ANNUAL REPORT
2018
Company Profile
Molina Healthcare, Inc., a FORTUNE 500 company, provides managed healthcare services under the Medicaid and
Medicare programs and through the insurance marketplaces. Through its locally operated health plans, Molina Healthcare
served approximately 3.8 million members as of December 31, 2018. For more information about Molina Healthcare, please
visit molinahealthcare.com.
Membership Profile
Membership by Line of Business
60%
TANF & CHIP
17%
Expansion
11%
ABD
10%
Marketplace
1%
MMP
1%
Medicare
Premium Revenue by Line of Business
30%
ABD
16%
Expansion
31%
TANF & CHIP
11%
Marketplace
8%
MMP
4%
Medicare
Historical Highlights
Premium Revenue
($ Millions)
After-Tax Margin1
Diluted Net Income (Loss) per Share
‘14
‘15
‘16
‘17
‘18
9,035
13,261
16,445
18,854
17,612
‘14
‘15
‘16
0.6%
1.0%
0.3%
‘17
(2.6%)
‘17
($9.07)
‘18
3.7%
1 After-Tax Margin represents net income (loss) as a percentage
of total revenue
$1.30
$2.58
$0.92
‘14
‘15
‘16
‘18
$10.61
Annual Meeting
The annual meeting of stockholders will be held on Wednesday, May 8th, 2019, at 10:00 a.m. Eastern time, at:
Park Hyatt New York (The Onyx Room)
153 W. 57th Street, New York, NY 10019
Phone: (646) 774-1234
Premium Revenue by Line of Business
Financial Highlights
(Dollars in millions, except per share data)
Premium revenue
Premium tax revenue
Health insurer fees reimbursed
Investment income and other revenue
Medical care costs
General and administrative expenses
Premium tax expenses
Health insurer fees
Restructuring and separation costs
Impairment losses
Loss on sales of subsidiaries, net of gain
Operating income (loss)
Interest expense
Other expenses (income), net
Income tax expense (benefit)
Net income (loss)
Net income (loss) per diluted share
Operating Statistics:
Ending total membership
Medical care ratio (1)
G&A ratio (2)
Premium tax ratio (1)
Effective income tax expense (benefit) rate
After-tax margin (2)
Year Ended December 31,
2017
$18,854
438
—
70
2018
$17,612
417
329
125
15,137
1,333
417
348
46
—
(15)
1,131
115
17
292
707
$ 10.61
17,073
1,594
438
—
234
470
—
(555)
118
(61)
(100)
(512)
$ (9.07)
4,453,000
90.6%
8.0%
2.3%
(16.4)%
3.7% (2.6)%
3,821,000
85.9%
7.1%
2.3%
29.2%
(1) 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.
(2) G&A ratio represents general and administrative expenses as a percentage of total revenue. After-tax margin represents net income (loss) as a percentage of total revenue.
(In millions)
Balance Sheet Data:
Cash and cash equivalents
Total assets
Medical claims and benefits payable
Long-term debt, including current portion (1)
Total liabilities
Stockholders’ equity
(1) Also includes lease financing obligations.
December 31,
2018
$2,826
7,154
1,961
1,458
5,507
1,647
2017
$3,186
8,471
2,192
2,169
7,134
1,337
Molina Healthcare | Annual Report 2018
A1
To Our Stockholders:
In my letter to you last year, I described 2017 as a transitional year, but also as a year in which a commitment to improved
execution had taken hold, which resulted in a strong sense of optimism throughout the company by year-end. The theme,
as stated, was reset, rightsize and refocus. I am pleased to tell you now that 2018’s results stand in stark and pleasant
contrast to the prior year, with the implementation of our margin recovery and sustainability plan having proceeded at a
rapid pace.
Because of this progress, our operating margin profile improved dramatically in 2018, exceeding our own expectations.
This has allowed us to accelerate our focus on operational improvements needed to sustain higher margin levels and drive
additional profit improvement initiatives to support continued margin expansion. As a result, net income for 2018 reached
$707 million or $10.61 per diluted share, representing a net profit margin of 3.7%, versus a loss for 2017 of $512 million or
$9.07 per diluted share, or a net loss margin of 2.6%.
The earnings improvement for 2018 primarily reflected enhanced performance along three dimensions: lines of business,
revenue growth, and balance sheet and capital structure. A few specific observations on these points:
• In our Medicaid and Medicare businesses, we were able to manage medical costs and high acuity members
adeptly and with greater skill than in the past.
• Concurrently, our Marketplace business benefited from the corrective pricing action we implemented, while still
remaining competitive as we ended the year with approximately 360,000 members.
• As to revenue growth, our management team successfully won three RFPs in Washington, Puerto Rico,
and Mississippi. These RFP wins, combined with organic growth in Illinois, Ohio, Mississippi, and Idaho, resulted
in approximately $900 million of additional revenue that will benefit 2019 and help offset revenue declines from
lost contract revenue in New Mexico and Florida.
• Lastly, on our balance sheet and capital structure, we deployed approximately $1.2 billion to retire highly volatile
and expensive convertible debt, repay the outstanding amount drawn on our revolver, and reduce earnings per
share volatility in order to return to a more traditional capital structure.
In summary, we are very pleased with our 2018 financial and operating performance, as margin recovery and sustainability
efforts have been successful and pronounced. These results serve not only as an indicator of the turnaround that has taken
place, but also of the strong foundation on which we will build our future success.
As we place more focus on accelerating our growth, we are carefully considering expanding to new geographic areas,
continuing our development within existing markets, increasing the reach of our product lines and evolving the synergies
between them. These actions, and the strategies underpinning them, remain vitally important to our members and, in turn,
to you, our stockholders, as we continue to unlock the opportunities within Molina Healthcare. We look forward to updating
you on our progress and reviewing our plans for the future at our investor day on May 30th.
Finally, as part of our overall effort to modernize the Company, and in response to feedback from our stockholders, we
are proposing on our own initiative to declassify our board of directors such that all directors will be subject to annual
stockholder election by 2022. We are also proposing to bolster the financial expertise on our board while at the same time
diversifying it further with the nomination of a new director, Barbara Brasier. These corporate governance improvements
reflect our conscious efforts to move the Company forward on a new more progressive footing.
Thank you for your ongoing support and interest in our company. We are most grateful for the confidence you express in
our team and the company’s future prospects, as demonstrated by your continued share ownership.
Sincerely,
Joseph M. Zubretsky
President and Chief Executive Officer
A2
Molina Healthcare | Annual Report 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
Form 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
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 Each 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. ý 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 ý 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. ý 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).
ý 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. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company ¨
ý
¨ (Do not check if a smaller reporting company)
¨
Accelerated filer
Smaller reporting company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes ý No
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2018, the last
business day of our most recently completed second fiscal quarter, was approximately $6,018.8 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, 2018).
As of February 15, 2019, approximately 62,460,000 shares of the registrant’s Common Stock, $0.001 par value per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2019 Annual Meeting of Stockholders to be held on May 8, 2019,
are incorporated by reference into Part III of this Form 10-K, to the extent described therein.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (this “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 heading “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. Readers are cautioned not to
place undue reliance on any forward-looking statements, as forward-looking statements are not guarantees of
future performance and the Company’s actual results may differ significantly due to numerous known and unknown
risks and uncertainties. Those known risks and uncertainties include, but are not limited to, the risk factors identified
in the section of this Form 10-K titled “Risk Factors,” as well as the following:
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the numerous political, judicial and market-based uncertainties associated with the Affordable Care Act (the
“ACA”) or “Obamacare,” including the ultimate outcome on appeal of the Texas et al. v. U.S. et al. matter;
the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated
with risk adjustment requirements, the potential for disproportionate enrollment of higher acuity members, the
discontinuation of premium tax credits, and the adequacy of agreed rates;
subsequent adjustments to reported premium revenue based upon subsequent developments or new
information, including changes to estimated amounts payable or receivable related to Marketplace risk
adjustment;
effective management of the Company’s medical costs;
the Company’s ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates
associated with seasonal flu patterns or other newly emergent diseases;
significant budget pressures on state governments and their potential inability to maintain current rates, to
implement expected rate increases, or to maintain existing benefit packages or membership eligibility
thresholds or criteria;
the full reimbursement of the ACA health insurer fee, or HIF;
the success of the Company’s efforts to retain existing or awarded government contracts, including the success
of any requests for proposal protest filings or defenses;
the success of the Company’s profit improvement and sustainability initiatives, including the timing and amounts
of the benefits realized, and administrative and medical cost savings achieved;
the Company’s ability to manage its operations, including maintaining and creating adequate internal systems
and controls relating to authorizations, approvals, provider payments, and the overall success of its care
management initiatives;
the Company’s receipt of adequate premium rates to support increasing pharmacy costs, including costs
associated with specialty drugs and costs resulting from formulary changes that allow the option of higher-
priced non-generic drugs;
the Company’s ability to operate profitably in an environment where the trend in premium rate increases lags
behind the trend in increasing medical costs;
the interpretation and implementation of federal or state medical cost expenditure floors, administrative cost
and profit ceilings, premium stabilization programs, profit sharing arrangements, and risk adjustment provisions
and requirements;
the Company’s estimates of amounts owed for such cost expenditure floors, administrative cost and profit
ceilings, premium stabilization programs, profit-sharing arrangements, and risk adjustment provisions;
the Medicaid expansion medical cost corridor, and any other retroactive adjustment to revenue where
methodologies and procedures are subject to interpretation or dependent upon information about the health
status of participants other than Molina members;
the interpretation and implementation of at-risk premium rules and state contract performance requirements
regarding the achievement of certain quality measures, and the Company’s ability to recognize revenue
amounts associated therewith;
the Company’s ability to successfully recognize the intended cost savings and other intended benefits of
outsourcing certain services and functions to third parties, and its ability to manage the risk that such third
parties may not perform contracted functions and services in a timely, satisfactory and compliant manner;
cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of
protected health information;
the success of the Company’s health plan in Puerto Rico, including the resolution of the debt crisis and the
effect of the PROMESA law, and the impact of any future significant weather events;
Molina Healthcare, Inc. 2018 Form 10-K | 1
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the success and renewal of the Company’s duals demonstration programs in California, Illinois, Michigan, Ohio,
South Carolina, and Texas;
the accurate estimation of incurred but not reported or paid medical costs across the Company’s health plans;
efforts by states to recoup previously paid and recognized premium amounts;
complications, member confusion, eligibility redeterminations, or enrollment backlogs related to the annual
renewal of Medicaid coverage;
government audits, reviews, comment letters, or potential investigations, and any fine, sanction, enrollment
freeze, monitoring program, or premium recovery that may result therefrom;
changes with respect to the Company’s provider contracts and the loss of providers;
approval by state regulators of dividends and distributions by the Company’s health plan subsidiaries;
changes in funding under the Company’s contracts as a result of regulatory changes, programmatic
adjustments, or other reforms;
high dollar claims related to catastrophic illness;
the favorable resolution of litigation, arbitration, or administrative proceedings, including litigation involving the
ACA to which we ourselves are not a direct party;
the relatively small number of states in which we operate health plans, including the greater scale and revenues
of the Company’s California, Ohio, Texas, and Washington health plans;
the availability of adequate financing on acceptable terms to fund and capitalize the Company’s expansion and
growth, repay the Company’s outstanding indebtedness at maturity and meet its liquidity needs, including the
interest expense and other costs associated with such financing;
the Company’s failure to comply with the financial or other covenants in its credit agreement or the indentures
governing its outstanding notes;
the sufficiency of the Company’s funds on hand to pay the amounts due upon conversion or maturity of its
outstanding notes;
the failure of a state in which we operate to renew its federal Medicaid waiver;
changes generally affecting the managed care industry;
increases in government surcharges, taxes, and assessments;
newly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated
public alarm;
the unexpected loss of the leadership of one or more of our senior executives; and
increasing competition and consolidation in the Medicaid industry.
Each of the terms “Molina Healthcare, Inc.” “Molina Healthcare,” “Company,” “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.
Molina Healthcare, Inc. 2018 Form 10-K | 2
OVERVIEW
ABOUT MOLINA HEALTHCARE
Molina Healthcare, Inc., a FORTUNE 500, multi-state healthcare organization, arranges for the delivery of health
care services to individuals and families who receive their care through the Medicaid and Medicare programs, and
through the state insurance marketplaces (the “Marketplace”).
Through our locally operated health plans in 14 states and the Commonwealth of Puerto Rico, we served
approximately 3.8 million members as of December 31, 2018. These health plans are operated by our respective
wholly owned subsidiaries in those states and in the Commonwealth of Puerto Rico, each of which is licensed as a
health maintenance organization (“HMO”).
Molina was founded in 1980 as a provider organization serving low-income families in Southern California. We were
originally organized in California as a health plan holding company and reincorporated in Delaware in 2002.
2018 EXECUTIVE SUMMARY
Following Molina’s internal restructuring in mid-2017, the board of directors appointed an experienced industry
leader, Joe Zubretsky, as its CEO in November 2017. Mr. Zubretsky made significant changes to the executive
management team throughout 2018 by recruiting new, experienced leaders of finance, health plan operations,
health plan services, strategic planning and corporate development, and human resources.
We have embarked on a deliberate turn-around strategy aimed at margin recovery and sustainability, pursuit of
targeted growth opportunities, enhancement of our talent and culture to align with our strategic initiatives, and
development of the future capabilities needed to address the evolving healthcare environment.
We believe that management has demonstrated the effectiveness of this strategy by its accomplishments in 2018,
which have included, among others:
•
•
•
•
•
•
Improving the efficiency of our administrative cost profile;
Strengthening our balance sheet by reducing our outstanding indebtedness;
Revamping the contract procurement process;
Realigning management incentive programs with our strategic objectives;
Divesting non-core businesses; and
Producing strong financial results, which have exceeded our initial and revised guidance and expectations.
The following table illustrates the year-over-year improvement in our operating results:
Total Revenue
Medical Care Ratio (“MCR”) (1)
Pre-Tax Margin (2)
After-Tax Margin (2)
Net Income (Loss) per Diluted Share
_______________________
2018
2017
(Dollars in millions, except per-share amounts)
$18,890
85.9%
5.3%
3.7%
$10.61
$19,883
90.6%
(3.1)%
(2.6)%
$(9.07)
(1) Medical care ratio represents medical care costs as a percentage of premium revenue.
(2) Pre-tax margin represents net income (loss) before income taxes as a percentage of total revenue. After-tax margin
represents net income (loss) as a percentage of total revenue.
Molina Healthcare, Inc. 2018 Form 10-K | 3
OUR BUSINESS FOOTPRINT TODAY
As of December 31, 2018, our health plans operated in 14 states and the Commonwealth of Puerto Rico. This
footprint includes the five largest Medicaid markets—California, Florida, New York, Ohio, and Texas.
OUR SEGMENTS
We currently have two reportable segments: our Health Plans segment and our Other segment. We manage the
vast majority of our operations through our Health Plans segment. Our Other segment includes the historical results
of the Pathways behavioral health subsidiary, which we sold in the fourth quarter of 2018, and certain corporate
amounts not allocated to the Health Plans segment. Effective in the fourth quarter of 2018, we reclassified the
historical results relating to our Molina Medicaid Solutions (“MMS”) segment, which we sold in the third quarter of
2018, to the Other segment. Previously, results for MMS were reported in a stand-alone segment. We regularly
evaluate the appropriateness of our reportable segments, particularly in light of organizational changes, acquisition
and divestiture activity, and changing laws and regulations. Therefore, these reportable segments may change in
the future.
Refer to Notes to Consolidated Financial Statements, Note 18, “Segments,” for segment revenue and profit
information, and Note 2, “Significant Accounting Policies” for revenue information by health plan.
MEMBERSHIP BY PROGRAM
Temporary Assistance for Needy Families (“TANF”) and Children’s Health
Insurance Program (“CHIP”)
Medicaid Expansion
Aged, Blind or Disabled (“ABD”)
Total Medicaid
Medicare-Medicaid Plan (“MMP”) - Integrated
Medicare Special Needs Plans
Total Medicare
Total Medicaid and Medicare
Marketplace
As of December 31,
2018
2017
2016
2,295,000
2,457,000
2,536,000
660,000
406,000
668,000
412,000
673,000
396,000
3,361,000
3,537,000
3,605,000
54,000
44,000
98,000
3,459,000
362,000
3,821,000
57,000
44,000
101,000
3,638,000
815,000
4,453,000
51,000
45,000
96,000
3,701,000
526,000
4,227,000
Molina Healthcare, Inc. 2018 Form 10-K | 4
MEMBERSHIP BY HEALTH PLAN
California
Florida
Illinois
Michigan
New Mexico
Ohio
Puerto Rico
South Carolina
Texas
Washington
Other (1)
As of December 31,
2018
2017
2016
608,000
313,000
224,000
383,000
222,000
302,000
252,000
120,000
423,000
781,000
193,000
746,000
625,000
165,000
398,000
253,000
327,000
314,000
116,000
430,000
777,000
302,000
683,000
553,000
195,000
391,000
254,000
332,000
330,000
109,000
337,000
736,000
307,000
3,821,000
4,453,000
4,227,000
__________________
(1)
“Other” includes the Idaho, Mississippi, New York, Utah and Wisconsin health plans, which are not individually significant to
our consolidated operating results.
MISSION
Molina’s mission is to provide quality health care services to financially vulnerable families and individuals who are
covered by government programs.
STRATEGY
Our strategy focuses on the following four key areas, which are described in detail below: margin recovery and
sustainability, growth opportunities, talent and culture, and future capabilities.
MARGIN RECOVERY AND SUSTAINABILITY
We are executing a comprehensive, short-term plan designed to restore margins through expense reductions,
operating improvements, execution of managed care fundamentals, and divestiture of non-strategic assets. In
addition, we are working to enhance our balance sheet by implementing a disciplined approach to capital
management.
We are simplifying our provider networks. We are terminating or renegotiating high-cost providers, narrowing
networks in certain geographies, evaluating stop-loss thresholds and carve-outs, implementing value-based
contracting, and evaluating ancillary services and pharmacy benefit management pricing and operations. In
addition, we have exited substantially all direct delivery operations.
We are striving to improve the effectiveness of utilization review and care management. Areas of focus include
specialist referrals, pre-authorization, concurrent review, high acuity populations and high utilizers of services,
emergency room utilization, and behavioral and medical integration.
We are addressing at-risk revenues and risk adjustment. We seek to more effectively engage in state rate setting,
improve Medicare Star Ratings, increase retention of quality revenue withholds, and focus on coding and
documentation to achieve risk scores commensurate with the acuity of our population.
We are working to improve our claims payment function. The key areas of improvement we are focusing on include
provider experience, payment accuracy, and oversight of claims fraud, waste and abuse.
We are evaluating and outsourcing certain elements of our information technology and management function. We
seek to standardize our administrative platform, streamline operations and procedures, evaluate potential co-
sourcing and/or outsource operational components, and consolidate data warehousing and data mining capabilities.
Molina Healthcare, Inc. 2018 Form 10-K | 5
GROWTH OPPORTUNITIES
Our immediate goal is to win re-procurements of state contracts and to capitalize on opportunities to achieve
measured growth. We see numerous opportunities for growth in our legacy state health plans and programs. We
have already experienced some success in the pursuit of new revenue and the defense of existing revenue:
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In May 2018, our Washington health plan was selected by the Washington State Health Care Authority to enter
into a managed care contract for the eight remaining regions of the state’s Apple Health Integrated Managed
Care program, in addition to the two regions previously awarded to us. As of December 31, 2018, we served
approximately 751,000 Medicaid members in Washington, which represented premium revenue of
approximately $2,035 million in the year ended December 31, 2018.
In June 2018, our Florida health plan was awarded comprehensive Medicaid Managed Care contracts by the
Florida Agency for Health Care Administration in Regions 8 and 11 of the Florida Statewide Medicaid Managed
Care Invitation to Negotiate. Under the new contracts, effective January 1, 2019, we serve approximately
98,000 Medicaid members in those regions, which represented premium revenue of approximately $462 million
in the year ended December 31, 2018. As of December 31, 2018, we served a total of 272,000 Medicaid
members in Florida, which represented premium revenue of approximately $1,479 million in the year ended
December 31, 2018.
In July 2018, our Puerto Rico health plan was selected by the Puerto Rico Health Insurance Administration to
be one of the organizations to administer the Commonwealth’s new Medicaid Managed Care contract. As of
December 31, 2018, we served approximately 252,000 members under the new contract, which represents a
reduction in membership compared with 320,000 members served as of September 30, 2018. The new contract
commenced on November 1, 2018 and has a three-year term with an optional one year extension. The Puerto
Rico health plan’s premium revenue amounted to $696 million in the year ended December 31, 2018.
• Our Mississippi health plan commenced operations on October 1, 2018 and served approximately 26,000
Medicaid members as of December 31, 2018. In December 2018, our Mississippi health plan was awarded a
contract by the Mississippi Division of Medicaid for the Children’s Health Insurance Program (“CHIP”). Services
under the new three-year contract were initially set to begin July 1, 2019; however, the start date is now
pending the outcome of a protest of the contract awards.
Now that our margin recovery efforts have been successful and margin sustainability is well under way, we expect
to expand our focus on growth opportunities in new markets.
TALENT AND CULTURE
We intend to drive our strategic initiatives by evolving to a more accountable and performance-driven culture with
the right talent in the right jobs. We believe that the success we have had in recruiting new leaders to our current
senior executive team has given us a strong start and we are optimistic about this initiative.
FUTURE CAPABILITIES
We are focused on building future capabilities needed to address the evolving healthcare environment and
competitive pressures. We believe that key future differentiating capabilities include, but are not limited to,
population health management, complex care management, advanced value-based contracting, advanced data
analytics, and improved member experience. We are creating a road-map designed to meet these market demands
by developing the people, processes, and technologies we require to build these capabilities.
OUR BUSINESS
MEDICAID
Overview
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.
Molina Healthcare, Inc. 2018 Form 10-K | 6
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 except Puerto Rico is
currently approximately 60%, and currently ranges from a federally established FMAP floor of 50% to as high as
76%. As a result of Hurricane Maria, the FMAP for the Commonwealth of Puerto Rico was temporarily raised from
55% to 100% until late in the third quarter of 2019.
We participate in the following Medicaid programs:
•
Temporary Assistance for Needy Families (“TANF”) - This is the most common Medicaid program. It
primarily covers low-income families with children.
