26, 2014.
Amendment No. 1 to the Molina Healthcare, Inc.
Amended and Restated Deferred Compensation
Plan (2013)
Filed as Exhibit 10.6 to registrant’s Form 10-K
filed February 26, 2014.
Amendment No. 2 to the Molina Healthcare, Inc.
Amended and Restated Deferred Compensation Plan (2013)
Filed as Exhibit 10.4 to registrant’s Form 10-K
filed February 26, 2015.
*10.5
2011 Equity Incentive Plan
*10.6
2011 Employee Stock Purchase Plan
Filed as Exhibit 10.8 to registrant’s Form 10-K
filed February 26, 2014.
Filed as Exhibit 10.6 to registrant’s Form 10-K
filed February 26, 2015.
*10.7
*10.8
*10.9
Form of Restricted Stock Award Agreement (Executive
Officer) under Molina Healthcare, Inc. Equity Incentive Plan
Filed as Exhibit 10.1 to registrant’s Form 10-Q
filed August 9, 2005.
Form of Restricted Stock Award Agreement (Outside
Director) under Molina Healthcare, Inc. Equity Incentive Plan
Filed as Exhibit 10.1 to registrant’s Form 10-Q
filed August 9, 2005.
Form of Restricted Stock Award Agreement (Employee) under
Molina Healthcare, Inc. Equity Incentive Plan
Filed as Exhibit 10.1 to registrant’s Form 10-Q
filed August 9, 2005.
*10.10
Form of Stock Option Agreement under Equity Incentive Plan
Filed as Exhibit 10.3 to registrant’s Form 10-K
filed March 14, 2007.
*10.11
*10.12
Amended and Restated Employment Agreement with J. Mario
Molina, M.D. dated as of December 31, 2009
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
January 7, 2010.
Amended and Restated Employment Agreement with John C.
Molina dated as of December 31, 2009
Filed as Exhibit 10.2 to registrant’s Form 8-K filed
January 7, 2010.
*10.13
Employment Agreement with Terry Bayer dated June 14, 2013
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
June 14, 2013.
122
Number
*10.14
*10.15
*10.16
*10.17
*10.18
Description
Method of Filing
Employment Agreement with Joseph White dated
June 14, 2013
Filed as Exhibit 10.2 to registrant’s Form 8-K filed
June 14, 2013.
Employment Agreement with Jeff Barlow, dated
June 14, 2013
Filed as Exhibit 10.3 to registrant’s Form 8-K filed
June 14, 2013.
Amended and Restated Change in Control Agreement with
Terry Bayer, dated as of December 31, 2009
Filed as Exhibit 10.4 to registrant’s Form 8-K filed
January 7, 2010.
Amended and Restated Change in Control Agreement with
Joseph W. White, dated as of December 31, 2009
Filed as Exhibit 10.6 to registrant’s Form 8-K filed
January 7, 2010.
Change in Control Agreement with Jeff D. Barlow, dated as of
September 18, 2012
Filed as Exhibit 10.16 to registrant’s Form 10-K
filed February 28, 2013.
10.19
Form of Indemnification Agreement
Base Call Option Transaction Confirmation, dated as of
February 11, 2013, between Molina Healthcare, Inc. and
JPMorgan Chase Bank, National Association, London Branch
Base Call Option Transaction Confirmation, dated as of
February 11, 2013, between Molina Healthcare, Inc. and Bank
of America, N.A.
Base Warrants Confirmation, dated as of February 11, 2013,
between Molina Healthcare, Inc. and JPMorgan Chase Bank,
National Association, London Branch
Filed as Exhibit 10.14 to registrant’s Form 10-K
filed March 14, 2007.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
February 15, 2013.
Filed as Exhibit 10.2 to registrant’s Form 8-K filed
February 15, 2013.
Filed as Exhibit 10.3 to registrant’s Form 8-K filed
February 15, 2013.
Base Warrants Confirmation, dated as of February 11, 2013,
between Molina Healthcare, Inc. and Bank of America, N.A.
Filed as Exhibit 10.4 to registrant’s Form 8-K filed
February 15, 2013.
Amendment to Base Call Option Transaction Confirmation,
dated as of February 13, 2013, between Molina Healthcare,
Inc. and JPMorgan Chase Bank, National Association,
London Branch
Amendment to Base Call Option Transaction Confirmation,
dated as of February 13, 2013, between Molina Healthcare,
Inc. and Bank of America, N.A.
Additional Base Warrants Confirmation, dated as of
February 13, 2013, between Molina Healthcare, Inc. and
JPMorgan Chase Bank, National Association, London Branch
Additional Base Warrants Confirmation, dated as of February
13, 2013, between Molina Healthcare, Inc. and Bank of
America, N.A.
Amended and Restated Base Warrants Confirmation, dated
as of April 22, 2013, between Molina Healthcare, Inc. and
JPMorgan Chase Bank, National Association, London Branch
Amended and Restated Base Warrants Confirmation, dated as
of April 22, 2013, between Molina Healthcare, Inc. and Bank
of America, N.A.