• Medicaid Aged, Blind or Disabled (“ABD”) - ABD programs cover low-income persons with chronic physical
disabilities or behavioral health impairments. ABD beneficiaries typically use more services than those
served by other Medicaid programs because of their critical health issues.
•
Children’s Health Insurance Program (“CHIP”) - 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.
• Medicaid Expansion - In states that have elected to participate, Medicaid Expansion provides eligibility to
nearly all low-income individuals under age 65 with incomes at or below 138% of the federal poverty line.
Our state Medicaid contracts generally have terms of three to five 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. Such contracts are subject to risk of loss in states that issue requests for proposal
(“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 not be renewed.
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; and regions or service areas.
Status of Contract Re-procurements
In November 2018, our Texas health plan submitted two separate RFP responses: one with regard to the Texas
ABD program, known in Texas as the Star Plus program; and the other with regard to the Texas TANF and CHIP
programs, known in Texas as the Star program. We expect the Star Plus award to be announced in the second
quarter of 2019, with an effective date of June 1, 2020. We expect the Star award to be announced in the third
quarter of 2019, with an effective date of September 1, 2020. As of December 31, 2018, the membership of our
Texas health plan under the existing Star Plus contract was 87,000 members, and the related premium revenues for
2018 were $1,605 million. As of December 31, 2018, the membership of our Texas health plan under the existing
Star contract was 122,000 members, and the related premium revenues for 2018 were $316 million.
We have received information that the Medicaid contracts of both our Ohio and California health plans may be
subject to RFP either in late 2019 or early 2020. A loss of any of our Texas, Ohio, or California Medicaid contracts
would have a material adverse effect on our business, financial condition, cash flows, and results of operations.
In January 2018, we were notified by the New Mexico Medicaid agency that we had not been selected for a
tentative award of a 2019 Medicaid contract. A hearing was held on our judicial protest on October 17, 2018, and
our protest was rejected. We filed an appeal with the New Mexico Court of Appeals on January 28, 2019. We are
continuing to manage the business in run-off until the determination of these further appeals or our decision not to
pursue our appeal rights. As of December 31, 2018, we served approximately 196,000 Medicaid members in New
Mexico, and Medicaid premium revenue amounted to $1,181 million in the year ended December 31, 2018. Our
New Mexico health plan continues to serve Medicare and Marketplace members, but, effective January 1, 2019, no
longer has Medicaid members.
Member Enrollment and Marketing
Most states allow eligible Medicaid members to select the Medicaid plan of their choice. This opportunity to choose
a plan is almost always afforded to the member at the time of first enrollment and, at a minimum, annually
thereafter. In some of our states, a substantial majority of new Medicaid members voluntarily select a plan with the
remainder subject to the auto-assignment process described below, while in other states less than half of new
members voluntarily choose a plan.
Molina Healthcare, Inc. 2018 Form 10-K | 7
Our Medicaid health plans may benefit from auto-assignment of individuals who do not choose a plan, but for whom
participation in managed care programs is mandatory. Each state differs in its approach to auto-assignment, but
one or more of the following criteria is typical in auto-assignment algorithms: a Medicaid beneficiary's previous
enrollment with a health plan or experience with a particular provider contracted with a health plan, enrolling family
members in the same plan, a plan's quality or performance status, a plan’s network and enrollment size, awarding
all auto-assignments to a plan with the lowest bid in a county or region, and equal assignment of individuals who do
not choose a plan in a specified county or region.
Our Medicaid marketing efforts are regulated by the states in which we operate, each of which imposes different
requirements for, or restrictions on, Medicaid sales and marketing. These requirements and restrictions are revised
from time to time. None of the jurisdictions in which we operate permit direct sales by Medicaid health plans.
MEDICARE
Overview
Medicare Advantage. 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 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.
Medicare-Medicaid Plans, or MMPs. Over 10 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. 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 MMPs. We operate MMPs in six states.
Contracts
We enter into Medicare and MMP contracts with CMS, in partnership with each state’s department of health and
human services. Such contracts typically have terms of one to two years.
Status of Contract Renewals - MMP
MMP premium revenues for the California, Illinois, and Ohio health plans, whose duals demonstration programs
currently expire on December 31, 2019, amounted to $189 million, $81 million, and $529 million, respectively, in the
year ended December 31, 2018.
•
•
California MMP. In 2018, the state submitted a one-year extension of its duals demonstration program with
CMS, through December 31, 2020, and is currently in negotiations with CMS to extend the program for
three years, through December 31, 2022.
Illinois MMP. We believe the state is likely moving toward a three-year extension of its duals demonstration
program with CMS. This potential extension is currently pending review with the state’s new administration.
• Ohio MMP. The state has submitted a three-year extension of its duals demonstration program with CMS,
through December 31, 2022.
Member Enrollment and Marketing
Our Medicare members may be enrolled through auto-assignment, as described above under “Medicaid - Member
Enrollment and Marketing,” or by enrolling in our plans with the assistance of insurance agents employed by Molina,
Molina Healthcare, Inc. 2018 Form 10-K | 8
outside brokers, or via the Internet.
Our Medicare marketing and sales activities are regulated by CMS and the states in which we operate. CMS has
oversight over all marketing materials used by Medicare Advantage plans, and in some cases has imposed
advance approval requirements. CMS generally limits sales activities to those conveying information regarding
benefits, describing the operations of our managed care plans, and providing information about eligibility
requirements.
We employ our own insurance agents and contract with independent, licensed insurance agents to market our
Medicare Advantage products. We have continued to expand our use of independent agents because the cost of
these agents is largely variable and we believe the use of independent, licensed agents is more conducive to the
shortened Medicare selling season and the open enrollment period. The activities of our independent, licensed
insurance agents are also regulated by CMS. We also use direct mail, mass media and the Internet to market our
Medicare Advantage products.
MARKETPLACE
Overview
Effective January 1, 2014, the ACA authorized the creation of Marketplace insurance exchanges, allowing
individuals and small groups to purchase federally subsidized health insurance. We offer Marketplace plans in
many of the states where we offer Medicaid health plans. Our plans allow our Medicaid members to stay with their
providers as they transition between Medicaid and the Marketplace. Additionally, they remove financial barriers to
quality care and keep members' out-of-pocket expenses to a minimum. In 2019, we participate in the Marketplace
in California, Florida, Michigan, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin.
Contracts
We enter into contracts with CMS annually for the state Marketplace programs. These contracts have a one-year
term ending on December 31 and must be renewed annually.
Member Enrollment and Marketing
Our Marketplace members enroll in our plans with the assistance of insurance agents employed by Molina, outside
brokers, vendors, direct to consumer marketing and via the Internet.
While our Marketplace sales activities are regulated by CMS (such as eligibility determinations), our marketing
activities are regulated by the individual states in which we operate. Some states require us to obtain prior approval
of our marketing materials, others simply require us to provide them with copies of our marketing materials, and
some states do not request our marketing materials. We are able to freely contact our own members and provide
them with marketing materials as long as those materials are fair and do not discriminate.
Our Marketplace sales and marketing strategy is to provide high quality, affordable, compliant and consumer centric
Marketplace products through a variety of distribution channels. Our Marketplace products are displayed on the
Federally Facilitated Marketplace (“FFM”) and the State Based Marketplace (“SBM”) in the states in which we
participate in the Marketplace. We also contract with independent, licensed insurance agents to market our
Marketplace products. The activities of our independently licensed insurance agents are also regulated by both
CMS and the departments of insurance in the states in which we participate. Our sales cycle typically peaks during
the annual Open Enrollment Period (“OEP”) as defined and regulated by CMS and applicable FFM and SBM.
For 2019, we are currently estimating that our Marketplace end-of-year membership will range from
250,000-275,000. This estimated membership is lower than the 362,000 enrollment as of December 31, 2018,
despite our return to Utah and Wisconsin, and we expect our Marketplace revenues to decrease in 2019 as a result.
BASIS FOR PREMIUM RATES
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. The amount of the
premiums paid to our health plans may vary substantially between states and among various government
Molina Healthcare, Inc. 2018 Form 10-K | 9
programs. For the year ended December 31, 2018, Medicaid program PMPM premium revenues ranged as follows:
TANF and CHIP ranged from $130.00 to $340.00; Medicaid Expansion ranged from $290.00 to $520.00; and ABD
ranged from $520.00 to $1,630.00.
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. For the year ended December 31, 2018, Medicare program PMPM premium
revenues ranged as follows: Medicare Advantage ranged from $590.00 to $1,370.00; and MMP ranged from
$1,390.00 to $3,250.00.
Marketplace
For Marketplace, we develop each state’s premium rates during the spring of each year for policies effective in the
following calendar year. Premium rates are based on our estimates of projected member utilization, medical unit
costs, member risk acuity, member risk transfer, 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. For the year ended December 31, 2018,
Marketplace program PMPM premium revenues ranged from $250.00 to $660.00.
PREMIUM REVENUE BY PROGRAM
TANF and CHIP
Medicaid Expansion
ABD
Total Medicaid
MMP
Medicare
Total Medicare
Total Medicaid and Medicare
Marketplace
Year Ended December 31,
2018
2017
2016
$
5,508
2,884
5,231
13,623
1,443
631
2,074
15,697
1,915
(In millions)
$
5,554
$
3,150
5,135
13,839
1,446
601
2,047
15,886
2,968
$
17,612
$
18,854
$
5,403
2,952
4,666
13,021
1,321
558
1,879
14,900
1,545
16,445
LEGISLATIVE AND POLITICAL ENVIRONMENT
PRESSURES ON MEDICAID FUNDING
Due to states’ budget challenges and political agendas at both the state and federal levels, there are a number of
different legislative proposals being considered, some of which would involve significantly reduced federal or state
spending on the Medicaid program, constitute a fundamental change to the federal role in health care and, if
enacted, could have a material adverse effect on our business, financial condition, cash flows and results of
operations. These proposals include elements such as the following, as well as numerous other potential changes
and reforms:
•
Ending the entitlement nature of Medicaid (and perhaps Medicare as well) by capping future increases in
federal health spending for these programs, and shifting much more of the risk for health costs in the future
to states and consumers;
Molina Healthcare, Inc. 2018 Form 10-K | 10
•
•
•
•
Reversing the ACA’s expansion of Medicaid that enables states to cover low-income childless adults;
Changing Medicaid to a state block grant program, including potentially capping spending on a per-enrollee
basis;
Requiring Medicaid beneficiaries to work; and
Limiting the amount of lifetime benefits for Medicaid beneficiaries.
AFFORDABLE CARE ACT
As a result of the election of President Trump, the GOP control of the Senate and the former GOP control of the
House, several changes have been made to the provisions of the ACA, including reduced funding. Accordingly, the
future of the ACA and its underlying programs are subject to continuing and substantial uncertainty, making long-
term business planning exceedingly difficult. In December 2018, in a case brought by the state of Texas and
nineteen other states, a federal judge in Texas struck down the ACA based on his determination that the ACA’s
individual mandate is unconstitutional and, since that mandate cannot be separated from the rest of the ACA, the
judge ruled that the rest of the ACA is also unconstitutional. The decision has been appealed to the U.S. Court of
Appeals for the Fifth Circuit. Other proposed changes and reforms to the ACA have included, or may include the
following:
•
•
•
•
•
•
Prohibiting the federal government from operating Marketplaces;
Eliminating the advanced premium tax credits, and cost sharing reductions for low income individuals who
purchase their health insurance through the Marketplaces;
Expanding and encouraging the use of private health savings accounts;
Providing for insurance plans that offer fewer and less extensive health insurance benefits than under the
ACA’s essential health benefits package, including broader use of catastrophic coverage plans, or short-
term health insurance;
Establishing and funding high risk pools or reinsurance programs for individuals with chronic or high cost
conditions; and
Allowing insurers to sell insurance across state lines.
Any final, not-appealable determination that the ACA is unconstitutional, or the passage of any of these changes or
other reforms, would have a material adverse effect on our business, financial condition, cash flows and results of
operations.
OPERATIONS
QUALITY
Our long-term success depends, to a significant degree, on the quality of the services we provide. As of December
31, 2018, 11 of our health plans were accredited by the National Committee for Quality Assurance (“NCQA”),
including the Multicultural Health Care Distinction, which is awarded to organizations that meet or exceed NCQA’s
rigorous requirements for multicultural health care.
The table below presents our health plans’ NCQA status, as well as their current scores as part of the Medicare
Star Ratings, which measures the quality of Medicare plans across the country using a 5-star rating system.
We believe that these objective measures of quality are important to state Medicaid agencies, as a growing number
of states link reimbursement and patient assignment to quality scores. Additionally, Medicare pays quality bonuses
to health plans that achieve high quality.
Molina Healthcare, Inc. 2018 Form 10-K | 11
PROVIDER NETWORKS
We arrange health care services for our members through contracts with a vast network of providers, including
independent physicians and physician groups, hospitals, ancillary providers, and pharmacies. We strive to ensure
that our providers have the appropriate expertise and cultural and linguistic experience.
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.
Physicians
We contract with both primary care physicians and specialists, many of whom are organized into medical groups or
independent practice associations. 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 care 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, capitation, and case rates.
Ancillary Providers
Our ancillary agreements provide coverage of medically-necessary care, including laboratory services, home
health, physical, speech and occupational therapy, durable medical equipment, radiology, ambulance and
transportation services, and are reimbursed on a capitation and fee-for-service basis.
Molina Healthcare, Inc. 2018 Form 10-K | 12
Pharmacy
We outsource pharmacy benefit management services, including claims processing, pharmacy network contracting,
rebate processing and mail and specialty pharmacy fulfillment services.
The following table provides the details of consolidated medical care costs by type for the periods indicated:
2018
Year Ended December 31,
2017
2016
Amount
PMPM
% of
Total
Amount
PMPM
% of
Total
Amount
PMPM
% of
Total
(In millions, except PMPM amounts)
Fee-for-service $ 11,278
2,138
Pharmacy
1,184
Capitation
Other (1)
537
$ 232.15
44.01
24.38
11.05
74.5% $ 12,682
2,563
14.1
1,360
7.8
468
3.6
$ 229.63
46.40
24.63
8.48
74.3% $ 10,993
2,213
15.0
1,218
8.0
350
2.7
$ 217.84
43.84
24.13
6.94
74.4%
15.0
8.2
2.4
Total
$ 15,137
$ 311.59
100.0% $ 17,073 $ 309.14
100.0% $ 14,774
$ 292.75
100.0%
_____________________
(1)
“Other” includes all medically related administrative costs, certain provider incentive costs, provider claims, and other health
care 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.
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. We believe 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.
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,
information technology, and centralized services.
Utilization Management
We continuously review utilization patterns with the intent to optimize quality of care and to ensure that 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. Our member assessment process evaluates the individual
needs of the members and ensures that the appropriate level of services and support are provided to
address the physical, behavioral and social determinants of health. This comprehensive and customized
approach is designed to address our members’ individual goals and improve their overall quality of life. For
example, our comprehensive maternity programs are 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.
•
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
Molina Healthcare, Inc. 2018 Form 10-K | 13
methods of prevention in a manner that supports our providers while meeting the unique needs of our
members. For example, we provide our members with information to guide them through various episodes
of care. This information, which is available in several languages, is designed to educate members on the
use of primary care physicians, emergency rooms, and nurse call centers.
•
Pharmacy Management Programs. Our pharmacy programs are designed with the goal to be a trusted
partner in improving member health and healthcare affordability. We do this by strategically partnering with
the physicians and other healthcare providers who treat our members. This collaboration results in drug
formularies and clinical initiatives that promote improved patient care. We employ full-time pharmacists and
pharmacy technicians who work closely with providers to educate them on our formulary products, clinical
programs and the importance of cost-effective care.
INFORMATION TECHNOLOGY
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 members and providers also depend upon our information
systems for enrollment, primary care and specialist physician roster access, membership verifications, claims
status, and other information.
We have partnered with third parties to support our information technology systems. This makes our operations
vulnerable to adverse effects if such third parties fail to perform adequately. On February 4, 2019, we entered into a
master services agreement with Infosys Limited pursuant to which Infosys will manage certain of our information
technology infrastructure services including, among other things, our information technology operations, end-user
services, and data centers. As a result of the agreement, we anticipate reducing our administrative expenses and
improving the reliability of our information technology functions, while aiming to maintain targeted levels of service
and operating performance. A segment of the infrastructure services will be provided on the Company’s premises,
while other portions of the infrastructure services will be performed at Infosys facilities. Infosys will provide us with
services required to migrate those information technology infrastructure operations that will be performed at Infosys
facilities. As the infrastructure services currently performed by the Company are transitioned to Infosys, we expect
to eliminate certain positions in our information technology group. Some of the employees in our information
technology group may become employees of Infosys. The initial term of this agreement with Infosys is three years,
commencing on February 4, 2019. We have the right to extend the agreement for up to two additional renewal
terms of one year each.
CENTRALIZED SERVICES
We provide certain centralized medical and administrative services to our subsidiaries pursuant to administrative
services agreements that include, but are not limited to, information technology, product development and
administration, underwriting, claims processing, customer service, certain care management services, human
resources, legal, marketing, purchasing, risk management, actuarial, underwriting, finance, accounting, legal and
public relations.
COMPETITIVE CONDITIONS AND ENVIRONMENT
We 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, quality scores, 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 Healthcare, Inc. 2018 Form 10-K | 14
Medicaid
The Medicaid managed care industry is subject to ongoing changes as a result of health care reform, business
consolidations and new strategic alliances. We compete with national, regional, and local Medicaid service
providers, principally on the basis of size, location, quality of the 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., Aetna Inc., and other large not-for-profit health care
organizations. Competition can vary considerably from state to state.
Medicare
While we expect to see strong growth in the Medicare program in coming years, the market is highly competitive
across the country, with large competitors, such as UnitedHealth Group Incorporated, Humana Inc., and Aetna Inc.,
holding significant market share.
Marketplace
Low-income members who receive government subsidies comprise the vast majority of Marketplace membership,
which is served by a limited number of health plans. Our primary competitor for low-income Marketplace
membership is Centene Corporation.
REGULATION
Our health plans are highly regulated by both state and federal government agencies. Regulation of managed care
products and health care services varies from jurisdiction to jurisdiction, and changes in applicable laws and rules
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.
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,
such as 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.
We enforce an internal HIPAA compliance program, which we believe complies with HIPAA privacy and security
regulations, and have dedicated resources to monitor compliance with this program.
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.
FRAUD AND ABUSE LAWS AND THE FALSE CLAIMS ACT
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, upcoding, payments made to excluded providers, improper
Molina Healthcare, Inc. 2018 Form 10-K | 15
marketing, and the violation of patient privacy rights. In particular, there has recently been increased scrutiny by the
Department of Justice on health plans’ risk adjustment practices, particularly in the Medicare program. 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.
LICENSING AND SOLVENCY
Our health plans are licensed by the insurance departments in the states in which they operate, except our New
York HMO, which is licensed as a prepaid health services plan by the New York State Department of Health, and
our California HMO, which is licensed by the California Department of Managed Health Care.
Our health plans are subject to stringent requirements to maintain a minimum amount of statutory capital
determined by statute or regulation, and restrictions that limit their ability to pay dividends to us. For further
information, refer to the Notes to Consolidated Financial Statements, Note 17, “Commitments and Contingencies—
Regulatory Capital Requirements and Dividend Restrictions.”
OTHER INFORMATION
EMPLOYEES
As of December 31, 2018, we had approximately 11,000 employees. Our employee base is multicultural and
reflects the diverse membership we serve.
AVAILABLE INFORMATION
Our principal executive offices are located at 200 Oceangate, Suite 100, Long Beach, California 90802, and our
telephone number is (562) 435-3666. The Company also maintains corporate offices in New York City, New York.
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 Form 10-K or any
other SEC filings.
RISK FACTORS
You should carefully consider the risks described below and all of the other information set forth in this Form 10-K,
including our consolidated financial statements and accompanying notes. These risks and other factors may affect
our forward-looking statements, including those we make in this annual report or elsewhere, such as in press
releases, presentations to securities analysts or investors, or other communications made by or with the approval of
one of our executive officers. The risks described below are not the only risks facing our Company. Additional risks
that we are unaware of, or that we currently believe are not material, may also become important factors that
Molina Healthcare, Inc. 2018 Form 10-K | 16
adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results
of operations, and future prospects could be materially and adversely affected. In that event, among other effects,
the trading price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
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 on favorable terms or at all, our premium
revenues could be materially reduced and our operating results could be negatively impacted.
We currently derive our premium revenues from health plans that operate in 14 states and the Commonwealth of
Puerto Rico. Measured by premium revenue by health plan, our top four health plans were in California, Ohio,
Texas, and Washington, with aggregate premium revenue of $10,143 million, or approximately 58% of total
premium revenue, in the year ended December 31, 2018. If we are unable to continue to operate in any of our
existing jurisdictions, or if our current operations in any portion of those jurisdictions are significantly curtailed or
terminated entirely, our revenues could decrease materially.
Many of our government contracts for the provision of managed care programs to people receiving government
assistance are effective only for a fixed period of time and may be extended for an additional period of time if the
contracting entity or its agent elects to do so. When such contracts expire, they may be opened for bidding by
competing healthcare providers, and there is no guarantee that the contracts will be renewed or extended. For
example, our previous Medicaid contract with the Florida Agency for Health Care Administration (“AHCA”) expired
on December 31, 2018, as of which date the Florida health plan served approximately 272,000 Medicaid members.
In June 2018, our Florida health plan was awarded a comprehensive Medicaid Managed Care contract by AHCA,
effective January 1, 2019, for two regions in Florida (which consisted of approximately 98,000 Medicaid members
as of December 31, 2018), as opposed to the eight regions covered by our previous contract.
As yet another example, our New Mexico health plan’s Medicaid contract with the New Mexico Human Services
Department (“HSD”) expired on December 31, 2018. In January 2018, we were notified by the New Mexico
Medicaid agency that we had not been selected for a tentative award of a 2019 Medicaid contract. A hearing was
held on our judicial protest on October 17, 2018, and our protest was rejected. We filed an appeal with the New
Mexico Court of Appeals on January 28, 2019. We are continuing to manage the business in run-off until the
determination of these further appeals or our decision not to pursue our appeal rights. As of December 31, 2018, we
served approximately 196,000 Medicaid members in New Mexico, and Medicaid premium revenue amounted to
$1,181 million in the year ended December 31, 2018. Our New Mexico health plan continues to serve Medicare and
Marketplace members, but, effective January 1, 2019, no longer has Medicaid members.
In any bidding process, our health plans may face competition from numerous other health plans, many with greater
financial resources and greater name recognition than we have. For example, in November 2018, our Texas health
plan submitted RFP responsive bids under the following two programs:
•
•
The Texas Health and Human Service Commission (“HHSC”) currently contracts with five STAR+PLUS (or
“ABD”) plans: Anthem, Cigna, Centene, United Healthcare, and Molina. Our Texas health plan served a
total of approximately 87,000 STAR+PLUS members as of December 31, 2018. We expect the new Texas
STAR+PLUS contracts to be awarded in the second quarter of 2019, and to become effective June 1, 2020.
The HHSC currently contracts with many STAR (or “TANF” and “CHIP”) plans, including Molina. Our Texas
health plan served a total of approximately 122,000 STAR members as of December 31, 2018. We expect
the new Texas STAR contracts to be awarded in the third quarter of 2019, and to become effective
September 1, 2020.
If the RFP responsive bids of our Texas health plan are not successful, or if our Texas health plan’s contracts with
HHSC are not renewed, or if they are renewed but coverage is reduced, our revenues would be materially and
adversely impacted.
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 or, in extreme cases, could result in a net loss. Furthermore, our government contracts contain certain
provisions regarding, among other things, eligibility, enrollment and dis-enrollment processes for covered services,
eligible providers, periodic financial and information reporting, quality assurance and timeliness of claims payment,
and are subject to cancellation if we fail to perform in accordance with the standards set by regulatory agencies.
If any of our governmental contracts are terminated, not renewed, renewed on less favorable terms, or not renewed
on a timely basis, our business and reputation may be adversely impacted, and our financial position, results of
Molina Healthcare, Inc. 2018 Form 10-K | 17
operations or cash flows could be materially and adversely affected. In addition, we may be unable to support the
carrying amount of goodwill we have recorded for the applicable business, because its fair value is based on
estimated future cash flows.
If we lose contracts that constitute a significant amount of our revenue, we will lose the administrative cost
efficiencies that are inherent in a large revenue base. In such circumstances, we may not be able to reduce
fixed costs proportionally with our lower revenue, and the financial impact of lost contracts may exceed the
net income ascribed to those contracts.
We are currently able to spread the cost of centralized services over a large revenue base. Many of our
administrative costs are fixed in nature, and will be incurred at the same level regardless of the size of our revenue
base. If we lose contracts that constitute a significant amount of our revenue, we may not be able to reduce the
expense of centralized services in a manner that is proportional to that loss of revenue. In such circumstances, not
only will our total dollar margins decline, but our percentage margins, measured as a percentage of revenue, will
also decline. This loss of cost efficiency, and the resulting stranded administrative costs, could have a material and
adverse impact on our business, cash flows, financial position, or results of operations.
If, in the interests of maintaining or improving longer term profitability, we decide to exit voluntarily certain
state contractual arrangements, make changes to our provider networks, or make changes to our
administrative infrastructure, we may incur short- to medium-term disruptions to our business that could
materially reduce our premium revenues and our net income.
Decisions that we make with regard to retaining or exiting our portfolio of state and federal contracts, and changes
to the manner in which we serve the members attached to those contracts, could generate substantial expenses
associated with the run out of existing operations and the restructuring of those operations that remain. Such
expenses could include, but would not be limited to, goodwill and intangible asset impairment charges, restructuring
costs, additional medical costs incurred due to the inability to leverage long-term relationships with medical
providers, and costs incurred to finish the run out of businesses that have ceased to generate revenue.
If we are unable to successfully execute our profit maintenance and improvement initiatives and our
restructuring plans, or if we fail to realize the anticipated benefits of those initiatives and plans, our
business, cash flows, financial position, or results of operations could be materially and adversely affected.
In August 2017, we announced the implementation of a comprehensive restructuring and profitability improvement
plan (the “2017 Restructuring Plan”). The 2017 Restructuring Plan included the streamlining of our organizational
structure, including the elimination of over 2,000 positions, the re-design of certain core operating processes, the
remediation of high cost provider contracts, the restructuring of our direct delivery operations, and the review of our
vendor base in an attempt to insure that we were partnering with the lowest cost, most effective, vendors. Since the
inception of the 2017 Restructuring Plan in August 2017 through December 31, 2018, we have reported
restructuring and separation costs of $271 million under the 2017 Restructuring Plan.
In addition, in the second half of 2017, we launched several profit maintenance and improvement initiatives. We
pursued additional profit maintenance and improvement initiatives throughout 2018, and have begun to implement a
plan to outsource certain functions of our information technology department. As a part of that plan, on February 4,
2019, we entered into a master services agreement with Infosys Limited pursuant to which Infosys will manage
certain of our information technology infrastructure services including, among other things, our information
technology operations, end-user services, and data centers.
Our restructuring plan and profit improvement initiatives create numerous uncertainties, including the effect of the
initiatives and plan on our business, operations, revenues, and profitability, potential disruptions to our business as
a result of management’s attention to the initiatives and plan, uncertainty regarding the potential amount and timing
of future cost savings associated with the initiatives and plan or problems experienced as a result of the outsourcing
of our information technology infrastructure services, and the potential negative impact of the initiatives and plan on
employee morale. The success of the initiatives and plan will depend, in part, on factors that are beyond our control,
including reliance on third parties as is the case with our agreement with Infosys. Accordingly, we can provide no
assurance that the goals of the initiatives and plan will be fully achieved. Failure in this regard could have a
material and adverse impact on our business, cash flows, financial position, or results of operations.
A failure to accurately estimate incurred but not paid 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
Molina Healthcare, Inc. 2018 Form 10-K | 18
for such incurred but not paid (“IBNP”) medical care costs are based on numerous assumptions. We estimate our
medical claims liabilities using actuarial methods based on historical data adjusted for claims receipt and payment
experience (and variations in that experience), changes in membership, provider billing practices, health care
service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit
changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract
changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our ability to
accurately estimate claims for our newer lines of business or populations, is negatively impacted by the more limited
experience we have had with those newer lines of business or 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 previously 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.
We are subject to retroactive adjustment to our Medicaid premium revenue as a result of retroactive risk
adjustment; retroactive changes to contract terms and the resolution of differing interpretations of those
terms; the difficulty of estimating performance-based premium; and retroactive adjustments to “blended”
premium rates to reflect the actual mix of members captured in those blended rates.
The complexity of some of our Medicaid contract provisions, imprecise language in those contracts, the desire of
state Medicaid agencies in some circumstances to retroactively adjust for the acuity of the medical needs of our
members; and state delays in processing rate changes, can create uncertainty around the amount of revenue we
should recognize.
A current example of exposure to this risk is in California. In the third and fourth quarters of 2018, we recognized
adjustments of $57 million and $24 million, respectively, mainly related to the retroactive reinstatement of the
Medicaid Expansion risk corridor requirement by the California Department of Health Care Services, mainly for the
state fiscal years ended June 2017 and 2018. The risk corridor provision mandates a minimum loss ratio (“MLR”) of
85% and a maximum MLR of 95%. The total impact of these adjustments resulted in a reduction to premium
revenue totaling approximately $81 million in the year ended December 31, 2018.
Any circumstance such as those described above could have a material adverse effect on our business, financial
condition, cash flows, or results of operations.
If we fail to accurately predict and effectively manage our medical care costs, our operating results could
be materially and adversely affected.
Our profitability depends to a significant degree on our ability to accurately predict and effectively manage our
medical care costs. Historically, our medical care ratio, meaning our medical care costs as a percentage of our
premium revenue, has fluctuated substantially, and has varied across our state health plans. Because the premium
payments we receive are generally fixed in advance and we operate with a narrow profit margin, relatively small
changes in our medical care ratio can create significant changes in our overall financial results. For example, if our
overall medical care ratio of 85.9%, for the year ended December 31, 2018 had been one percentage point higher,
or 86.9%, our net income per diluted share for the year ended December 31, 2018 would have been approximately
$8.54 rather than our actual net income per diluted share of $10.61, a difference of $2.07.
Many factors may affect our medical care costs, including:
•
•
•
•
•
•
•
the level of utilization of health care services,
changes in the underlying risk acuity of our membership,
unexpected patterns in the annual flu season,
increases in hospital costs,
increased incidences 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,
Molina Healthcare, Inc. 2018 Form 10-K | 19
•
•
•
•
•
•
•
changes in state eligibility certification methodologies,
relatively low levels of hospital and specialty provider competition in certain geographic areas,
increases in the cost of pharmaceutical products and services,
changes in health care regulations and practices,
epidemics,
new medical technologies, and
other various external factors.
Many of these factors are beyond our control and could reduce our ability to accurately predict and effectively
manage the costs of providing health care services. The inability to forecast and manage our medical care costs or
to establish and maintain a satisfactory medical care ratio, either with respect to a particular state health plan or
across the consolidated entity, could have a material adverse effect on our business, financial condition, cash flows,
or results of operations.
If we are unable to collect health insurer fee (“HIF”) reimbursement for 2018 from our state partners, our
business, cash flows, financial position, or results of operations could be materially and adversely affected.
Because Medicaid is a government funded program, Medicaid health plans must request reimbursement for the HIF
from respective state partners to offset the impact of this tax. When states reimburse us for the amount of the HIF,
that reimbursement is itself subject to income tax, the HIF, and applicable state premium taxes. Because the HIF is
not deductible for income tax purposes, our net income is reduced by the full amount of the assessment. The 2018
HIF assessment, related to our Medicaid business, was $257 million, with an expected tax gross-up effect from the
reimbursement of the assessment of approximately $72 million. Therefore, the total reimbursement needed as a
result of the Medicaid-related HIF was approximately $329 million. As of December 31, 2018, we have collected
$188 million of this total, with reimbursements receivable of $141 million. The delay or failure of our state partners to
reimburse us in full for the 2018 HIF and its related tax effects could have a material adverse effect on 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, 2018, the carrying amounts of goodwill and intangible assets, net, amounted to $143 million,
and $47 million, respectively.
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business
combinations. Goodwill is not amortized but is tested for impairment on an annual basis and more frequently if
impairment indicators are present. Such events or circumstances may include experienced or expected operating
cash-flow deterioration or losses, significant losses of membership, loss of state funding, loss of state contracts, and
other factors. Goodwill is impaired if the carrying amount of the reporting unit exceeds its estimated fair value. This
excess is recorded as an impairment loss and adjusted if necessary for the impact of tax-deductible goodwill. The
loss recognized may not exceed the total goodwill allocated to the reporting unit. Our reporting units consist of our
individual health plans.
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).
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 greater of the undiscounted cash flows
that are expected to result from the use of the asset or related group of assets, or its value under the asset
liquidation method. 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.
An event or events could occur that would cause us to revise our estimates and assumptions used in analyzing the
value of our goodwill, and intangible assets, net. For example, if 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. If such state health plans
have recorded goodwill and intangible assets, net, the contract loss would result in a non-cash impairment charge.
Such a non-cash impairment charge could have a material adverse impact on our financial results.
We operate in an uncertain political and judicial environment which creates uncertainties with regard to the
sources and amounts of our revenues, volatility with regard to the amount of our medical costs, and
vulnerability to unforeseen programmatic or regulatory changes.
As a result of the election of President Trump, the GOP control of the Senate and the former GOP control of the
House, several changes have been made to the provisions of the ACA, including reduced funding. Accordingly, the
future of the ACA and its underlying programs are subject to continuing and substantial uncertainty, making long-
Molina Healthcare, Inc. 2018 Form 10-K | 20
term business planning exceedingly difficult. In December 2018, in a case brought by the state of Texas and
nineteen other states, a federal judge in Texas struck down the ACA based on his determination that the ACA’s
individual mandate is unconstitutional and, since that mandate cannot be separated from the rest of the ACA, the
judge ruled that the rest of the ACA is also unconstitutional. The decision has been appealed to the U.S. Court of
Appeals for the Fifth Circuit. Any final, not-appealable determination that the ACA is unconstitutional would have a
material adverse effect on our business, financial condition, cash flows and results of operations.
We are unable to predict with any degree of certainty whether the ACA will be modified or repealed in its entirety,
and if it is repealed, what it will be replaced with; nor are we able to predict when any such changes, if enacted,
would become effective.
Currently, there are a number of different legislative proposals being considered, some of which would involve
significantly reduced federal spending on the Medicaid program, and constitute a fundamental change in the federal
role in health care. These proposals include elements such as the following: ending the entitlement nature of
Medicaid (and perhaps Medicare as well) by capping future increases in federal health spending for these
programs, and shifting much more of the risk for health costs in the future to states and consumers; reversing the
ACA’s expansion of Medicaid that enables states to cover low-income childless adults; changing Medicaid to a state
block grant program, including potentially capping spending on a per-enrollee basis; requiring Medicaid
beneficiaries to work; limiting the amount of lifetime benefits for Medicaid beneficiaries; prohibiting the federal
government from operating Marketplaces; eliminating the advanced premium tax credits, and cost sharing
reductions for low income individuals who purchase their health insurance through the Marketplaces; expanding
and encouraging the use of private health savings accounts; providing for insurance plans that offer fewer and less
extensive health insurance benefits than under the ACA’s essential health benefits package, including broader use
of catastrophic coverage plans, or short-term health insurance (Short-Term Medical or STM plans); establishing and
funding high risk pools or reinsurance programs for individuals with chronic or high cost conditions; allowing
insurers to sell insurance across state lines; and numerous other potential changes and reforms. Changes to or the
repeal of the ACA, or the adoption of new health care regulatory laws, could have a material adverse effect on our
business, financial condition, cash flows, or results of operations.
A reversal of the Medicaid Expansion would have a negative impact on our revenues.
In the states that have elected to participate, the ACA provided for the expansion of the Medicaid program to offer
eligibility to nearly all individuals under age 65 with incomes at or below 138% of the federal poverty line. Since
January 1, 2014, several of our health plans have participated in the Medicaid Expansion program under the ACA.
At December 31, 2018, our membership included approximately 660,000 Medicaid Expansion members, or 17% of
our total membership. If the Medicaid Expansion is reversed by repeal of the ACA or otherwise, we could lose this
membership, which could have a material adverse effect on our business, financial condition, cash flows, or results
of operations.
Our participation in the Marketplace creates certain risks which could adversely impact our business,
financial position, and results of operations.
The ACA authorized the creation of marketplace insurance exchanges (the “Marketplace”), allowing individuals and
small groups to purchase federally subsidized health insurance. As of December 31, 2018, we participated in the
individual Marketplace in seven states which represented approximately 9% of our total membership. For 2019, we
are currently estimating that our Marketplace end-of-year membership will range from 250,000-275,000. This
estimated membership is lower than the 362,000 enrollment as of December 31, 2018, despite our return to Utah
and Wisconsin, and we expect our Marketplace revenues to decrease in 2019 as a result.
A number of larger commercial insurance plans, including Humana Inc., have discontinued their participation in the
Marketplace. The perceived instability and impending changes in the Marketplace could further promote reduced
participation among the uninsured. Further, the withdrawal of cost sharing subsidies and/or premium tax credits, the
elimination of the individual mandate to purchase health insurance in December 2017, the use of special enrollment
periods, or any announcement that some or all of our health plans will be leaving the Marketplace, could
additionally impact Marketplace enrollment. These market and political dynamics may increase the risk that our
Marketplace products will be selected by individuals who have a higher risk profile or utilization rate than we
anticipated when we established the pricing for our Marketplace products, leading to financial losses.
The Medicare-Medicaid Duals Demonstration Pilot Programs could be discontinued or altered, resulting in a
loss of premium revenue.
To coordinate care for those who qualify to receive both Medicare and Medicaid services (the “dual eligibles”), and
to deliver services to these individuals in a more financially efficient manner, under the direction of CMS some
Molina Healthcare, Inc. 2018 Form 10-K | 21
states implemented demonstration pilot programs to integrate Medicare and Medicaid services for the dual eligibles.
The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (“MMPs”). We
operate MMPs in six states: California, Illinois, Michigan, Ohio, South Carolina, and Texas. At December 31, 2018,
our membership included approximately 54,000 integrated MMP members, representing just over 1% of our total
membership. However, the capitation payments paid to us for dual eligibles are significantly higher than the
capitation payments for other members, representing 8% of our total premium revenues in 2018. If the states
running the MMP pilot programs conclude that the demonstration pilot programs are not delivering better
coordinated care and reduced costs, they could decide to discontinue or substantially alter such programs, resulting
in a reduction to our premium revenues.
Continuing changes in health care laws, and in the health care industry, make it difficult to develop
actuarially sound rates.
Comprehensive changes to the U.S. health care system make it more difficult for us to manage our business, and
increase the likelihood that the assumptions we make with respect to our future operations and results will prove to
be inaccurate. The continuing pace of change has made it difficult for us to develop actuarially sound rates because
we have limited historical information on which to develop these rates. In the absence of significant historical
information to develop actuarial rates, we must make certain assumptions. These assumptions may subsequently
prove to be inaccurate. For example, rates of utilization could be significantly higher than we 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, our lack of actuarial experience for a particular program,
region, or population, could cause us to set our reserves at an inadequate level.
Our health plans operate with very low profit margins, and small changes in operating performance or
slight changes to our accounting estimates will have a disproportionate impact on our reported net income.
A substantial portion of our premium revenue is subject to contract provisions pertaining to medical cost expenditure
floors and corridors, administrative cost and profit ceilings, premium stabilization programs, and cost-plus and
performance-based reimbursement programs. 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. If 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 such government agency. Any
interpretation of these contract provisions by the applicable governmental agency that varies from 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. If 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.
If we are unable to deliver quality care, and 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.
Molina Healthcare, Inc. 2018 Form 10-K | 22
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 to such providers and the possibility of
subsequent adjustment of the payment could adversely affect 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.
Introduction of new high cost specialty drugs and sudden costs spikes for existing drugs increase the risk that the
pharmacy cost assumptions used to develop our capitation rates are not adequate to cover the actual pharmacy
costs, which jeopardizes the overall actuarial soundness of our rates. Bearing the high costs of new specialty drugs
or the high cost inflation of generic drugs without an appropriate rate adjustment or other reimbursement
mechanism has an adverse impact on our financial condition and results of operations. For example, the FDA
approved the first drug to treat patients with spinal muscular atrophy, Spinraza, in December 2016. After this
approval, the distributor of Spinraza announced that one dose will have a list price of $125,000, which means the
drug will cost between $650,000 and $750,000 to cover the five or six doses required in the first year, and
approximately $375,000 annually thereafter, presumably for the life of the patient. The inordinate cost of Spinraza
was not contemplated in the development of our 2017 capitation rates. 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. Although we will continue to work with state Medicaid agencies in an effort to ensure that we receive
appropriate and actuarially sound reimbursement for all new drug therapies and pharmaceuticals trends, there can
be no assurance that we will always be successful.
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 plans 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.
Further, when a state implements new programs to determine eligibility, establishes new processes to assign or
enroll eligible members into health plans, or chooses new subcontractors, there is an increased potential for an
unanticipated impact on the overall number of members assigned to managed care health plans. Whenever a state
effects an eligibility redetermination for any reason, there is generally a reduction in Medicaid membership
associated with that exercise which could have an adverse effect on our premium revenues and results of
operations.
Our investment portfolio may suffer losses which could materially and adversely affect our results of
operations or liquidity.
We maintain a significant investment portfolio of cash equivalents and short-term and long-term investments in a
variety of securities, which are subject to general credit, liquidity, market and interest rate risks and will decline in
value if interest rates increase or one of the issuers’ credit ratings is reduced. As a result, we may experience a
reduction in value or loss of our investments, which may have a negative adverse effect on our results of
operations, liquidity and financial condition.
Molina Healthcare, Inc. 2018 Form 10-K | 23
The insolvency of a delegated provider could obligate us to pay its referral claims, which could have a
material adverse effect on our business, membership, cash flows, or results of operations.
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 per member per month to the provider without regard
to the frequency, extent, or nature of the medical services actually furnished. Due to insolvency or other
circumstances, such providers may be unable or unwilling to pay claims they have incurred with third parties in
connection with referral services provided to our members. The inability or unwillingness of delegated providers to
pay referral claims presents us with both immediate financial risk and potential disruption to member care, as well
as potential loss of members. 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 or practical
regulatory considerations 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 such payments cannot be recouped when the delegated
provider becomes insolvent. Liabilities incurred or losses suffered as a result of provider insolvency 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 have a
material adverse effect on our business, financial condition, cash flows, or results of operations.
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid, Medicare, and
CHIP programs. The states in which we operate our health plans regularly face significant budgetary pressures. As
discussed below, such budgetary pressures are particularly intense in the Commonwealth of Puerto Rico. State
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. We believe there 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.
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 or more
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 on our business, financial condition, cash flows, or
results of operations.
Furthermore, a state or commonwealth 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.
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 in which we operate a health plan 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.
Molina Healthcare, Inc. 2018 Form 10-K | 24
The Commonwealth of Puerto Rico may fail to pay the premiums of our Puerto Rico health plan, which
could negatively impact our business, financial condition, cash flows, or results of operations.
The government of Puerto Rico continues to struggle with major fiscal and liquidity challenges. The extreme
financial difficulties faced by the Commonwealth may make it very difficult 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,
2018, our Puerto Rico health plan served approximately 252,000 members, and had recognized premium revenue
of approximately $147 million in the fourth quarter of 2018. 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.
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 or wildfire in California, or a major hurricane
affecting Florida, Puerto Rico, South Carolina or Texas, could have a significant impact on the health of a large
number of our covered members. Other conditions that could impact our members include a virulent influenza
season or 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, or results of operations.
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 in, and conduct most of our operations
through, our 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 ordinary 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. In general, our other health plans must
give thirty days’ advance notice and the opportunity to disapprove “extraordinary” dividends to the respective state
departments of insurance for amounts over the lesser of (a) ten percent of surplus or net worth at the prior year end
or (b) the net income for the prior year. The discretion of the state regulators, if any, in approving or disapproving a
dividend is not clearly defined. Health plans that declare ordinary dividends must usually provide notice to the
regulators ten or fifteen days in advance of the intended distribution date of the ordinary dividend. We received
$288 million, $245 million, and $100 million in dividends from our regulated health plan subsidiaries during 2018,
2017 and 2016, respectively. The aggregate additional amounts our health plan subsidiaries could have paid us at
December 31, 2018 and 2017, without approval of the regulatory authorities, were approximately $126 million and
$85 million, respectively. If the regulators were to deny or significantly restrict our subsidiaries’ requests to pay
dividends to us, the funds available to our Company as a whole would be limited, which could harm our ability to
implement our business strategy. For example, we could be hindered in our ability to make debt service payments
under our senior notes or credit agreement (“Credit Agreement”).