Filed as Exhibit 10.5 to registrant’s Form 8-K filed
February 15, 2013.
Filed as Exhibit 10.6 to registrant’s Form 8-K filed
February 15, 2013.
Filed as Exhibit 10.7 to registrant’s Form 8-K filed
February 15, 2013.
Filed as Exhibit 10.8 to registrant’s Form 8-K filed
February 15, 2013.
Filed as Exhibit 10.1 to registrant’s Form 10-Q
filed May 3, 2013.
Filed as Exhibit 10.2 to registrant’s Form 10-Q
filed May 3, 2013.
123
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
Number
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Description
Method of Filing
Additional Amended and Restated Base Warrants
Confirmation, dated as of April 22, 2013, between Molina
Healthcare, Inc. and JPMorgan Chase Bank, National
Association, London Branch
Additional Amended and Restated Base Warrants
Confirmation, dated as of April 22, 2013, between Molina
Healthcare, Inc. and Bank of America, N.A.
Lease Agreement, dated as of February 27, 2013, by
and between 6th & Pine Development, LLC and Molina
Healthcare, Inc.
First Amendment to Office Building Lease, effective as of
October 31, 2014, by and between 6th & Pine Development,
LLC and Molina Healthcare, Inc.
Second Amendment to Office Building Lease, effective as of
November 2, 2015, by and between 6th & Pine Development,
LLC and Molina Healthcare, Inc.
Settlement Agreement entered into on October 30, 2013, by
and between the Department of Health Care Services and
Molina Healthcare of California and Molina Healthcare of
California Partner Plan, Inc.
Agreement of Purchase and Sale, dated as of June 12, 2013,
by and between Molina Healthcare, Inc. and Molina Center,
LLC, and AG Net Lease Acquisition Corp.
Filed as Exhibit 10.3 to registrant’s Form 10-Q
filed May 3, 2013.
Filed as Exhibit 10.4 to registrant’s Form 10-Q
filed May 3, 2013.
Filed as Exhibit 10.32 to registrant’s Form 10-K
filed February 28, 2013.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
November 5, 2014.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
November 6, 2015.
Filed as Exhibit 10.1 to registrant’s Form 10-Q
filed October 30, 2013.
Filed as Exhibit 10.1 to registrant’s Form 10-Q
filed July 25, 2013.
Lease Agreement, dated as of June 13, 2013, by and between
AGNL Clinic, L.P., and Molina Healthcare, Inc.
Filed as Exhibit 10.2 to registrant’s Form 10-Q
filed July 25, 2013.
Form of Exchange Agreement, dated August 11, 2014, by and
between Molina Healthcare, Inc. and certain beneficial owners
of Molina Healthcare, Inc.’s 3.75% Convertible Senior Notes
due 2014
Credit Agreement, dated as of June 12, 2015, by and among
Molina Healthcare, Inc., Molina Information Systems,
LLC, Molina Medical Management, Inc., certain lenders
named on the signature pages thereto and SunTrust Bank, as
Administrative Agent, Swingline Lender and Issuing Bank
Guarantor Joinder Agreement, dated February 18, 2016, by
and among the guarantor parties thereto and SunTrust Bank,
as Administrative Agent.
Purchase Agreement, dated as of February 11, 2013, among
Molina Healthcare, Inc. and J.P. Morgan Securities LLC
and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
Representatives of the Initial Purchasers
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
August 12, 2014.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
June 16, 2015.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
February 18, 2016.
Filed as Exhibit 1.1 to registrant’s Form 8-K filed
February 15, 2013.
Capitated Medical Group/IPA Provider Services Agreement,
effective May 1, 2013, by and between Molina Healthcare of
California and Pacific Healthcare IPA.
Filed herewith.
124
Number
10.43
10.44
12.1
21.1
23.1
31.1
31.2
32.1
32.2
Description
Method of Filing
Regulatory Amendment for the Capitated Financial Alignment
Demonstration Product to Molina Healthcare of California
Group/IPA Provider Services Agreement(s), effective
September 26, 2014, by and between Molina Healthcare of
California and Pacific Healthcare IPA Associates, Inc.
Capitated Financial Alignment Demonstration Amendment to
Molina Healthcare of California Group/IPA Provider Services
Agreement, effective as of July 1, 2014, by and between
Molina Healthcare of California and Pacific Healthcare IPA
Associates, Inc.
Computation of Ratio of Earnings to Fixed Charges
List of subsidiaries
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Consent of Independent Registered Public Accounting Firm
Filed herewith.
Section 302 Certification of Chief Executive Officer
Filed herewith.
Section 302 Certification of Chief Financial Officer
Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.INS
XBRL Taxonomy Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith.
* Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form
10-K pursuant to Item 15(b) of Form 10-K.
125
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