Our use and disclosure of personally identifiable information and other non-public information, including
protected health information, is subject to federal and state privacy and security regulations, and our
Molina Healthcare, Inc. 2018 Form 10-K | 25
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, but not limited to, HIPAA and the Gramm-Leach-Bliley Act, govern
the collection, dissemination, use, privacy, confidentiality, security, availability, and integrity of personally identifiable
information (“PII”), including protected health information (“PHI”). HIPAA establishes basic national privacy and
security standards for protection of PHI by covered entities and business associates, 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.
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, PII, or non-public information, 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.
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, upcoding, payments made to excluded providers,
improper marketing, and the violation of patient privacy rights. In particular, there has recently been increased
scrutiny by the Department of Justice on health plans’ risk adjustment practices, particularly in the Medicare
program. 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
Molina Healthcare, Inc. 2018 Form 10-K | 26
health care programs as a result of an investigation arising out of such action. We have been the subject of qui tam
actions in the past and other qui tam actions may be filed against us in the future. If we are subject to liability under
a qui tam or other actions, our business, financial condition, cash flows, or results of operations could be adversely
affected.
Failure to attain profitability in any new start-up operations could negatively affect our results of
operations.
Start-up costs associated with a new business can be substantial. For example, to obtain a certificate of authority to
operate as a health maintenance organization in most jurisdictions, we must first establish a provider network, have
infrastructure and required systems in place, and demonstrate our ability to obtain a state contract and process
claims. Often, we are also required to contribute significant capital to fund mandated net worth requirements,
performance bonds or escrows, or contingency guaranties. If we are unsuccessful in obtaining the certificate of
authority, winning the bid to provide services, or attracting members in sufficient numbers to cover our costs, the
new business 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 start-up costs.
Even if we are successful in establishing a profitable health plan in a new jurisdiction, 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 jurisdiction 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 jurisdiction, or expanding a health plan in an existing jurisdiction could have a material
adverse effect on our business, financial condition, cash flows, or results of operations.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect
on our business, operating results, stock price, and result in our inability to maintain compliance with
applicable stock exchange listing requirements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements
will not be prevented or detected on a timely basis.
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.
We have identified material weaknesses in our internal control over financial reporting in the past, which have
subsequently been remediated. If additional material weaknesses in our internal control over financial reporting are
discovered or occur in the future, our consolidated financial statements may contain material misstatements and we
could be required to restate our financial results.
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 unable 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.
This Form 10-K reflects management's conclusion regarding the effectiveness of our disclosure controls and
procedures and internal control over financial reporting as of December 31, 2018. See Item 9A, “Controls and
Procedures–Management’s Evaluation of Disclosure Controls and Procedures and Management’s Report on
Internal Control Over Financial Reporting.”
We are dependent on the leadership of our chief executive officer and other executive officers and key
employees.
In late 2017, the board hired Joe Zubretsky as our chief executive officer. Mr. Zubretsky, in turn, has hired other
senior level executives. Under the leadership and direction of Mr. Zubretsky, our executive team has launched a
vigorous turnaround plan, including many profit improvement initiatives. Our turnaround plan and operational
improvements are highly dependent on the efforts of Mr. Zubretsky and our other key executive officers and
Molina Healthcare, Inc. 2018 Form 10-K | 27
employees. The loss of their leadership, expertise, and experience could negatively impact our operations. Our
ability to replace them or any other key employee may be difficult and may take an extended period of time because
of the limited number of individuals in the health care industry who have the breadth and depth of skills and
experience necessary to operate and lead a business such as ours. Competition to hire from this limited pool is
intense, and we may be unable to hire, train, retain, or motivate these personnel. If we are unsuccessful in
recruiting, retaining, managing, and motivating such personnel, our business, financial condition, cash flows, or
results of operations may be adversely affected.
We face various risks inherent in the government contracting process that could materially and adversely
affect our business and profitability, including periodic routine and non-routine reviews, audits, and
investigations by government agencies.
We are subject to various risks inherent in the government contracting process. These risks include routine and
non-routine governmental reviews, audits, and investigations, and compliance with government reporting
requirements. 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 government contracts, 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. 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.
If we sustain a cyber-attack or suffer privacy or data security breaches that disrupt our information systems
or 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, including
sensitive personal information as well as proprietary or confidential information relating to our business or third
parties. To ensure information security, we have implemented controls to protect the confidentiality, integrity and
availability of this data and the systems that store and transmit such data. However, our information technology
systems and safety control systems are subject to a growing number of threats from computer programmers,
hackers, and other adversaries that may be able to penetrate our network security and misappropriate our
confidential information or that of third parties, create system disruptions, or cause damage, security issues, or
shutdowns. They also may be able to develop and deploy viruses, worms, and other malicious software programs
that attack our systems or otherwise exploit security vulnerabilities. Because the techniques used to circumvent,
gain access to, or sabotage security systems can be highly sophisticated and change frequently, they 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 anticipate these techniques or implement adequate preventive measures, resulting in
potential data loss and damage to our systems. Our systems are also subject to compromise from internal threats
such as improper action by employees including malicious insiders, vendors, counterparties, and other third parties
with otherwise legitimate access to our systems. Our policies, employee training (including phishing prevention
training), procedures and technical safeguards may not prevent all improper access to our network or proprietary or
confidential information by employees, vendors, counterparties, or other third parties. Our facilities may also be
vulnerable to security incidents or security attacks, acts of vandalism or theft, misplaced or lost data, human errors,
or other similar events that could negatively affect our systems and our and our members’ data.
Moreover, we face the ongoing challenge of managing access controls in a complex environment. The process of
enhancing our protective measures can itself create a risk of systems disruptions and security issues. Given the
breadth of our operations and increasing sophistication of cyberattacks, a particular incident could occur and persist
for an extended period of time before being detected. The extent of a particular cyberattack and the steps that we
may need to take to investigate the attack may take a significant amount of time before such an investigation could
be completed and full and reliable information about the incident is known. During such time, the extent of any harm
or how best to remediate it might not be known, which could further increase the risks, costs, and consequences of
a data security incident. In addition, our systems must be routinely updated, patched, and upgraded to protect
against known vulnerabilities. The volume of new software vulnerabilities has increased substantially, as has the
importance of patches and other remedial measures. In addition to remediating newly identified vulnerabilities,
previously identified vulnerabilities must also be updated. We are at risk that cyber attackers exploit these known
Molina Healthcare, Inc. 2018 Form 10-K | 28
vulnerabilities before they have been addressed. The complexity of our systems and platforms that we operate, the
increased frequency at which vendors are issuing security patches to their products, our need to test patches, and
in some instances, coordinate with third-parties before they can be deployed, all could further increase our risks.
The increased use of mobile devices and other technologies can heighten these and other risks.
Furthermore, certain aspects of the security of various technologies are unpredictable or beyond our control. For
example, on February 4, 2019, we entered into a master services agreement with Infosys Limited pursuant to which
Infosys will manage certain of our information technology infrastructure services including, among other things, our
information technology operations, end-user services, and data centers. The security of these services will depend
in part on Infosys’s ability to perform the contracted functions and services, including with respect to data security,
in a timely, satisfactory, and compliant manner. The Infosys transaction will require us to devote significant
resources to transition from our existing systems infrastructure, and if we are unable to successfully execute and
manage this transition, any movement of data during the transition may enhance the information management and
data security risks we currently face.
The cost to eliminate or address the foregoing security threats and vulnerabilities before or after a cyber-incident
could be significant. 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. Further, our remediation efforts may be delayed or complicated as a
result of our desire to cooperate with law enforcement agencies. 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 (including but not limited to material fines, damages, consent orders, penalties and/or remediation costs,
mandatory disclosure to the media and regulators, or enforcement proceedings), damage our reputation, or
otherwise have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Any changes to the laws and regulations governing our business, or the interpretation and enforcement of
those laws or regulations, could require us to modify our operations and could negatively impact our
operating results.
Our business is extensively regulated by the federal government and the states in which we operate. The laws and
regulations governing our operations are generally intended to benefit and protect health plan members and
providers rather than managed care organizations. The government agencies administering these laws and
regulations have broad latitude in interpreting and applying them. These laws and regulations, along with the terms
of our government contracts, regulate how we do business, what services we offer, and how we interact with
members and the public. For instance, some states mandate minimum medical expense levels as a percentage of
premium revenues. These laws and regulations, and their interpretations, are subject to frequent change. The
interpretation of certain contract provisions by our governmental regulators may also change. Changes in existing
laws or regulations, or their interpretations, or the enactment of new laws or regulations, could reduce our
profitability by imposing additional capital requirements, increasing our liability, increasing our administrative and
other costs, increasing mandated benefits, forcing us to restructure our relationships with providers, requiring us to
implement additional or different programs and systems, or making it more difficult to predict future results.
Changes in the interpretation of our contracts could also reduce our profitability if we have detrimentally relied on a
prior interpretation.
Potential divestitures of businesses or product lines may materially adversely affect our business, financial
condition, cash flows, or results of operations.
As a part of our business strategy, we continually review our products and business lines across all geographies to
identify opportunities for performance improvement. Depending on the particular circumstances, we may determine
that a divestiture of one or more businesses or product lines would be the best means to further our plan to improve
and sustain profitability and enhance our focus on the execution of our business plan. For example, in late 2018 we
sold two of our former wholly owned subsidiaries: Molina Information Systems, LLC d/b/a Molina Medicaid
Solutions, and Pathways Health and Community Support LLC.
Divestitures involve risks, including: difficulties in the separation of operations, services, products and personnel;
the diversion of management's attention from other business concerns; the disruption of our business; the potential
loss of key employees; the retention of uncertain contingent liabilities related to the divested business or product
line; and the failure of our efforts to divest any such business or product line on the terms and time frames desired
by management, or at all. Furthermore, we may be unsuccessful in finding a replacement for any lost revenue or
Molina Healthcare, Inc. 2018 Form 10-K | 29
income previously derived from the divested business or product line. In addition, divestitures may result in
significant impairment charges, including those related to goodwill and other intangible assets, all of which could
have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Our encounter data may be inaccurate or incomplete, which could have a material adverse effect on our
results of operations, financial condition, cash flows and ability to bid for, and continue to participate in,
certain programs.
Our contracts require the submission of complete and correct encounter data. The accurate and timely reporting of
encounter data is increasingly important to the success of our programs because more states are using encounter
data to determine compliance with performance standards and to set premium rates. We have expended and may
continue to expend additional effort and incur significant additional costs to collect or correct inaccurate or
incomplete encounter data and have been, and continue to be exposed to, operating sanctions and financial fines
and penalties for noncompliance. In some instances, our government clients have established retroactive
requirements for the encounter data we must submit. There also may be periods of time in which we are unable to
meet existing requirements. In either case, it may be prohibitively expensive or impossible for us to collect or
reconstruct this historical data.
We have experienced challenges in obtaining complete and accurate encounter data, due to difficulties with
providers and third-party vendors submitting claims in a timely fashion in the proper format, and with state agencies
in coordinating such submissions. As states increase their reliance on encounter data, these difficulties could
adversely affect the premium rates we receive and how membership is assigned to us and subject us to financial
penalties, which could have a material adverse effect on our results of operations, financial condition, cash flows
and our ability to bid for, and continue to participate in, certain programs.
Our business depends on our information and medical management systems, and our inability to
effectively integrate, manage, update, 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 members and providers also depend upon our information
systems for enrollment, primary care and specialist physician roster access, 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.
We have partnered with third parties to support our information technology systems. This makes our operations
vulnerable to adverse effects if such third parties fail to perform adequately. For example, on February 4, 2019, we
entered into a master services agreement with Infosys Limited pursuant to which Infosys will manage certain of our
information technology infrastructure services including, among other things, our information technology operations,
end-user services, and data centers. If Infosys or any licensor or vendor of any technology which is integral to our
operations were to become insolvent or otherwise fail to support the technology sufficiently, our operations could be
negatively affected.
Our information systems and applications require continual maintenance, upgrading, and enhancement to meet our
operational needs. On an ongoing basis, we evaluate the ability of our existing operations to support our current
and future business needs and to maintain our compliance requirements. As a result, we periodically consolidate,
integrate, upgrade and expand our information systems capabilities as a result of technology initiatives, industry
trends and recently enacted regulations, and changes in our system platforms. Our information systems require an
ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new
systems to keep pace with continuing changes in information processing technology, evolving systems and
regulatory standards and changing customer preferences. Any inability or failure by us or our vendors to properly
maintain information management systems; any failure to efficiently and effectively consolidate our information
systems, including to renew technology, maintain technology currency, keep pace with evolving industry standards
or eliminate redundant or obsolete applications; or any inability or failure to successfully update or expand
processing capability or develop new capabilities to meet our business needs, could result in operational
disruptions, loss of existing members, providers, and customers, difficulty in attracting new members, providers, and
customers, disputes with members, providers, and customers, regulatory or other legal or compliance problems,
and significant increases in administrative expenses and/or other adverse consequences. If for any reason there is
a business continuity interruption resulting in loss of access to or availability of data, we may, among other things,
Molina Healthcare, Inc. 2018 Form 10-K | 30
not be able to meet the full demands of our customers and, in turn, our business, results of operations, financial
condition and cash flow could be adversely impacted.
Moreover, business acquisitions require 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 systems, we could suffer from, among other things, operational disruptions, loss of
members, difficulty in attracting new members, regulatory problems, and increases in administrative expenses.
Because our corporate headquarters are located in Southern California, our business operations may be
significantly disrupted as a result of a major earthquake or wildfire.
Our corporate headquarters is located in Long Beach, California. In addition, some of our health plans’ claims are
processed in Long Beach. Southern California is exposed to a statistically greater risk of a major earthquake and
wildfires than most other parts of the United States. If a major earthquake or wildfire were to strike the Los Angeles
area, our corporate functions and claims processing could be significantly impaired for a substantial period of time.
If there is a major Southern California earthquake or wildfire, there can be no assurances that our disaster recovery
plan will be successful or that the business operations of our health plans, including those that are remote from any
such event, would not be substantially impacted.
We face claims related to litigation which could result in substantial monetary damages.
We are subject to a variety of legal actions, including provider disputes, employment related disputes, health care
regulatory law-based litigation, breach of contract actions, qui tam or False Claims Act actions, and securities class
actions. If we incur liability materially in excess of the amount for which we have insurance coverage, our
profitability would suffer. 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.
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 insurance coverage. Successful 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. Some of the liabilities related to litigation that we may incur 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. The litigation to which we are subject
could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
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
and service providers. Our health plans 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 us. Many other
organizations with which we compete, including large commercial plans and other service providers, have
substantially greater financial and other resources than we do. For these reasons, we may be unable to grow our
business, or may lose business to third parties.
We are subject to risks associated with outsourcing services and functions to third parties.
We contract with third party vendors and service providers who provide services to us and our subsidiaries or to
whom we delegate selected functions. Some of these third-parties also have direct access to our systems. For
example, on February 4, 2019, we entered into a master services agreement with Infosys Limited pursuant to which
Infosys will manage certain of our information technology infrastructure services including, among other things, our
information technology operations, end-user services, and data centers. Our arrangements with third party vendors
and service providers such as Infosys 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 or the information and data relating to our members or customers. We are also at risk of a data security
incident involving a vendor or third party, which could result in a breakdown of such third party’s data protection
Molina Healthcare, Inc. 2018 Form 10-K | 31
processes or cyber-attackers gaining access to our infrastructure through the third party. To the extent that a vendor
or third party suffers a data security incident that compromises its operations, we could incur significant costs and
possible service interruption, which could have an adverse effect on our business and operations. In addition, we
may have disagreements with third party vendors and service providers regarding relative responsibilities for any
such failures or incidents under applicable business associate agreements or other applicable outsourcing
agreements. Any contractual remedies and/or indemnification obligations we may have for vendor or service
provider failures or incidents may not be adequate to fully compensate us for any losses suffered as a result of any
vendor’s failure to satisfy its obligations to us or under applicable law. 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, including significant cybersecurity risk. Violations of, or noncompliance with, laws and/or regulations
governing our business or noncompliance with contract terms by third party vendors and service providers could
increase our exposure to liability to our members, providers, or other third parties, or could result in 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 and/or experience significant
disruption to our operations 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 members or customers and, in turn, our business, financial condition,
and results of operations may be harmed. In addition, we may not fully realize the anticipated economic and other
benefits from our outsourcing projects or other relationships we enter into with third party vendors and service
providers, as a result of regulatory restrictions on outsourcing, unanticipated delays in transitioning our operations
to the third party, vendor or service provider noncompliance with contract terms, unanticipated costs or expenses, or
violations of laws and/or regulations, or otherwise. This could result in substantial costs or other operational or
financial problems that could have a material adverse effect on our business, financial condition, cash flows, and
results of operations.
We are subject to a number of risks in connection with our decision to enter into a master services
agreement with Infosys for the management of certain of our information technology infrastructure
functions.
On February 4, 2019, we entered into a master services agreement with Infosys Limited pursuant to which Infosys
will manage certain of our information technology infrastructure services including, among other things, our
information technology operations, end-user services, and data centers.
Given the scope of services that will be provided by Infosys, the transition of services presents considerable
execution risk inherent to large scale strategic and operational initiatives, including, among others, with respect to
the efficient and secure transfer of information and data and the management of our workforce, which will require us
to coordinate with Infosys and monitor the transition. We have incurred costs and will continue to incur costs and
devote substantial resources during the transition to prepare for Infosys’s services. If we are unable to efficiently,
effectively and successfully carry out the transition of our information technology infrastructure activities to Infosys in
a coordinated and timely manner, including securely transferring information and data between the parties, such
failures or delays in the start of Infosys’s services could materially impact the amount of the intended cost savings
and other intended benefits of the Infosys transaction.
The success of our business will depend in part on Infosys’s ability to perform the contracted functions and
services, including with respect to data security, in a timely, satisfactory, and compliant manner. To protect our
expectations regarding Infosys’ performance, the agreement has minimum service levels that Infosys must meet or
exceed. In the event of an expiration of our agreement with Infosys or upon termination of the agreement for any
reason, we have the right to obtain disengagement assistance from Infosys to facilitate the transition of the
infrastructure services from Infosys to another supplier or back to the Company itself. We would be required to pay
for any disengagement assistance based on a combination of pre-determined charges and hourly fees for services
for which there is no pre-determined charge. We retain the right to terminate the agreement with Infosys, in whole or
in part, for, among other things, cause, convenience, and, if certain criteria are met, a change in the control of
Infosys. However, we will be required to pay varying termination charges if we terminate the agreement for certain
reasons other than for cause. Depending upon the circumstances of the termination, the termination charge may be
material.
Molina Healthcare, Inc. 2018 Form 10-K | 32
Furthermore, changes in Infosys’s operations, security posture or vulnerabilities, financial condition, or other matters
outside of our control could adversely affect the provision of their services to the Company. If we experience a loss
or disruption in the provision of any of these functions or services, or they are not performed in a timely, satisfactory
or compliant manner, we may not fully achieve anticipated cost savings or other expected benefits of the
transaction; we may be subject to regulatory enforcement actions; we may be vulnerable to security breaches that
threaten the security and confidentiality of our information and data; we may not be able to meet the full demands of
our customers and members or be subject to claims against us by our members and providers; and we may have
difficulty in finding alternate providers in a timely manner on terms and conditions favorable to us upon expiration or
termination of the agreement, or at all. Furthermore, the contractual remedies and indemnification obligations for
Infosys’s failures may not fully compensate us for any losses suffered as a result of Infosys’s failure to satisfy its
obligations to us. Any of the foregoing could have a material and adverse impact on our business.
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 obligations under our
outstanding indebtedness.
We have a significant amount of indebtedness. As of December 31, 2018, our total indebtedness was approximately
$1,458 million, including lease financing obligations. As of December 31, 2018, we also had $493 million available
for borrowing under our Credit Facility. On January 31, 2019, we entered into a Sixth Amendment to the Credit
Agreement that provides for a delayed draw term loan facility in an aggregate principal amount of $600 million (the
“Term Loan”), under which we may request up to ten advances, each in a minimum principal amount of $50 million,
until 18 months after January 31, 2019.
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;
exposing us to the risk of increased interest rates to the extent of any future borrowings, including
borrowings under our Credit Agreement, at variable rates of interest;
•
•
• making it more difficult for us to satisfy our obligations with respect to our indebtedness, including our Credit
Agreement 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.
•
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 our revolving Credit
Facility and Term Loan 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;
Molina Healthcare, Inc. 2018 Form 10-K | 33
•
•
enter into certain transactions with our affiliates; and
designate our restricted subsidiaries as unrestricted subsidiaries.
All of these covenants may restrict our ability 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 our Credit Facility and Term Loan including, as a result of cross default provisions and, in the case of our
Credit Agreement, 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 our Credit Facility and
Term Loan, 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 our Credit Facility and Term Loan 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 our Credit
Agreement governing our Credit Facility and Term Loan, from the holders of our outstanding senior notes or from
the holders of other obligations, to avoid defaults thereunder. For example, in February 2017, to avoid default under
our Credit Agreement as a result of our failure to comply with certain financial covenants therein applicable to the
three months ended December 31, 2016, we sought, and obtained, a waiver of such defaults by the required
lenders under our Credit Agreement.
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 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 onerous covenants, which could further restrict our business operations. The
terms of existing or future debt instruments, including our Credit Agreement, 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.
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. In 2017, both Moody’s and Standard and Poor’s downgraded our debt ratings. In February 2018, both S&P
and Moody’s downgraded our corporate and debt ratings further to BB- and B3, respectively, with modest negative
impact on future borrowing cost. A further 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 business, financial condition, cash flows, or results of operations.
Molina Healthcare, Inc. 2018 Form 10-K | 34
Risks Related to Our Common Stock
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 million shares of common stock and 20
million shares of preferred stock. As of December 31, 2018, approximately 62 million 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 of
such state regulatory agencies.
Further, 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 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.
PROPERTIES
As of December 31, 2018, the Health Plans segment leased a total of 66 facilities. We own a 186,000 square-foot
office building in Troy, Michigan, a 24,000 square-foot mixed use facility in Pomona, California, and a 26,700 square
foot data center in Albuquerque, New Mexico. While we believe our current and anticipated facilities will be
adequate to meet our operational needs for the foreseeable future, we continue to periodically evaluate our
employee and operational growth prospects to determine if additional space is required, and where it would be best
located.
Molina Healthcare, Inc. 2018 Form 10-K | 35
LEGAL PROCEEDINGS
Refer to the Notes to Consolidated Financial Statements, Note 17, “Commitments and Contingencies—Legal
Proceedings,” for a discussion of legal proceedings.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
STOCK REPURCHASE PROGRAMS
Purchases of common stock made by us, or on our behalf during the quarter ended December 31, 2018, including
shares withheld by us 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
Average
Price Paid
per
Share
Total Number
of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value
of Shares
Authorized to
Be
Purchased
Under the
Plans or
Programs
— $
— $
— $
— $
—
—
—
—
— $
— $
— $
—
—
—
—
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 U.S. Securities and Exchange Commission (“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 we specifically incorporate it by reference into a filing.
The following line graph compares the percentage change in the cumulative total return on our common stock
against the cumulative total return of the Standard & Poor’s Corporation Composite 500 Index (the “S&P 500”) and
a peer group index for the five-year period from December 31, 2013 to December 31, 2018. The comparison
assumes $100 was invested on December 31, 2013, in our 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.
Molina Healthcare, Inc. 2018 Form 10-K | 36
The peer group index consists of Centene Corporation (CNC), Cigna Corporation (CI), DaVita HealthCare Partners,
Inc. (DVA), Humana Inc. (HUM), Magellan Health, Inc. (MGLN), Team Health Holdings, Inc. (TMH), Tenet
Healthcare Corporation (THC), Triple-S Management Corporation (GTS), Universal American Corporation (UAM),
Universal Health Services, Inc. (UHS) and WellCare Health Plans, Inc. (WCG).
STOCK TRADING SYMBOL AND DIVIDENDS
Our common stock is listed on the New York Stock Exchange under the trading symbol “MOH.” As of February 15,
2019, there were 14 holders of record of our common stock.
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 operations. 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 and Term Loan 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 the Notes to Consolidated Financial Statements, Note 17, “Commitments and
Contingencies—Regulatory Capital Requirements and Dividend Restrictions.”
Molina Healthcare, Inc. 2018 Form 10-K | 37
SELECTED FINANCIAL DATA
Premium revenue
Total revenue
Operating income (loss)
Income (loss) before income taxes
Net income (loss)
Basic net income (loss) per share (1)
Diluted net income (loss) per share (1)
Weighted average shares outstanding:
Basic
Diluted
Operating Statistics:
Medical care ratio (2)
G&A ratio (3)
Effective income tax expense (benefit)
rate
Pre-tax margin (3)
After-tax margin (3)
Ending Membership by Government
Program:
Medicaid
Medicare
Marketplace
Year Ended December 31,
2018
2017
2016
2015
2014
(In millions, except per-share data, percentages and membership)
$
$
$
$
$
$
$
17,612
18,890
1,131
999
707
11.57
10.61
$
$
$
$
$
$
$
61.1
66.6
85.9%
7.1%
29.2%
5.3%
3.7%
$
$
$
$
$
$
$
18,854
19,883
(555)
(612)
(512)
(9.07)
(9.07)
56.4
56.4
90.6 %
8.0 %
(16.4)%
(3.1)%
(2.6)%
$
$
$
$
$
$
$
16,445
17,782
306
205
52
0.93
0.92
55.4
56.2
$
$
$
$
$
$
$
13,261
14,178
387
322
143
2.75
2.58
52.2
55.6
89.8%
7.8%
74.8%
1.2%
0.3%
88.9%
8.1%
55.5%
2.3%
1.0%
9,035
9,667
193
135
62
1.33
1.29
46.9
48.3
89.4%
7.9%
53.8%
1.4%
0.6%
3,361,000
3,537,000
3,605,000
3,235,000
2,541,000
98,000
362,000
101,000
815,000
96,000
526,000
93,000
205,000
67,000
15,000
3,821,000
4,453,000
4,227,000
3,533,000
2,623,000
_______________________________
(1) Source data for calculations in thousands.
(2) Medical care ratio represents medical care costs as a percentage of premium revenue.
(3) G&A ratio represents general and administrative expenses as a percentage of total revenue. Pre-tax margin represents net
income (loss) before income taxes as a percentage of total revenue. After-tax margin represents net income (loss) as a
percentage of total revenue.
Balance Sheet Data:
Cash and cash equivalents
Total assets
Medical claims and benefits payable
Long-term debt, including current portion (1)
Total liabilities
Stockholders’ equity
_______________________________
(1) Also includes lease financing obligations.
December 31,
2018
2017
2016
2015
2014
(In millions)
$
2,826
$
3,186 $
2,819
$
2,329
$
7,154
1,961
1,458
5,507
1,647
8,471
2,192
2,169
7,134
1,337
7,449
1,929
1,645
5,800
1,649
6,576
1,685
1,609
5,019
1,557
1,539
4,435
1,201
887
3,425
1,010
Molina Healthcare, Inc. 2018 Form 10-K | 38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
OVERVIEW
Molina Healthcare, Inc., a FORTUNE 500, multi-state healthcare organization, arranges for the delivery of health
care services to individuals and families who receive their care through the Medicaid and Medicare programs, and
through the state insurance marketplaces (the “Marketplace”). Through our locally operated health plans in 14
states and the Commonwealth of Puerto Rico, we served approximately 3.8 million members as of December 31,
2018. These health plans are operated by our respective wholly owned subsidiaries in those states and in the
Commonwealth of Puerto Rico, each of which is licensed as a health maintenance organization (“HMO”).
We currently have two reportable segments: our Health Plans segment and our Other segment. We manage the
vast majority of our operations through our Health Plans segment. Our Other segment includes the historical results
of the Pathways behavioral health subsidiary, which we sold in the fourth quarter of 2018, and certain corporate
amounts not allocated to the Health Plans segment. Effective in the fourth quarter of 2018, we reclassified the
historical results relating to our Molina Medicaid Solutions (“MMS”) segment, which we sold in the third quarter of
2018, to the Other segment. Previously, results for MMS were reported in a stand-alone segment.
2018 HIGHLIGHTS
In summary, we produced pretax earnings of $999 million and net income of $707 million for the full year ending
December 31, 2018, resulting in an after-tax margin of 3.7%. These results include, on a consolidated basis, a
medical cost ratio (“MCR”) of 85.9% and a general and administrative (“G&A”) expense ratio of 7.1%. The improved
performance in 2018 across all of our programs, health plans, operating metrics, and the actions we took with
respect to capital management, are summarized below.
Program Performance. The improved performance in 2018 demonstrates the effectiveness of our margin recovery
and sustainability plan.
• Our Medicaid program, with $13.6 billion in premium revenue, ended the year with a 90.0% MCR, both
improved when compared with 2017. Several factors contributed to this result, including our ability to manage
medical costs, our success in executing on a variety of profit improvement initiatives, including network
contracting, front-line utilization management, and retaining increased levels of revenue at risk for quality
scores.
• Our Medicare program also delivered improved results in 2018 when compared to 2017. We earned premium
revenues of $2.1 billion in 2018 and attained an MCR of 84.5%. We believe we have proved our ability to
manage high-acuity members who have complex medical conditions and co-morbidities, and we believe we
have proved to be proficient at managing long-term services and supports benefits, an important and fast-
growing benefit across all of our products. Additionally, we increased revenues tied to member risk scores to be
more commensurate with the acuity of our membership.
• Our Marketplace program was a significant contributor to our results in 2018, with approximately $1.9 billion in
premium revenue and an MCR of 58.9%. In 2017 and prior years, the performance in our Marketplace program
was challenged, and we executed corrective pricing actions of nearly 60% in 2018 to improve our results. Our
prices were competitive, even with the significant increases over 2017; which enabled us to retain higher
membership in 2018 than we expected. Lastly, execution of the core managed care fundamentals that are also
applicable to our other programs, and an increase in revenues tied to member risk scores to be commensurate
with the acuity of our membership, also helped to produce the results that we attained.
Health Plan Performance. In summary, we believe our health plan portfolio is performing well. In 2017, more than
25% of our premium revenue related to plans that were not profitable. In 2018, all these plans were profitable. We
significantly improved the performance and balance of our locally operated health plans in 2018. Our largest health
plans from a membership standpoint (going forward in 2019)–California, Ohio, Michigan, Texas, and Washington–
continued to perform well. Florida and New Mexico were challenges due to contract losses, but performed well
considering they faced the run-off of large proportions of membership and revenues. Additionally, our Washington
health plan began to improve its profitability midway through 2018 and we believe is now well-positioned to improve
its pretax margins on an expanded revenue base.
Molina Healthcare, Inc. 2018 Form 10-K | 39
Operational Improvements. We implemented operational improvements that enabled us to gain operating
efficiencies. We continued to improve our G&A cost profile, managing to a G&A expense ratio of 7.1% for the full
year of 2018, which is a 90 basis-point improvement compared to 2017. We reduced our core business workforce
by more than 800 full-time equivalents, or nearly 7% from the beginning of the year. More importantly, we continued
to invest in the business. We improved the performance of our core processes: claims, payment integrity, member
and provider services and a host of others, all of which create lasting effects. Finally, in 2018, we set the stage for
ongoing improvement by making significant progress on a variety of outsourcing initiatives, including the recently
announced outsourcing of certain information technology infrastructure functions to Infosys, which will benefit us in
2019 and beyond.
Balance Sheet and Capital Management. Our improved operating performance in 2018 allowed our business to
dividend approximately $300 million to the parent company. We deployed approximately $1.2 billion to retire
convertible debt and repay the outstanding amount drawn on our revolving Credit Facility. This reduced earnings
per share volatility and lowered our debt-to-capital ratio to approximately 47%.
FINANCIAL SUMMARY
Premium revenue
Premium tax revenue
Health insurer fees reimbursed
Investment income and other revenue
Medical care costs
General and administrative expenses
Premium tax expenses
Health insurer fees
Restructuring and separation costs
Impairment losses
Loss on sales of subsidiaries, net of gain
Operating income (loss)
Interest expense
Other expenses (income), net
Income tax expense (benefit)
Net income (loss)
Net income (loss) per diluted share
Operating Statistics:
Ending total membership
Medical care ratio (1)
G&A ratio (2)
Premium tax ratio (1)
Effective income tax expense (benefit) rate
After-tax margin (2)
$
$
2018
2016
Year Ended December 31,
2017
(Dollars in millions, except per-share amounts)
16,445
468
292
38
18,854
438
—
70
17,612
417
329
125
$
$
15,137
1,333
417
348
46
—
(15)
1,131
115
17
292
707
10.61
$
17,073
1,594
438
—
234
470
—
(555)
118
(61)
(100)
(512)
(9.07)
$
14,774
1,393
468
217
—
—
—
306
101
—
153
52
0.92
3,821,000
4,453,000
4,227,000
85.9%
7.1%
2.3%
29.2%
3.7%
90.6 %
8.0 %
2.3 %
(16.4)%
(2.6)%
89.8%
7.8%
2.8%
74.8%
0.3%
__________________
(1) 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.
(2) G&A ratio represents general and administrative expenses as a percentage of total revenue. After-tax margin represents net
income (loss) as a percentage of total revenue.
Molina Healthcare, Inc. 2018 Form 10-K | 40
CONSOLIDATED RESULTS
See tables below, under “Summary of Significant Items,” for details relating to significant non-run rate items, such as
impairment losses, restructuring costs and material out of period adjustments to premiums or medical care costs.
NET INCOME AND OPERATING INCOME
2018 vs. 2017
Net income amounted to $707 million, or $10.61 per diluted share in 2018, compared with a net loss of $512 million,
or $9.07 per diluted share in 2017. The year-over-year improvement was mainly driven by a decline in the medical
care ratio (“MCR”) and the general and administrative (G&A) expense ratio. Additionally, results for 2017 reflect
$704 million in impairment losses and restructuring costs, or $8.87 per diluted share.
2017 vs. 2016
Net loss was $512 million, or $9.07 per diluted share in 2017 compared with net income of $52 million, or $0.92 per
diluted share in 2016. The substantial decline in 2017 was mainly due to $704 million in impairment losses and
restructuring costs, as mentioned above.
PREMIUM REVENUE
2018 vs. 2017
Premium revenue decreased $1,242 million in 2018 when compared with 2017. Lower premium revenue was
mainly driven by a decrease in Marketplace membership, and lower premiums in Medicaid, including retroactive
California Medicaid Expansion risk corridor adjustments, partially offset by Marketplace premium rate increases.
2017 vs. 2016
Premium revenue increased $2,409 million in 2017 when compared with 2016, due to a 10% increase in
membership, mainly in Marketplace, and a 5% increase in the overall premium revenue PMPM.
PREMIUM TAX REVENUE AND EXPENSES
2018 vs. 2017
The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue)
remained consistent in 2018 when compared to 2017 and was 2.3% in both years. The decrease in expense is
consistent with the decline in premiums.
2017 vs. 2016
The premium tax ratio decreased to 2.3% in 2017 from 2.8% in 2016, mainly due to the significant revenue growth
at our Florida health plan in 2017 and 2016, which operates in a state with no premium tax, and growth in MMP
revenue. The Medicare portion of MMP revenue is not subject to premium tax.
INVESTMENT INCOME AND OTHER REVENUE
2018 vs. 2017
Investment income and other revenue increased to $125 million in 2018, compared with $70 million in 2017,
primarily for two reasons. First, investment income increased due to improved annualized portfolio yields and higher
average invested assets in 2018. In addition, other revenue increased in 2018 due to administrative services fees
earned by our Washington health plan, following that state’s decision to transition the management of Medicaid
pharmacy benefits to an administrative services-based arrangement in 2018.
2017 vs. 2016
Investment income and other revenue increased to $70 million in 2017 compared with $38 million in 2016, mainly
due to an increase in average invested assets.
MEDICAL CARE RATIO (“MCR”)
2018 vs. 2017
Overall, the MCR improved to 85.9% in 2018, from 90.6% in 2017. Excluding the retroactive California Medicaid
Expansion risk corridor adjustments, and the combined benefit of the 2017 Marketplace risk adjustment and CSR
Molina Healthcare, Inc. 2018 Form 10-K | 41
benefit, the MCR for 2018 would have been 86.3%. Excluding several, substantial out-of-period items that are
discussed further below, the MCR for 2017 would have been 89.3%. The improvement was due to a decrease in
the MCRs across our Medicaid, Medicare and Marketplace programs.
2017 vs. 2016
The medical care ratio increased to 90.6% in 2017, from 89.8% in 2016. Our 2017 medical care ratio was burdened
by substantial unfavorable out-of-period items, including $150 million of medical margin deterioration resulting from
unfavorable prior period claims development, the related need to replenish margins for adverse development in our
liability for medical claims and benefits payable, increased reserves for premiums we expect to repay to state
Medicaid agencies, and approximately $90 million of unfavorable Marketplace items, most notably the lack of CSR
reimbursement in the fourth quarter of 2017. Absent these items, our medical care ratio for 2017 would have been
approximately 89.3%.
GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES
2018 vs. 2017
The G&A expense ratio improved to 7.1% in 2018 compared with 8.0% in 2017. This year-over-year improvement
was primarily the result of continued G&A cost containment, partially offset by decreased leverage resulting from
the decline in premium revenues.
2017 vs. 2016
The G&A expense ratio increased to 8.0% in 2017 compared with 7.8% in 2016 due to increased spending related
to growth in our Marketplace membership, partially offset by the benefit of increased leverage resulting from the
associated increase in premium revenues.
HEALTH INSURER FEES (“HIF”)
Health insurer fees amounted to $348 million, and health insurer fees reimbursed amounted to $329 million in 2018.
There were no HIF expensed or reimbursed in 2017 due to the moratorium under the Consolidated Appropriations
Act of 2016. A new moratorium will be in effect in 2019.
IMPAIRMENT LOSSES
In the year ended December 31, 2017, we recorded impairment losses relating to goodwill and intangible assets,
net, of $470 million. These losses included $269 million recorded in the Health Plans segment, and $201 million
recorded in the Other segment, relating to our recently divested Pathways and Molina Medicaid Solutions
subsidiaries.
RESTRUCTURING AND SEPARATION COSTS
In 2018, we incurred restructuring and separation costs of $46 million, including $37 million of additional costs
related to implementation of our restructuring and profit improvement plan in 2017 (the “2017 Restructuring Plan”),
and $9 million related to our IT restructuring plan that was commenced in 2018. In 2017, we incurred restructuring
and separation costs of $234 million as a result of the implementation of our 2017 Restructuring Plan.
LOSS ON SALES OF SUBSIDIARIES, NET OF GAIN
Molina Medicaid Solutions. We closed on the sale of Molina Medicaid Solutions (“MMS”) to DXC Technology
Company on September 30, 2018. The net cash selling price for the equity interests of MMS was $233 million. As a
result of this transaction, we recognized a pretax gain, net of transaction costs, of $37 million. The gain, net of
income tax expense, was $28 million.
Pathways. We closed on the sale of our Pathways behavioral health subsidiary to Pyramid Health Holdings, LLC on
October 19, 2018, for a nominal purchase price. As a result of this transaction, we recognized a pretax loss of $52
million. The loss, net of income tax benefit, was $32 million.
Molina Healthcare, Inc. 2018 Form 10-K | 42
INTEREST EXPENSE
2018 vs. 2017
Interest expense decreased to $115 million for the year ended December 31, 2018, compared with $118 million for
the year ended December 31, 2017. As further described below in “Liquidity,” we reduced the principal amount of
outstanding debt by $759 million in 2018.
Interest expense includes non-cash interest expense relating to the amortization of the discount on our long-term
debt obligations, which amounted to $22 million and $32 million, and $31 million for the years ended December 31,
2018, 2017, and 2016 respectively. See further discussion in Notes to Consolidated Financial Statements, Note 11,
“Debt.”
2017 vs. 2016
Interest expense increased to $118 million for the year ended December 31, 2017, compared with $101 million for
the year ended December 31, 2016. The increase was due primarily to our issuance of $330 million aggregate
principal amount of senior notes (the “4.875% Notes”) due June 15, 2025, and $300 million borrowed under our
Credit Facility in the third quarter of 2017.
OTHER EXPENSES (INCOME), NET
In 2018, we recorded other expenses of $17 million, primarily due to the loss on debt extinguishment resulting from
our 1.125% Convertible Notes repayments and the 1.625% Convertible Notes exchange. These transactions are
described further in Notes to Consolidated Financial Statements, Note 11, “Debt.” In early 2017, we received a $75
million fee in connection with a terminated Medicare acquisition.
INCOME TAXES
2018 vs. 2017
Income tax expense amounted to $292 million in 2018, or 29.2% of pretax income, compared with an income tax
benefit of $100 million in 2017, or 16.4% of the pretax loss.
The effective tax rate for 2018 differs from 2017 mainly due to: 1) the reduction in the federal statutory rate from 35%
to 21% under the Tax Cuts and Jobs Act of 2017 (“TCJA”); and 2) higher non-deductible expenses in 2018, primarily
related to the non-deductible HIF, as a percentage of pre-tax income (loss). The HIF was not applicable in 2017 due
to the 2017 HIF moratorium.
The revaluation of deferred tax assets in connection with the TJCA resulted in $54 million additional income tax expense
in the year ended December 31, 2017. In addition, the effective tax benefit rate for 2017 was less than the statutory
tax benefit due to the relatively large amount of reported expenses that were not deductible for tax purposes, primarily
relating to goodwill impairment losses and separation costs.
2017 vs. 2016
The income tax benefit amounted to $100 million in 2017, or 16.4% of the pretax loss, compared with an income tax
expense of $153 million in 2016, or 74.8% of pretax income.
As discussed above, the effective tax benefit rate in 2017 was impacted by a revaluation of deferred tax assets and
relatively large amounts of nondeductible expenses. The effective tax rate of 74.8% in 2016 mainly reflected the
relatively large impact of the non-deductible HIF expenses relative to pretax income.
Molina Healthcare, Inc. 2018 Form 10-K | 43
SUMMARY OF SIGNIFICANT ITEMS
The tables below summarize the impact of certain items significant to our financial performance in the periods
presented. The individual items presented below increase (decrease) income (loss) before income tax expense
(benefit).
Retroactive California Medicaid Expansion risk corridor
Marketplace risk adjustment, for 2017 dates of service
Marketplace CSR subsidies, for 2017 dates of service
Loss on sales of subsidiaries, net of gain
Restructuring costs
Loss on debt extinguishment
Year Ended
December 31, 2018
Amount
(In millions)
Per Diluted
Share (1)
$
(81) $
56
81
(15)
(46)
(22)
(27) $
$
(0.95)
0.66
0.95
(0.05)
(0.54)
(0.29)
(0.22)
Year Ended
December 31, 2017
Amount
(In millions)
Per Diluted
Share (1)
Termination of CSR subsidy payments for the fourth quarter of 2017
$
(73) $
(0.82)
Marketplace adjustments related to risk adjustment, CSR subsidies, and other items for 2016
dates of service
Change in Marketplace premium deficiency reserve for 2017 dates of service
Impairment losses
Restructuring and separation costs
Loss on debt extinguishment
Fee received for terminated Medicare acquisition
(47)
30
(470)
(234)
(14)
75
(733) $
(0.52)
0.33
(6.01)
(2.86)
(0.24)
0.84
(9.28)
$
___________________________
(1) Except for permanent differences between GAAP and tax (such as certain expenses that are not deductible for tax
purposes), per diluted share amounts are generally calculated at the statutory income tax rate of 22% for 2018, and 37% for
2017.
REPORTABLE SEGMENTS
HOW WE ASSESS PERFORMANCE
We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid
agencies and the federal government.
One of the key metrics used to assess the performance of our Health Plans segment is the MCR, which represents
the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying margin, or the
amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most
important measure of earnings reviewed by management.
Margin for our Health Plans segment is referred to as “Medical Margin,” and for Other, as “Service Margin.”
Management’s discussion and analysis of the changes in the individual components of Medical Margin and Service
Margin follows.
See Notes to Consolidated Financial Statements, Note 18, “Segments,” for more information.
Molina Healthcare, Inc. 2018 Form 10-K | 44
SEGMENT SUMMARY
Medical Margin (1)
Service Margin (2)
Total Margin
MCR
_______________________
2018
2017
2016
(In millions)
$
$
2,475
43
2,518
$
$
1,781
29
1,810
$
$
1,671
54
1,725
85.9%
90.6%
89.8%
(1) Represents premium revenue minus medical care costs.
(2) Represents service revenue minus cost of service revenue.
HEALTH PLANS SEGMENT
RECENT DEVELOPMENTS
For a description of recent renewals of Medicaid contracts, see Item 1. Business— Strategy— Growth Opportunities.
TRENDS AND UNCERTAINTIES
For descriptions of “Status of Contract Re-procurements,” and other developments see Item 1. Business— Our
Business— Medicaid, Medicare and Marketplace.
For discussions of “Pressures on Medicaid Funding,” and “ACA and the Marketplace,” see Item 1. Business—
Legislative and Political Environment.
FINANCIAL PERFORMANCE BY PROGRAM
The following tables summarize member months, premium revenue, medical care costs, MCR and medical margin
by program for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar
amounts are in millions):
TANF and CHIP
Medicaid Expansion
ABD
Total Medicaid
MMP
Medicare
Total Medicare
Total Medicaid and Medicare
Marketplace
Year Ended December 31, 2018
Member
Months (1)
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR (2)
Medical
Margin
29.4 $
5,508
$
187.04
$
4,908
$
166.66
89.1% $
8.1
5.0
42.5
0.7
0.5
1.2
43.7
4.9
2,884
5,231
13,623
1,443
631
2,074
15,697
1,915
356.81
1,049.26
320.43
2,192.58
1,180.46
1,738.85
359.14
392.97
2,587
4,763
12,258
320.11
955.22
288.31
1,241
1,885.59
511
955.81
1,752
1,468.77
14,010
1,127
320.53
231.33
89.7
91.0
90.0
86.0
81.0
84.5
89.2
58.9
600
297
468
1,365
202
120
322
1,687
788
48.6 $
17,612
$
362.54
$
15,137
$
311.59
85.9% $
2,475
Molina Healthcare, Inc. 2018 Form 10-K | 45
Year Ended December 31, 2017
Member
Months (1)
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR (2)
Medical
Margin
30.2 $
5,554
$
183.75
$
5,111
$
169.09
92.0% $
8.1
4.9
43.2
0.7
0.5
1.2
44.4
10.8
3,150
5,135
13,839
1,446
601
2,047
15,886
2,968
388.42
1,050.41
320.16
2,177.72
1,143.63
1,722.47
357.68
274.47
2,674
4,863
12,648
329.73
994.80
292.61
1,317
1,982.36
493
939.67
1,810
1,523.15
14,458
2,615
325.53
241.84
84.9
94.7
91.4
91.0
82.2
88.4
91.0
88.1
443
476
272
1,191
129
108
237
1,428
353
55.2 $
18,854
$
341.39
$
17,073
$
309.14
90.6% $
1,781
Year Ended December 31, 2016
Member
Months (1)
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR (2)
Medical
Margin
30.2 $
5,403
$
179.21
$
4,950
$
164.18
91.6% $
7.8
4.7
42.7
0.6
0.5
1.1
43.8
6.7
2,952
4,666
13,021
1,321
558
1,879
14,900
1,545
378.58
991.24
305.28
2,160.94
1,063.44
1,653.73
340.28
231.38
2,475
4,277
11,702
317.37
908.39
274.33
1,141
1,866.93
515
981.36
1,656
1,457.67
13,358
1,416
305.03
212.17
83.8
91.6
89.9
86.4
92.3
88.1
89.6
91.7
453
477
389
1,319
180
43
223
1,542
129
50.5 $
16,445
$
325.87
$
14,774
$
292.75
89.8% $
1,671
TANF and CHIP
Medicaid Expansion
ABD
Total Medicaid
MMP
Medicare
Total Medicare
Total Medicaid and Medicare
Marketplace
TANF and CHIP
Medicaid Expansion
ABD
Total Medicaid
MMP
Medicare
Total Medicare
Total Medicaid and Medicare
Marketplace
_______________________
(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2)
“MCR” represents medical costs as a percentage of premium revenue.
Medicaid Program
2018 vs. 2017
Our Medicaid Medical Margin improved $174 million, or 15%, in 2018 when compared with 2017. This improvement
was mainly due to an improvement in the MCR from 91.4% to 90.0%, partially offset by a slight decline in
premiums. Medicaid premiums declined slightly, mainly due to a carve-out of pharmacy benefits for all Medicaid
membership in Washington effective July 1, 2018, $81 million in retroactive California Medicaid Expansion risk
corridor adjustments, and a decline in TANF and CHIP membership, partially offset by the impact of rate increases
in certain markets and increased quality incentive premium revenue.
Excluding recognition of the retroactive California Medicaid Expansion risk corridor adjustments, the Medicaid MCR
would have been 89.4% in 2018, or 200 basis points lower compared with 2017. The improvement in MCR was
mainly attributable to improvements in the MCR for TANF and CHIP, primarily at our Illinois, California and Texas
health plans, and improvement in the MCR for ABD, due to several actions, including improved network contracting
and our management of high acuity members. We also benefited from net favorable prior year claims development
in 2018, compared with net unfavorable claims development in 2017. Partially offsetting these improvements was
an increase in the MCR for Medicaid Expansion. The increase was due to the retroactive California risk corridor
adjustments and the premium reduction we received in California in July 2017. Despite an increase in MCR in 2018,
Medicaid Expansion has generally performed well because rate adequacy has trended favorably, and membership
is concentrated in our higher performing health plans, particularly California, Michigan, and Washington.
Molina Healthcare, Inc. 2018 Form 10-K | 46
2017 vs. 2016
Medicaid Medical Margin decreased $128 million, or 10%, in 2017 when compared with 2016, mainly due to an
increase in the MCR from 89.9% to 91.4%, partially offset by an increase in premiums. Medicaid premiums
increased $818 million, or 6%, in 2017 when compared with 2016, mainly due to enrollment growth in Medicaid
Expansion and ABD, and higher average premium PMPM in TANF, CHIP and ABD.
The increase in the Medicaid MCR was mainly attributed to a deterioration in ABD medical costs most notably in
Michigan, New Mexico and Texas, and an increase in Expansion MCR, principally driven by reduced premium rates
in California.
Medicare Program
2018 vs. 2017
The Medicare Medical Margin increased $85 million in 2018, or 36%, when compared with 2017 due mainly to an
improvement in the MCR.
The overall MCR for the combined Medicare programs decreased to 84.5% in 2018, from 88.4% in 2017. The
improvement in 2018 was due to improved medical management of high-acuity members and long-term services
and supports benefits, in addition to increased premium revenue tied to risk scores that is more commensurate with
the acuity of our population.
2017 vs. 2016
The Medicare Medical Margin increased slightly in 2017 when compared with 2016, due mainly to an increase in
premiums, partially offset by an increase in the MCR. MMP and Medicare enrollment and premium combined grew
by approximately 9% in 2017 compared with 2016. The MCR for this membership increased 30 basis points from
2016 to 2017.
Marketplace Program
2018 vs. 2017
The Marketplace Medical Margin increased $435 million in 2018, or 123%, when compared to 2017, due mainly to
an improvement in the MCR, partially offset by a $1,053 million decrease in premiums. The lower Marketplace
premium revenue was driven by a nearly 60% decrease in membership, partially offset by premium rate increases.
As previously disclosed, we increased premium rates and reduced our Marketplace presence effective January 1,
2018, as part of our overall program to improve profitability.
The MCR for the Marketplace program improved to 58.9% in 2018, from 88.1% in 2017. Excluding the combined
benefit of the 2017 Marketplace risk adjustment and CSR benefit recognized in 2018, the MCR in 2018 would have
been 65.0%. Excluding the changes in Marketplace premium deficiency reserves for 2017 dates of service, the
MCR would have been 89.1% for 2017. The year over year improvement is mainly due to the overall program to
improve profitability, as discussed above, as well as increased premium revenue tied to risk scores more that is
commensurate with the acuity of our population.
2017 vs. 2016
The Marketplace Medical Margin increased by $224 million in 2017, almost double that of 2016, due to an increase
in premiums and a reduction in the MCR. The increase in Marketplace premium revenue was driven by a 60%
increase in membership in 2017 compared with 2016.
The Marketplace MCR improved to 88.1% in 2017 compared with 91.7% in 2016. Excluding the changes in
Marketplace premium deficiency reserves for 2017 dates of service, the MCR would have been 89.1% for 2017.
Despite a decrease in the MCR in 2017 compared with 2016, our Marketplace program still failed to meet
expectations in 2017.
Molina Healthcare, Inc. 2018 Form 10-K | 47
FINANCIAL PERFORMANCE BY HEALTH PLAN
The following tables summarize member months, premium revenue, medical care costs, MCR, and medical margin
by health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar
amounts are in millions):
Health Plans Segment Financial Data — Medicaid and Medicare
California
Florida
Illinois
Michigan
New Mexico
Ohio
Puerto Rico
South Carolina
Texas
Washington
Other (1)
California
Florida
Illinois
Michigan
New Mexico
Ohio
Puerto Rico
South Carolina
Texas
Washington
Other (1)
Member
Months
Year Ended December 31, 2018
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
7.1 $
1,931
$
273.59 $
1,724
$
244.21
89.3% $
4.2
2.5
4.5
2.6
3.7
3.7
1.4
2.7
9.1
2.2
1,517
793
1,550
1,241
2,277
696
495
2,296
2,178
723
360.98
322.87
344.42
474.10
608.29
186.59
351.38
839.70
240.42
329.06
1,414
670
1,303
1,140
2,001
636
429
2,092
1,999
602
336.43
272.61
289.53
435.65
534.59
170.45
304.85
765.12
220.72
273.55
93.2
84.4
84.1
91.9
87.9
91.4
86.8
91.1
91.8
83.1
207
103
123
247
101
276
60
66
204
179
121
43.7 $
15,697
$
359.14
$
14,010
$
320.53
89.2% $
1,687
Member
Months
Year Ended December 31, 2017
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
7.4 $
2,392
$
321.46 $
2,117
$
284.53
88.5% $
4.3
2.1
4.6
2.9
3.9
3.8
1.4
2.8
8.9
2.3
1,522
593
1,545
1,258
2,130
732
445
2,150
2,445
674
350.15
286.69
334.22
439.95
544.98
190.13
328.41
769.82
275.64
292.92
1,461
638
1,360
1,166
1,894
691
412
1,978
2,143
598
335.97
308.41
294.15
407.94
484.66
179.65
304.04
708.20
241.55
259.85
96.0
107.6
88.0
92.7
88.9
94.5
92.6
92.0
87.6
88.7
275
61
(45)
185
92
236
41
33
172
302
76
44.4 $
15,886
$
357.68
$
14,458
$
325.53
91.0% $
1,428
Molina Healthcare, Inc. 2018 Form 10-K | 48
California
Florida
Illinois
Michigan
New Mexico
Ohio
Puerto Rico
South Carolina
Texas
Washington
Other (1)
Member
Months
Year Ended December 31, 2016
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
7.4 $
2,247
$
304.83 $
1,900
$
257.72
84.5% $
4.1
2.3
4.7
2.8
3.9
4.0
1.3
2.9
8.1
2.3
1,348
603
1,517
1,245
1,927
726
378
2,182
2,146
581
329.58
258.72
324.18
440.63
490.71
180.65
296.58
744.65
263.50
264.52
1,227
568
1,339
1,162
1,718
694
320
1,926
1,936
568
299.94
243.71
286.00
411.30
437.56
172.57
250.97
657.38
237.66
258.77
91.0
94.2
88.2
93.3
89.2
95.5
84.6
88.3
90.2
97.8
347
121
35
178
83
209
32
58
256
210
13
43.8 $
14,900
$
340.28
$
13,358
$
305.03
89.6% $
1,542
_____________________
(1)
“Other” includes the Idaho, Mississippi, New York, Utah and Wisconsin health plans, which are not individually significant to
our consolidated operating results.
Health Plans Segment Financial Data — Marketplace
California
Florida
Michigan
New Mexico
Ohio
Texas
Washington
Other (1)
California
Florida
Michigan
New Mexico
Ohio
Texas
Washington
Other (1)
Member
Months
0.6 $
0.6
0.2
0.3
0.3
2.7
0.2
—
Year Ended December 31, 2018
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
219
273
51
115
111
948
183
15
$
325.84 $
125
$
187.37
57.5% $
498.66
250.69
403.55
477.03
356.06
664.48
NM
99
31
74
78
593
140
(13)
181.52
150.11
260.29
334.32
222.89
506.07
NM
36.4
59.9
64.5
70.1
62.6
76.2
NM
94
174
20
41
33
355
43
28
788
4.9 $
1,915
$
392.97
$
1,127
$
231.33
58.9% $
Member
Months
Year Ended December 31, 2017
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
1.7 $
309
$
185.88 $
231
$
138.61
74.6% $
3.6
0.3
0.3
0.2
2.6
0.5
1.6
1,046
51
110
86
663
163
540
293.35
180.26
349.50
363.24
250.08
317.39
340.13
1,009
38
84
81
517
156
499
283.17
135.64
264.14
340.44
195.20
304.74
314.21
96.5
75.2
75.6
93.7
78.1
96.0
92.4
10.8 $
2,968 $
274.47
$
2,615
$
241.84
88.1% $
78
37
13
26
5
146
7
41
353
Molina Healthcare, Inc. 2018 Form 10-K | 49
California
Florida
Michigan
New Mexico
Ohio
Texas
Washington
Other (1)
Member
Months
0.8 $
2.6
—
0.2
0.1
1.4
0.3
1.3
Year Ended December 31, 2016
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
131
590
10
60
40
279
76
359
$
166.01 $
228.65
232.88
287.37
348.06
208.48
272.48
271.04
129
538
6
47
29
184
79
404
$
164.35
99.0% $
208.53
154.32
223.85
254.78
137.13
284.87
304.22
91.2
66.3
77.9
73.2
65.8
104.5
112.2
2
52
4
13
11
95
(3)
(45)
129
6.7 $
1,545
$
231.38
$
1,416
$
212.17
91.7% $
_____________________
(1)
“Other” includes the Utah and Wisconsin health plans, which are not individually significant to our consolidated operating
results. We terminated Marketplace operations at these plans effective January 1, 2018, so the ratios for 2018 periods are not
meaningful (NM).
Health Plans Segment Financial Data — Total
California
Florida
Illinois
Michigan
New Mexico
Ohio
Puerto Rico
South Carolina
Texas
Washington
Other (1)
Member
Months
Year Ended December 31, 2018
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
7.7 $
2,150 $
278.13 $
1,849
$
239.28
86.0% $
4.8
2.5
4.7
2.9
4.0
3.7
1.4
5.4
9.3
2.2
1,790
793
1,601
1,356
2,388
696
495
3,244
2,361
738
376.84
322.87
340.35
467.17
600.62
186.59
351.38
601.23
252.92
336.86
1,513
670
1,334
1,214
2,079
636
429
2,685
2,139
589
318.58
272.61
283.47
418.44
522.89
170.45
304.85
497.75
229.13
268.17
84.5
84.4
83.3
89.6
87.1
91.4
86.8
82.8
90.6
79.6
301
277
123
267
142
309
60
66
559
222
149
48.6 $
17,612
$
362.54
$
15,137
$
311.59
85.9% $
2,475
Molina Healthcare, Inc. 2018 Form 10-K | 50
California
Florida
Illinois
Michigan
New Mexico
Ohio
Puerto Rico
South Carolina
Texas
Washington
Other (1)
California
Florida
Illinois
Michigan
New Mexico
Ohio
Puerto Rico
South Carolina
Texas
Washington
Other (1)
Member
Months
Year Ended December 31, 2017
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
9.1 $
2,701
$
296.68 $
2,348
$
257.86
86.9% $
7.9
2.1
4.9
3.2
4.1
3.8
1.4
5.4
9.4
3.9
2,568
593
1,596
1,368
2,216
732
445
2,813
2,608
1,214
324.56
286.69
325.43
430.97
534.56
190.13
328.41
516.84
277.93
312.20
2,470
638
1,398
1,250
1,975
691
412
2,495
2,299
1,097
312.18
308.41
285.11
393.67
476.39
179.65
304.04
458.50
245.01
282.06
96.2
107.6
87.6
91.3
89.1
94.5
92.6
88.7
88.2
90.3
353
98
(45)
198
118
241
41
33
318
309
117
55.2 $
18,854
$
341.39
$
17,073
$
309.14
90.6% $
1,781
Member
Months
Year Ended December 31, 2016
Premium Revenue
Medical Care Costs
Total
PMPM
Total
PMPM
MCR
Medical
Margin
8.2 $
2,378
$
291.41 $
2,029
$
248.70
85.3% $
6.7
2.3
4.7
3.0
4.0
4.0
1.3
4.3
8.4
3.6
1,938
603
1,527
1,305
1,967
726
378
2,461
2,222
940
290.56
258.72
323.36
430.15
486.66
180.65
296.58
576.69
263.80
266.98
1,765
568
1,345
1,209
1,747
694
320
2,110
2,015
972
264.60
243.71
284.82
398.49
432.36
172.57
250.97
494.41
239.21
275.92
91.1
94.2
88.1
92.6
88.8
95.5
84.6
85.7
90.7
103.3
349
173
35
182
96
220
32
58
351
207
(32)
50.5 $
16,445
$
325.87
$
14,774
$
292.75
89.8% $
1,671
____________________________
(1)
“Other” includes the Idaho, New York, Utah and Wisconsin health plans, which are not individually significant to our
consolidated operating results.
OTHER
Molina Medicaid Solutions. We closed on the sale of Molina Medicaid Solutions (“MMS”) to DXC Technology
Company on September 30, 2018. The net cash selling price for the equity interests of MMS was $233 million. As a
result of this transaction, we recognized a pretax gain, net of transaction costs, of $37 million. The gain, net of
income tax expense, was $28 million.
Pathways. We closed on the sale of our Pathways behavioral health subsidiary to Pyramid Health Holdings, LLC on
October 19, 2018, for a nominal purchase price. As a result of this transaction, we recognized a pretax loss of $52
million. The loss, net of income tax benefit, was $32 million.
FINANCIAL OVERVIEW
The year over year changes in service margin in 2018 and 2017 were insignificant to our consolidated results of
operations.
Molina Healthcare, Inc. 2018 Form 10-K | 51
As discussed further in the Notes to Consolidated Financial Statements, Note 8, “Goodwill and Intangible Assets,
Net,” in the year ended December 31, 2017, we recorded goodwill impairment losses of $162 million for Pathways,
and $28 million for MMS, and intangible assets, net impairment losses of $11 million for Pathways.
LIQUIDITY AND FINANCIAL CONDITION
LIQUIDITY
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.
We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company. Our
regulated health plan 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 health plan subsidiaries is in the form of cash, cash equivalents, and investments.
When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated
health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general
corporate purposes. The regulated health plan subsidiaries paid $288 million, $245 million, and $100 million in such
dividends to the parent company in 2018, 2017 and 2016, respectively. Additionally, our unregulated subsidiaries
paid $10 million, $41 million, and $1 million in dividends to the parent in 2018, 2017 and 2016, respectively.
Conversely, the parent company contributed capital of $145 million, $370 million, and $338 million in 2018, 2017
and 2016, respectively, to our regulated health plan subsidiaries to satisfy statutory net worth requirements.
Cash, cash equivalents and investments at the parent company amounted to $170 million and $696 million as of
December 31, 2018 and 2017, respectively. The decrease in 2018 was mainly attributed to cash paid to reduce the
principal amount of outstanding debt, partially offset by net cash dividends received from our subsidiaries.
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.
Our restricted investments are invested principally in certificates of deposit and U.S. Treasury securities; we have
the ability to hold such restricted investments until maturity. All of our unrestricted investments are classified as
current assets and are presented in the table below.
52
INVESTMENTS
As of December 31, 2018
Asset-backed
securities
5%
Municipal
securities
7%
Certificates of deposit
1%
U.S.
reasury
notes
11%
Government-sponsored
enterprise securities
9%
Corporate debt
securities
67%
Cash Flow Activities
Our cash flows are summarized as follows:
Year Ended December 31,
2018
2017
2016
2017 to 2018
Change
2016 to 2017
Change
(In millions)
Net cash (used in) provided by operating activities
$
(314) $
804
$
673
$
(1,118) $
Net cash provided by (used in) investing activities
Net cash (used in) provided by financing activities
1,143
(1,193)
(1,062)
636
(206)
19
2,205
(1,829)
131
(856)
617
Net (decrease) increase in cash, cash
equivalents, and restricted cash and cash
equivalents
Operating Activities
$
(364) $
378
$
486
$
(742) $
(108)
We typically receive capitation payments monthly, in advance of payments for medical claims; however, state or
federal payors may decide to adjust their payment schedules which could positively or negatively impact our
reported cash flows from operating activities in any given period. State or federal payors may delay our premium
payments, or they may prepay the following month’s premium payment.
2018 vs. 2017
Net cash used in operating activities was $314 million in 2018 compared with $804 million of net cash provided in
2017, a decrease in cash of $1,118 million, due to the following factors:
•
•
•
The timing effect of premium receipts and other revenues negatively impacted our cash flows from operating
activities by $633 million on a year-over-year comparative basis. This impact was mainly related to the timing of
premiums received at our California, Illinois, Michigan, Ohio, and Washington health plans.
The decline in medical claims and benefits payable, mainly resulting from reduced Marketplace membership in
Florida, Utah, Washington and Wisconsin decreased cash flows from operations by $489 million.
Settlements with government agencies decreased our cash flows by $915 million on a year-over-year
comparative basis, primarily due to payments in the third quarter of 2018, including risk transfer payments
associated with our Marketplace health plans.
Molina Healthcare, Inc. 2018 Form 10-K | 53
•
The declines discussed above were partially offset by the improved operating performance in our health plans,
driven mainly by lower medical care costs.
2017 vs. 2016
Net cash provided by operating activities was $804 million in 2017, compared with $673 million of net cash provided
in 2016, an increase in cash of $131 million, due to the following factors:
•
•
The timing effect of premium receipts and other revenues, mainly in our California, Florida, Illinois, and
Washington health plans, favorably impacted our cash flows from operating activities by $325 million on a year-
over-year comparative basis.
This improvement was partially offset by: 1) a decrease in cash flows associated with the settlements with
government agencies of approximately $132 million, mainly related to provisions that mandate medical cost
floors or medical corridors; and 2) a decline in our operating performance.
Investing Activities
2018 vs. 2017
Net cash provided by investing activities was $1,143 million in 2018, compared with $1,062 million of net cash used
in 2017, an increase in cash of $2,205 million. The year over year improvement was primarily due to higher
proceeds from sales and maturities of investments, net of purchases, in 2018, largely driven by cash flow needs
associated with our financing activities, as described below.
2017 vs. 2016
Net cash used in investing activities was $1,062 million in 2017, compared with $206 million of net cash used in
2016, a decrease in cash of $856 million. More cash was used in investing activities in 2017 primarily due to $768
million of increased purchases of investments as a result of the 2017 financing transactions described below, and
$207 million decreased proceeds from sales and maturities of investments.
Financing Activities
2018 vs. 2017
Net cash used in financing activities was $1,193 million in 2018, compared with $636 million of net cash provided in
2017, a decrease in cash of $1,829 million, due to the following factors:
•
•
•
•
$300 million repayment of the Credit Facility in 2018;
$847 million net payments for partial repayment of the 1.125% Convertible Notes, and partial settlements of the
related 1.125% Conversion Option, 1.125% Call Option and 1.125% Warrants in 2018; and
$64 million principal repayment of 1.625% Convertible Notes in 2018; partially offset by
$625 million of proceeds from the issuance of the 4.875% Notes and borrowings under the Credit Facility in
2017.
2017 vs. 2016
Cash provided by financing activities was $636 million in 2017, compared with $19 million of net cash provided in
2016, an increase in cash of $617 million. In 2017, cash inflows included $325 million for the net proceeds from our
issuance of the 4.875% Notes, and borrowings under our Credit Facility, with no comparable activity in 2016.
FINANCIAL CONDITION
We believe that our cash resources, borrowing capacity available under our Credit Agreement as discussed further
below in “Future Sources and Uses of Liquidity—Future Sources,” and internally generated funds will be sufficient
to support our operations, regulatory requirements, debt repayment obligations and capital expenditures for at least
the next 12 months.
On a consolidated basis, at December 31, 2018, our working capital was $2,216 million compared with $1,954
million at December 31, 2017. At December 31, 2018, our cash and investments amounted to $4,629 million,
compared with $6,000 million of cash and investments at December 31, 2017.
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 our unregulated parent and subsidiaries. For more information, see the
Liquidity discussion presented earlier in this section of the MD&A.
Molina Healthcare, Inc. 2018 Form 10-K | 54
Debt Ratings
Our 5.375% Notes and 4.875% Notes are rated “BB-” by Standard & Poor’s, and “B3” by Moody’s Investor Service,
Inc. A downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs.
Financial Covenants
Our Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and
an interest coverage ratio. Such ratios, presented below, are computed as defined by the terms of the Credit
Agreement.
Credit Agreement Financial Covenants
Net leverage ratio
Interest coverage ratio
Required Per
Agreement
As of
December 31,
2018
<4.0x
>3.5x
1.1x
13.6x
In addition, the terms of our 4.875% Notes, 5.375% Notes and the 1.125% Convertible Notes contain cross-default
provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the
amount specified in the applicable indenture. As of December 31, 2018, we were in compliance with all covenants
under the Credit Agreement and the indentures governing our outstanding notes.
Capital Plan Progress
In the year ended December 31, 2018, we have reduced the principal amount of our outstanding debt by $759
million.
In the fourth quarter of 2018, we repaid $62 million aggregate principal amount of our 1.125% Convertible Notes
and entered into privately negotiated termination agreements to partially terminate the related 1.125% Call Option
and 1.125% Warrants.
In the third quarter of 2018, we repaid $140 million aggregate principal amount of our 1.125% Convertible Notes
and entered into privately negotiated termination agreements to partially terminate the related 1.125% Call Option
and 1.125% Warrants. In addition, we converted the remaining $64 million aggregate principal amount of our
1.625% Convertible Notes for cash and 0.6 million shares of our common stock. We also terminated our bridge
credit agreement in the third quarter of 2018.
In the second quarter of 2018, we repaid $300 million outstanding under our Credit Facility. In addition, we repaid
$96 million aggregate principal amount of our 1.125% Convertible Notes, and entered into privately negotiated
termination agreements to partially terminate the related 1.125% Call Option and 1.125% Warrants.
In the first quarter of 2018, we exchanged $97 million aggregate principal amount and accrued interest of our
1.625% Convertible Notes for 1.8 million shares of our common stock.
FUTURE SOURCES AND USES OF LIQUIDITY
Future Sources
Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which we
generally receive a short time before we pay for the related health care services. Such cash flows are our primary
source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity.
Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the
capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent
company to be used for general corporate purposes. For more information on our regulatory capital requirements
and dividend restrictions, refer to Notes to Consolidated Financial Statements, Note 17, “Commitments and
Contingencies—Regulatory Capital Requirements and Dividend Restrictions,” and Note 20, “Condensed Financial
Information of Registrant—Note C - Dividends and Capital Contributions.”
Borrowing Capacity and Debt Financing. On January 31, 2019, we entered into a Sixth Amendment to the Credit
Agreement that provides for a delayed draw term loan facility in an aggregate principal amount of $600 million (the
“Term Loan”), under which we may request up to ten advances, each in a minimum principal amount of $50 million,
Molina Healthcare, Inc. 2018 Form 10-K | 55
until 18 months after January 31, 2019. In addition, we have available borrowing capacity of $493 million under our
Credit Facility. See further discussion in the Notes to Consolidated Financial Statements, Note 11, “Debt.”
Savings from Restructuring Plans. Our new executive team has focused on a margin recovery plan that includes
identification and implementation of various profit improvement initiatives. To that end, we implemented a plan to
restructure our information technology department (the “IT Restructuring Plan”) in the third quarter of 2018. As a
part of that plan, on February 4, 2019, we entered into a master services agreement with Infosys Limited pursuant
to which Infosys will manage certain of our information technology infrastructure services including, among other
things, our information technology operations, end-user services, and data centers. We expect the IT Restructuring
Plan to be completed by the end of 2019. We currently estimate that the IT Restructuring Plan will reduce
annualized run-rate expenses by approximately $15 million to $20 million in the first full year, increasing up to
approximately $30 million to $35 million by the end of the fifth full year. Such savings, if achieved, would reduce
Other segment “General and administrative expenses” in our consolidated statements of operations.
Under the restructuring plan we implemented in 2017 (the “2017 Restructuring Plan”), we achieved savings in our
Health Plans and Other segments, which have reduced both “General and administrative expenses” and “Medical
care costs” reported in our consolidated statements of operations. The following table illustrates the run-rate
savings realized under the 2017 Restructuring Plan:
Run-Rate Savings Realized by Reportable Segment
Health Plans
Other
Total
General and administrative expenses
Medical care costs
(In millions)
$
$
60 $
168
228
$
93 $
23
116
$
153
191
344
Further details of the restructuring plans, including costs associated with such plans, are described in the Notes to
Consolidated Financial Statements, Note 15, “Restructuring and Separation Costs.”
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.
Future Uses
Regulatory Capital Requirements and Dividend Restrictions. We have the ability, and have committed to provide,
additional capital to each of our health plans as necessary to ensure compliance with minimum statutory capital
requirements.
1.125% Convertible Notes. The fair value of the 1.125% Convertible Notes was $732 million as of December 31,
2018, which includes both the principal amount outstanding and the fair value of the 1.125% Conversion Option.
Refer to the Notes to Consolidated Financial Statements, Note 11, “Debt,” for a detailed discussion of our
convertible notes, including recent transactions. The 1.125% Convertible Notes are convertible by the holders within
one year of December 31, 2018, until they mature; therefore, they are reported in current portion of long-term debt.
If conversion requests are received, the settlement of the notes must be paid in cash pursuant to the terms of the
applicable indenture. We have sufficient available cash, combined with borrowing capacity available under our
Credit Agreement (including the Term Loan described above), to fund conversions should they occur.
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:
• Medical claims and benefits payable. See discussion below, and refer to the Notes to Consolidated
Financial Statements, Notes 2, “Significant Accounting Policies,” and 10, “Medical Claims and Benefits
Payable” for more information.
Molina Healthcare, Inc. 2018 Form 10-K | 56
•
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 the Notes to
Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”
• Quality incentives. For a comprehensive discussion of this topic, including amounts recorded in our
consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2,
“Significant Accounting Policies.”
• Goodwill and intangible assets, net. At December 31, 2018, goodwill and intangible assets, net,
represented approximately 3% of total assets and 12% of total stockholders’ equity, compared with 3% and
19%, respectively, at December 31, 2017. For a comprehensive discussion of this topic, including amounts
recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements,
Note 2, “Significant Accounting Policies,” and Note 8, “Goodwill and Intangible Assets, Net.”
MEDICAL CARE COSTS
MEDICAL CLAIMS AND BENEFITS PAYABLE
Medical care costs are recognized in the period in which services are provided and include amounts that have been
paid by us through the reporting date, as well as estimated medical claims and benefits payable for costs that have
been incurred but not paid by us as of the reporting date. Medical care costs include, among other items, fee-for-
service claims, pharmacy benefits, capitation payments to providers, and various other medically-related costs. We
use judgment to determine the appropriate assumptions for determining the required estimates.
Under fee-for-service claims arrangements, we retain the financial responsibility for medical care provided and incur
costs based on actual utilization of hospital and physician services. Pharmacy benefits represent payments for
members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates earned
based on historical and current utilization of prescription drugs and contract terms. Capitation payments represent
monthly contractual fees paid to physicians and other providers on a per-member, per-month basis, who are
responsible for providing medical care to members, which could include medical or ancillary costs like dental, vision
and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered and are
not subject to significant accounting estimates. Due to insolvency or other circumstances, such providers may be
unable to pay claims they have incurred with third parties in connection with referral services provided to our
members. Depending on states’ laws, we may be held liable for such unpaid referral claims even though the
delegated provider has contractually assumed such risk. Based on our current assessment, such losses have not
been and are not expected to be significant. Other medical care costs include all medically-related administrative
costs, certain provider incentive costs, provider claims, and other health care expenses. See further discussion of
provider claims in Notes to Consolidated Financial Statements, Note 17, “Commitments and Contingencies.”
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. Additionally, we include an estimate for the cost of settling
claims incurred through the reporting date in our medical claims and benefits payable liability.
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
_____________________
December 31,
2018
2017
2016
(In millions)
1,562
$
1,717
$
1,352
115
52
232
112
67
296
112
37
428
1,961
$
2,192
$
1,929
$
$
(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 operations. As of December 31, 2018, 2017, and 2016, we recorded non-risk provider
payables relating to such intermediary arrangements of approximately $107 million, $122 million and $225 million,
respectively.
Molina Healthcare, Inc. 2018 Form 10-K | 57
The determination of our liability for fee-for-service claims incurred but not paid (“IBNP”) is particularly important to
the determination of our financial position and results of operations in any given period and requires the application
of a significant degree of judgment by our management.
As a result, the determination of IBNP is subject to an inherent degree of uncertainty. Our IBNP claims reserve
represents our best estimate of the total amount we will ultimately pay with respect to claims incurred as of the
balance sheet date. We estimate our IBNP monthly using actuarial methods based on several factors.
The factors we consider when estimating our IBNP include, without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
claims receipt and payment experience (and variations in that experience),
changes in membership,
provider billing practices,
health care service utilization trends,
cost trends,
product mix,
seasonality,
prior authorization of medical services,
benefit changes,
known outbreaks of disease or increased incidence of illness such as influenza,
provider contract changes,
changes to Medicaid fee schedules, and
the incidence of high dollar or catastrophic claims.
Our assessment of these factors is then translated into an estimate of our IBNP liability at the relevant measuring
point through the calculation of a base estimate of IBNP, a further provision for adverse claims development, and an
estimate of the administrative costs of settling all claims incurred through the reporting date. The base estimate of
IBNP is derived through application of claims payment completion factors and trended PMPM cost estimates.
For the fourth 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, 2018 that
would result if we change our completion factors for the fourth through the twelfth months preceding December 31,
2018, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims
liabilities. Dollar amounts are in millions.
Increase (Decrease) in Estimated Completion Factors
(6)%
(4)%
(2)%
2%
4%
6%
Increase
(Decrease)
in Medical
Claims
and
Benefits
Payable
$
554
369
185
(185)
(369)
(554)
For the three months of service immediately prior to the reporting date, actual claims paid are a less 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 a blend of
estimated completion factors and trended PMPM cost estimates. The PMPM costs estimates are designed to reflect
recent trends in payments and expense, utilization patterns, authorized services, pharmacy utilization and other
relevant factors.
The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2018 that
would result if we alter 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.
Molina Healthcare, Inc. 2018 Form 10-K | 58
(Decrease) Increase in Trended Per Member Per Month Cost Estimates
(6)%
(4)%
(2)%
2%
4%
6%
(Decrease)
Increase
in Medical
Claims
and
Benefits
Payable
$
(185)
(124)
(62)
62
124
185
The following per-share amounts are based on a combined federal and state statutory tax rate of 22%, and 67
million diluted shares outstanding for the year ended December 31, 2018. Assuming a hypothetical 1% change in
completion factors from those used in our calculation of IBNP at December 31, 2018, net income for the year ended
December 31, 2018 would increase or decrease by approximately $72 million, or $1.08 per diluted share. Assuming
a hypothetical 1% change in PMPM cost estimates from those used in our calculation of IBNP at December 31,
2018, net income for the year ended December 31, 2018 would increase or decrease by approximately $24 million,
or $0.36 per diluted share. The corresponding figures for a 5% change in completion factors and PMPM cost
estimates would be $360 million, or $5.41 per diluted share, and $121 million, or $1.81 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, changes 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 $72 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 development in our claim payments for which the base actuarial model is not intended to and does not
account. We refer to this additional liability as the provision for adverse claims development. The provision for
adverse claims development is a component of our overall determination of the adequacy of our IBNP, and
averages between 8% to 10% of 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 are based,
modifications and upgrades to our claims processing systems and practices, and increasing medical costs.
Because of the complexity of our business, the number of states in which we operate, and the need to account for
different health care benefit packages among those states, we make an overall assessment of IBNP after
considering the base actuarial model reserves and the provision for adverse claims development.
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 development and the accrued cost of settling those claims. Because the
amount of our initial liability is 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.
The use of a consistent methodology (including a consistent provision for adverse claims development) in
estimating our liability for medical claims and benefits payable minimizes the degree to which the estimate of that
liability at the close of one period may materially differ compared to our actual experience and affect consolidated
Molina Healthcare, Inc. 2018 Form 10-K | 59
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. For
example, 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, to the
extent that replenishment of reserves is not equal to the benefit recognized due to the absence of adverse
development. Conversely, in the presence of adverse claims development, the financial impact of recording claims
expense in the current period that is related to dates of service in the prior period will be compounded by the need
to replenish the provision for adverse development.
The development of our IBNP estimate is a continuous process that we monitor and update monthly as additional
claims payment information becomes available. As additional information becomes known to us, we adjust our
actuarial model accordingly. 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 claim reserves would materially decrease reported earnings for the period in which the adjustment is made.
There are many related factors working in conjunction with one another that determine the accuracy of our
estimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to
quantify the impact that any single factor has on a change in estimate. 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.
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, changes in estimates involving trended PMPM costs will almost
always be accompanied by changes in estimates involving completion factors, and vice versa. In such
circumstances, changes 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.
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 report reinsurance premiums as a
reduction to premium revenue, while related reinsurance recoveries are reported as a reduction to medical care
costs.
Refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” and Note 10,
“Medical Claims and Benefits Payable,” for additional information regarding the specific factors used to determine
our changes in estimates of IBNP, as well as a table presenting the components of the change in our medical
claims and benefits payable, for all periods presented in the accompanying consolidated financial statements.
CONTRACTUAL OBLIGATIONS
In the table below, we present our contractual obligations as of December 31, 2018. 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 non-cancelable commitments.
Molina Healthcare, Inc. 2018 Form 10-K | 60
Total (1)
2019
2020-2021
(In millions)
2022-2023
2024 and after
Medical claims and benefits payable
Principal amount of debt (2)
Amounts due government agencies
Lease financing obligations
Interest on long-term debt
Operating leases
Purchase commitments
$
1,961
$
1,961
$
— $
1,282
967
411
253
147
8
—
967
19
57
46
5
252
—
39
108
58
3
— $
700
—
42
65
28
—
$
5,029
$
3,055
$
460
$
835
$
—
330
—
311
23
15
—
679
_______________________________
(1) As of December 31, 2018, we have recorded approximately $20 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 Notes to Consolidated Financial Statements, Note 13, “Income Taxes.”
(2) Represents the principal amounts due on our 1.125% Convertible Notes due 2020, 5.375% Notes due 2022, and our
4.875% Notes due 2025.
Commitments and Contingencies. We are not a party to off-balance sheet financing arrangements, except for
operating leases which are disclosed in the Notes to Consolidated Financial Statements, Note 17, “Commitments
and Contingencies.”
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Our earnings and financial position are exposed to financial market risk relating changes in interest rates, and the
resulting impact on investment income and interest expense.
Substantially all of our investments and restricted investments are subject to interest rate risk and will decrease in
value if market interest rates increase. Assuming a hypothetical and immediate 1% increase in market interest rates
at December 31, 2018, the fair value of our fixed income investments would decrease by approximately $14
million. Declines in interest rates over time will reduce our investment income.
For further information on fair value measurements and our investment portfolio, please refer to the Notes to
Consolidated Financial Statements, Note 4, “Fair Value Measurements,” Note 5, “Investments,” and Note 9,
“Restricted Investments.”
Molina Healthcare, Inc. 2018 Form 10-K | 61
Borrowings under our Credit Agreement, including both the Credit Facility and the Term Loan, bear interest based,
at our election, on a base rate or other defined rate, plus in each case the applicable margin. As of December 31,
2018, no amounts were outstanding under the Credit Facility. See Notes to Consolidated Financial Statements,
Note 11, “Debt,” for more information.
Molina Healthcare, Inc. 2018 Form 10-K | 62
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Balance Sheets
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
64
65
66
67
68
70
Molina Healthcare, Inc. 2018 Form 10-K | 63
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenue:
Premium revenue
Service revenue
Premium tax revenue
Health insurer fees reimbursed
Investment income and other revenue
Total revenue
Operating expenses:
Medical care costs
Cost of service revenue
General and administrative expenses
Premium tax expenses
Health insurer fees
Depreciation and amortization
Restructuring and separation costs
Impairment losses
Total operating expenses
Loss on sales of subsidiaries, net of gain
Operating income (loss)
Other expenses, net:
Interest expense
Other expenses (income), net
Total other expenses, net
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
2018
Year Ended December 31,
2017
(In millions, except per-share data)
2016
$
17,612
$
18,854
$
16,445
407
417
329
125
521
438
—
70
539
468
292
38
18,890
19,883
17,782
17,073
492
1,594
438
—
137
234
470
14,774
485
1,393
468
217
139
—
—
20,438
17,476
15,137
364
1,333
417
348
99
46
—
17,744
(15)
1,131
115
17
132
999
292
707
—
(555)
118
(61)
57
(612)
(100)
$
(512) $
11.57
$
10.61 $
(9.07) $
(9.07) $
61
67
56
56
—
306
101
—
101
205
153
52
0.93
0.92
55
56
$
$
$
See accompanying notes.
Molina Healthcare, Inc. 2018 Form 10-K | 64
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)
Other comprehensive (loss) income:
Unrealized investment (loss) gain
Less: effect of income taxes
Other comprehensive (loss) income, net of tax
Comprehensive income (loss)
2018
Year Ended December 31,
2017
(In millions)
2016
707
$
(512) $
(3)
(1)
(2)
(5)
(2)
(3)
705
$
(515) $
52
3
1
2
54
$
$
See accompanying notes.
Molina Healthcare, Inc. 2018 Form 10-K | 65
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2018
2017
(In millions,
except per-share data)
ASSETS
Current assets:
Cash and cash equivalents
Investments
Restricted investments
Receivables
Prepaid expenses and other current assets
Derivative asset
Total current assets
Property, equipment, and capitalized software, net
Goodwill and intangible assets, net
Restricted investments
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
Current portion of long-term debt
Derivative liability
Total current liabilities
Long-term debt
Lease financing obligations
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.001 par value per share; 150 million shares authorized; outstanding:
62 million shares at December 31, 2018 and 60 million shares at December 31, 2017
Preferred stock, $0.001 par value per share; 20 million shares authorized, no shares
issued and outstanding
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
See accompanying notes.
$
$
$
$
$
2,826
1,681
—
1,330
149
476
6,462
241
190
120
117
24
7,154 $
$
1,961
967
390
211
241
476
4,246
1,020
197
44
5,507
—
—
643
(8)
1,012
1,647
7,154
$
3,186
2,524
169
871
239
522
7,511
342
255
119
103
141
8,471
2,192
1,542
366
282
653
522
5,557
1,318
198
61
7,134
—
—
1,044
(5)
298
1,337
8,471
Molina Healthcare, Inc. 2018 Form 10-K | 66
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Outstanding
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
(In millions)
Retained
Earnings
Total
Balance at January 1, 2016
56 $
— $
803
$
(4) $
758 $
1,557
Net income
Other comprehensive income, net
Share-based compensation
Tax benefit from share-based
compensation
Balance at December 31, 2016
Net loss
Exchange of 1.625% Convertible Notes
Other comprehensive loss, net
Share-based compensation
Balance at December 31, 2017
Net income
Adoption of Topic 606
Adoption of ASU 2018-02
Partial termination of 1.125% Warrants
Exchange of 1.625% Convertible Notes
Conversion of 1.625% Convertible Notes
Other comprehensive loss, net
Share-based compensation
Balance at December 31, 2018
—
—
1
—
57
—
3
—
—
60
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
36
2
841
—
161
—
42
1,044
—
—
—
(550)
108
4
—
37
—
2
—
—
(2)
—
—
(3)
—
(5)
—
—
(1)
—
—
—
(2)
—
52
—
—
—
810
(512)
—
—
—
298
707
6
1
—
—
—
—
—
52
2
36
2
1,649
(512)
161
(3)
42
1,337
707
6
—
(550)
108
4
(2)
37
62 $
— $
643
$
(8) $
1,012 $
1,647
See accompanying notes.
Molina Healthcare, Inc. 2018 Form 10-K | 67
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
$
operating activities:
Depreciation and amortization
Deferred income taxes
Share-based compensation
Non-cash restructuring charges
Amortization of convertible senior notes and lease financing obligations
Loss on sales of subsidiaries, net of gain
Loss on debt extinguishment
Impairment losses
Other, net
Changes in operating assets and liabilities:
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 (used in) provided by operating activities
Investing activities:
Purchases of investments
Proceeds from sales and maturities of investments
Purchases of property, equipment and capitalized software
Net cash received from sale of subsidiaries
Net cash paid in business combinations
Other, net
Net cash provided by (used in) investing activities
Financing activities:
Repayment of credit facility
Repayment of principal amount of 1.125% Convertible Notes
Cash paid for partial settlement of 1.125% Conversion Option
Cash received for partial settlement of 1.125% Call Option
Cash paid for partial termination of 1.125% Warrants
Repayment of principal amount of 1.625% Convertible Notes
Proceeds from senior notes offerings, net of issuance costs
Proceeds from borrowings under credit facility
Other, net
Net cash (used in) provided by financing activities
Net (decrease) increase in cash, cash equivalents, and restricted cash and
cash equivalents
Cash, cash equivalents, and restricted cash and cash equivalents at
beginning of period
Cash, cash equivalents, and restricted cash and cash equivalents at end of
period
2018
Year Ended December 31,
2017
(In millions)
2016
707
$
(512) $
52
127
(6)
27
17
22
15
22
—
4
(530)
6
(226)
(574)
45
(21)
51
(314)
(1,444)
2,445
(30)
190
—
(18)
1,143
(300)
(298)
(623)
623
(549)
(64)
—
—
18
(1,193)
(364)
178
(94)
46
60
32
—
14
470
21
103
(56)
263
341
(12)
(34)
(16)
804
(2,697)
1,759
(86)
—
—
(38)
(1,062)
—
—
—
—
—
—
325
300
11
636
378
3,290
2,912
182
22
26
—
31
—
—
—
16
(348)
(69)
226
473
(4)
92
(26)
673
(1,929)
1,966
(176)
—
(48)
(19)
(206)
—
—
—
—
—
—
—
—
19
19
486
2,426
$
2,926
$
3,290
$
2,912
See accompanying notes.
Molina Healthcare, Inc. 2018 Form 10-K | 68
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Supplemental cash flow information:
Cash paid during the period for:
Income taxes
Interest
Schedule of non-cash investing and financing activities:
1.625% Convertible Notes exchange transaction:
Common stock issued in exchange for 1.625% Convertible Notes
Component of 1.625% Convertible Notes allocated to additional paid-in
capital, net of income taxes
Net increase to additional paid-in capital
Common stock used for stock-based compensation
Details of sales of subsidiaries:
Decrease in carrying amount of assets
Decrease in carrying amount of liabilities
Transaction costs
Cash received from buyers
Loss on sale of subsidiaries, net of gain
Details of business combinations:
Fair value of assets acquired
Fair value of liabilities assumed
Payable to seller
Amounts advanced for acquisitions
Net cash paid in business combinations
Details of change in fair value of derivatives, net:
Gain (loss) on 1.125% Call Option
(Loss) gain on 1.125% Conversion Option
Change in fair value of derivatives, net
2018
Year Ended December 31,
2017
(In millions)
2016
240
$
93 $
7 $
78 $
153
66
131
$
193
$
(23)
108
$
(32)
161
$
(6) $
(22) $
(327) $
— $
85
(15)
242
—
—
—
(15) $
— $
— $
— $
—
—
—
—
—
—
— $
— $
577
$
(577)
— $
255
$
(255)
— $
—
—
—
(8)
—
—
—
—
—
(186)
28
8
102
(48)
(107)
107
—
$
$
$
$
$
$
$
$
$
$
$
See accompanying notes.
Molina Healthcare, Inc. 2018 Form 10-K | 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides managed health care services under the Medicaid and Medicare programs and
through the state insurance marketplaces (the “Marketplace”). We currently have two reportable segments: our
Health Plans segment and our Other segment. We manage the vast majority of our operations through our Health
Plans segment. Our Other segment includes the historical results of the Pathways behavioral health subsidiary,
which we sold in the fourth quarter of 2018, and certain corporate amounts not allocated to the Health Plans
segment. Effective in the fourth quarter of 2018, we reclassified the historical results relating to our Molina Medicaid
Solutions (“MMS”) segment, which we sold in the third quarter of 2018, to the Other segment. Previously, results for
MMS were reported in a stand-alone segment.
We operate health plans in 14 states and the Commonwealth of Puerto Rico. As of December 31, 2018, these
health plans served approximately 3.8 million members eligible for Medicaid, Medicare, and other government-
sponsored health care programs for low-income families and individuals. This membership includes Affordable Care
Act 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 state Medicaid contracts generally have terms of three to five 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. Such contracts are subject to risk of loss in states that issue requests for proposal
(“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 not be renewed.
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; and regions or service areas.
Recent Developments – Health Plans Segment
Mississippi Health Plan. Our Mississippi health plan commenced operations on October 1, 2018 and served
approximately 26,000 Medicaid members as of December 31, 2018. In December 2018, our Mississippi health plan
was awarded a contract by the Mississippi Division of Medicaid for the Children’s Health Insurance Program
(“CHIP”). Services under the new three-year contract were initially set to begin July 1, 2019; however, the start date
is now pending the outcome of a protest of the contract awards.
Puerto Rico Health Plan. In July 2018, our Puerto Rico health plan was selected by the Puerto Rico Health
Insurance Administration to be one of the organizations to administer the Commonwealth’s new Medicaid Managed
Care contract. As of December 31, 2018, we served approximately 252,000 members under the new contract,
which represents a reduction in membership compared with 320,000 members served as of September 30, 2018.
The new contract commenced on November 1, 2018 and has a three-year term with an optional one year
extension. The Puerto Rico health plan’s premium revenue amounted to $696 million in the year ended December
31, 2018.
Florida Health Plan. In June 2018, our Florida health plan was awarded comprehensive Medicaid Managed Care
contracts by the Florida Agency for Health Care Administration in Regions 8 and 11 of the Florida Statewide
Medicaid Managed Care Invitation to Negotiate. Under the new contracts, effective January 1, 2019, we serve
approximately 98,000 Medicaid members in those regions, which represented premium revenue of approximately
$462 million in the year ended December 31, 2018. As of December 31, 2018, we served a total of 272,000
Medicaid members in Florida, which represented premium revenue of approximately $1,479 million in the year
ended December 31, 2018.
Washington Health Plan. In May 2018, our Washington health plan was selected by the Washington State Health
Care Authority to enter into a managed care contract for the eight remaining regions of the state’s Apple Health
Integrated Managed Care program, in addition to the two regions previously awarded to us. As of December 31,
2018, we served approximately 751,000 Medicaid members in Washington, which represented premium revenue of
approximately $2,035 million in the year ended December 31, 2018.
New Mexico Health Plan. In January 2018, we were notified by the New Mexico Medicaid agency that we had not
been selected for a tentative award of a 2019 Medicaid contract. A hearing was held on our judicial protest on
Molina Healthcare, Inc. 2018 Form 10-K | 70
October 17, 2018, and our protest was rejected. We filed an appeal with the New Mexico Court of Appeals on
January 28, 2019. We are continuing to manage the business in run-off until the determination of these further
appeals or our decision not to pursue our appeal rights. As of December 31, 2018, we served approximately
196,000 Medicaid members in New Mexico, and Medicaid premium revenue amounted to $1,181 million in the year
ended December 31, 2018. Our New Mexico health plan continues to serve Medicare and Marketplace members,
but, effective January 1, 2019, no longer has Medicaid members.
Recent Developments – Other
Molina Medicaid Solutions. We closed on the sale of Molina Medicaid Solutions (“MMS”) to DXC Technology
Company on September 30, 2018. The net cash selling price for the equity interests of MMS was $233 million. As a
result of this transaction, we recognized a pretax gain, net of transaction costs, of $37 million. The gain, net of
income tax expense, was $28 million.
Pathways. We closed on the sale of our Pathways behavioral health subsidiary to Pyramid Health Holdings, LLC on
October 19, 2018, for a nominal purchase price. As a result of this transaction, we recognized a pretax loss of $52
million. The loss, net of income tax benefit, was $32 million.
Presentation and Reclassification
We have reclassified certain amounts in the 2017 and 2016 consolidated statements of cash flows to conform to the
2018 presentation, relating to the presentation of restricted cash and cash equivalents. The reclassification is a
result of our adoption of Accounting Standards Update (“ASU”) 2016-18, Restricted Cash effective January 1, 2018.
See Note 2, “Significant Accounting Policies,” for further information, including the amount reclassified.
We have combined certain line items in the accompanying consolidated balance sheets. For all periods presented,
we have combined the presentation of:
Income taxes refundable with “Prepaid expenses and other current assets;”
Income taxes payable with “Accounts payable and accrued liabilities;” and
•
•
• Goodwill, and intangible assets, net to a single line.
Consolidation
The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. As of
December 31, 2018, we were no longer a party to any variable interest entities following the termination of certain
agreements earlier in the year and in the fourth quarter of 2018. Such variable interest entities were insignificant. 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. 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.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles
(“GAAP”) 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 plans’ contractual provisions that may limit revenue recognition based upon the costs incurred or the
profits realized under a specific contract;
Health plans’ quality incentives that allow us to recognize incremental revenue if certain quality standards
are met;
Settlements under risk or savings sharing programs;
The assessment of long-lived and intangible assets, and goodwill, for impairment;
The determination of 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.
Molina Healthcare, Inc. 2018 Form 10-K | 71
2. Significant Accounting Policies
Certain of our significant accounting policies are discussed within the note to which they specifically relate.
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. The
following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents
reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts
presented in the accompanying consolidated statements of cash flows. The restricted cash and cash equivalents
presented below are included in “Restricted investments” in the accompanying consolidated balance sheets.
2018
Year Ended December 31,
2017
(In millions)
2016
Cash and cash equivalents
Restricted cash and cash equivalents, non-current
Restricted cash and cash equivalents, current
$
2,826 $
3,186
$
2,819
100
—
95
9
93
—
Total cash, cash equivalents, and restricted cash and cash equivalents
presented in the consolidated statements of cash flows
$
2,926
$
3,290
$
2,912
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 (loss). The cost of securities sold is
determined using the specific-identification method.
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 investments, see
Note 4, “Fair Value Measurements,” Note 5, “Investments,” and Note 9, “Restricted Investments.”
Long-Lived Assets, including Intangible Assets
Long-lived assets consist primarily of property, equipment, capitalized software (see Note 7, “Property, Equipment,
and Capitalized Software, Net”), and intangible assets resulting from acquisitions. 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 five 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, including the ability of our health plan subsidiaries to obtain 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 greater of the undiscounted cash flows that are expected to result from the use of the asset
or related group of assets, or its value under the asset liquidation method. 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. Refer to Note 8, “Goodwill and Intangible Assets, Net”, for further details.
Molina Healthcare, Inc. 2018 Form 10-K | 72
Goodwill and Business Combinations
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business
combinations. Goodwill is not amortized but is tested for impairment on an annual basis and more frequently if
impairment indicators are present. Such events or circumstances may include experienced or expected operating
cash-flow deterioration or losses, significant losses of membership, loss of state funding, loss of state contracts, and
other factors. Goodwill is impaired if the carrying amount of the reporting unit exceeds its estimated fair value. This
excess is recorded as an impairment loss and adjusted if necessary for the impact of tax-deductible goodwill. The
loss recognized may not exceed the total goodwill allocated to the reporting unit. Our reporting units consist of our
individual health plans.
During the fourth quarter of 2018, we changed the date of our annual impairment testing of goodwill from December
31 to October 1. When testing goodwill for impairment, we may first assess qualitative factors, such as industry and
market factors, cost factors, and changes in overall performance, to determine if it is more likely than not that the
carrying value of a reporting unit exceeds its estimated fair value. If our qualitative assessment indicates that it is
more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, we perform the
quantitative assessment.
We may also elect to bypass the qualitative assessment and proceed directly to the quantitative assessment. The
dynamic economic and political environments in which we operate may necessitate the performance of a
quantitative test to prove that goodwill is not impaired. If performing a quantitative assessment, we generally
estimate the fair values of our reporting units by applying the income approach, using discounted cash flows. For
the annual impairment test, the base year in the reporting units’ discounted cash flows is derived from the annual
financial budgeting cycle, for which the planning process commences in the fourth quarter of the year. When
computing discounted cash flows, we make assumptions about a wide variety of internal and external factors, and
consider what the reporting unit’s selling price would be in an orderly transaction between market participants at the
measurement date. Significant assumptions include financial projections of free cash flow (including significant
assumptions about membership, premium rates, health care and operating cost trends, contract renewal and the
procurement of new contracts, capital requirements and income taxes), long-term growth rates for determining
terminal value beyond the discretely forecasted periods, and discount rates. When determining the discount rate,
we consider the overall level of inherent risk of the reporting unit, and the expected rate an outside investor would
expect to earn. As part of a quantitative assessment, we may also apply the asset liquidation method to estimate
the fair value of individual reporting units, which is computed as total assets minus total liabilities, excluding
intangible assets and deferred taxes. Finally, we apply a market approach to reconcile the value of our reporting
units to our consolidated market value. Under the market approach, we consider publicly traded comparable
company information to determine revenue and earnings multiples which are used to estimate our reporting units’
fair values. The assumptions used are consistent with those used in our long-range business plan and annual
planning process. However, if these assumptions differ from actual results, the outcome of our goodwill impairment
tests could be adversely affected.
Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities
assumed at their acquisition date fair values. 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
may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.
Upon the conclusion of the final determination of the values of assets acquired or liabilities assumed, or one year
after the date of acquisition, whichever comes first, any subsequent adjustments are recorded within our
consolidated statements of operations. Refer to Note 8, “Goodwill and Intangible Assets, Net”, for further details.
Revenue Recognition
We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) effective January 1, 2018, using
the modified retrospective approach. The insurance contracts of our Health Plans segment are excluded from the
scope of Topic 606 because the recognition of revenue under these contracts is dictated by other accounting
standards governing insurance contracts. The cumulative effect of initially applying the guidance, relating entirely to
the contracts of our recently divested MMS subsidiary, resulted in an immaterial impact to beginning retained
earnings as of January 1, 2018. Such impact is presented in the accompanying consolidated statement of
stockholders’ equity.
Premium Revenue
Premium revenue is generated from our Health Plans segment contracts, including agreements with other managed
care organizations for which we operate as a subcontractor. Premium revenue is generally received based on per
Molina Healthcare, Inc. 2018 Form 10-K | 73
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
premiums. 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 by geography for the periods indicated:
2018
Year Ended December 31,
2017
2016
Amount
% of Total
Amount
% of Total
Amount
% of Total
(Dollars in millions)
California
Florida
Illinois
Michigan
New Mexico
Ohio
Puerto Rico
South Carolina
Texas
Washington
Other (1)
$
2,150
1,790
793
1,601
1,356
2,388
696
495
3,244
2,361
738
12.2% $
10.2
4.5
9.1
7.7
13.6
3.9
2.8
18.4
13.4
4.2
2,701
2,568
593
1,596
1,368
2,216
732
445
2,813
2,608
1,214
14.3% $
13.6
3.1
8.5
7.3
11.8
3.9
2.4
14.9
13.8
6.4
2,378
1,938
603
1,527
1,305
1,967
726
378
2,461
2,222
940
14.4%
11.8
3.7
9.3
7.9
12.0
4.4
2.3
15.0
13.5
5.7
_______________________
$
17,612
100.0% $
18,854
100.0% $
16,445
100.0%
(1)
“Other” includes the Idaho, Mississippi, New York, Utah and Wisconsin health plans, which are not individually significant to
our consolidated operating results.
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 Program
Medical Cost Floors (Minimums), and Medical Cost Corridors. A portion of our premium revenue 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 $103 million and $135 million at December 31, 2018 and
December 31, 2017, respectively, to amounts due government agencies. Approximately $87 million and $96 million
of the liability accrued at December 31, 2018 and December 31, 2017, respectively, relates to our participation in
Medicaid Expansion programs.
In the third and fourth quarters of 2018, we recognized adjustments of $57 million and $24 million, respectively,
mainly related to the retroactive reinstatement of the Medicaid Expansion risk corridor requirement by the California
Department of Health Care Services, mainly for the state fiscal years ended June 2017 and 2018. The risk corridor
provision mandates a minimum loss ratio (“MLR”) of 85% and a maximum MLR of 95%. The total impact of these
adjustments resulted in a reduction to premium revenue totaling approximately $81 million in the year ended
December 31, 2018.
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs
exceed a defined maximum threshold. Receivables relating to such provisions were insignificant at
December 31, 2018 and December 31, 2017.
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, we are limited in the amount of administrative costs that we may deduct in calculating
the refund, if any. Liabilities for profits in excess of the amount we are allowed to retain under these provisions were
insignificant at December 31, 2018 and December 31, 2017.
Molina Healthcare, Inc. 2018 Form 10-K | 74
Retroactive Premium Adjustments. State Medicaid programs periodically adjust premium rates on a retroactive
basis. In these cases, we must adjust our premium revenue in the period in which we learn of the adjustment, rather
than in the months of service to which the retroactive adjustment applies.
Medicare Program
Risk Adjusted Premiums: Our Medicare premiums are subject to retroactive increase or decrease based on the
health status of our Medicare members (as measured by member risk score). We estimate our members’ risk
scores and the related amount of Medicare revenue that will ultimately be realized for the periods presented based
on our knowledge of our members’ health status, risk scores and CMS practices. Consolidated balance sheet
amounts related to anticipated Medicare risk adjusted premiums and Medicare Part D settlements were insignificant
at December 31, 2018 and December 31, 2017.
Minimum MLR: Additionally, federal regulations have established a minimum annual medical loss ratio (Minimum
MLR) of 85% for Medicare. The medical loss ratio represents medical costs as a percentage of premium revenue.
Federal regulations define what constitutes medical costs and premium revenue. If the Minimum MLR is not met,
we may be required to pay rebates to the federal government. We recognize estimated rebates under the Minimum
MLR as an adjustment to premium revenue in our consolidated statements of operations. Aggregate balance sheet
amounts related to the Medicare Minimum MLR were insignificant at December 31, 2018 and December 31, 2017.
Marketplace Program
Risk adjustment: Under this program, our health plans’ composite risk scores are compared with the overall average
risk score for the relevant state and market pool. Generally, our health plans will make a risk adjustment payment
into the pool if their composite risk scores are below the average risk score, and will receive a risk adjustment
payment from the pool if their composite risk scores are above 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 operations. As of
December 31, 2018, and December 31, 2017, the Marketplace risk adjustment payable amounted to $466 million
and $917 million, respectively.
Minimum MLR: The ACA has established a Minimum MLR of 80% for the Marketplace. If the Minimum MLR is not
met, we may be required to pay rebates to our Marketplace policyholders. The Marketplace risk adjustment program
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 operations. Aggregate balance sheet
amounts related to the Marketplace Minimum MLR were insignificant at December 31, 2018 and December 31,
2017.
Quality Incentives
At many of our health plans, revenue ranging from approximately 1% to 3% of certain health plan premiums is
earned only 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 periods presented and prior periods. Although the reasonably possible effects of a
change in estimate related to quality incentive premium revenue as of December 31, 2018 are not known, we have
no reason to believe that the adjustments to prior periods noted below are not indicative of the potential future
changes in our estimates as of December 31, 2018.
Maximum available quality incentive premium - current period
Amount of quality incentive premium revenue recognized in current period:
Earned current period
Earned prior periods
Total
$
$
$
2018
Year Ended December 31,
2017
(In millions)
150
$
$
182
133
31
164
$
$
97
10
107
$
$
2016
147
104
47
151
Quality incentive premium revenue recognized as a percentage of total
premium revenue
0.9%
0.6%
0.9%
Molina Healthcare, Inc. 2018 Form 10-K | 75
A summary of the categories of amounts due government agencies is as follows:
Medicaid program:
Medical cost floors and corridors
Other amounts due to states
Marketplace program:
Risk adjustment
Cost sharing reduction
Other
December 31,
2018
2017
(In millions)
$
103 $
81
466
183
134
967 $
$
135
71
917
275
144
1,542
Medical Care Costs and Medical Claims and Benefits Payable
Medical care costs are recognized in the period in which services are provided and include amounts that have been
paid by us through the reporting date, as well as estimated medical claims and benefits payable for costs that have
been incurred but not paid by us as of the reporting date. Medical care costs include, among other items, fee-for-
service claims, pharmacy benefits, capitation payments to providers, and various other medically-related costs. We
use judgment to determine the appropriate assumptions for determining the required estimates.
Under fee-for-service claims arrangements, we retain the financial responsibility for medical care provided and incur
costs based on actual utilization of hospital and physician services. Pharmacy benefits represent payments for
members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates earned
based on historical and current utilization of prescription drugs and contract terms. Capitation payments represent
monthly contractual fees paid to physicians and other providers on a per-member, per-month basis, who are
responsible for providing medical care to members, which could include medical or ancillary costs like dental, vision
and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered and are
not subject to significant accounting estimates. Due to insolvency or other circumstances, such providers may be
unable to pay claims they have incurred with third parties in connection with referral services provided to our
members. Depending on states’ laws, we may be held liable for such unpaid referral claims even though the
delegated provider has contractually assumed such risk. Based on our current assessment, such losses have not
been and are not expected to be significant. Other medical care costs include all medically-related administrative
costs, certain provider incentive costs, provider claims, and other health care expenses. See further discussion of
provider claims in Note 17, “Commitments and Contingencies.” 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.
Additionally, we include an estimate for the cost of settling claims incurred through the reporting date in our medical
claims and benefits payable liability.
The following table provides the details of our consolidated medical care costs for the periods indicated:
2018
Year Ended December 31,
2017
2016
Amount
PMPM
% of
Total
Amount
PMPM
% of
Total
Amount
PMPM
% of
Total
(In millions, except PMPM amounts)
Fee-for-service $ 11,278
2,138
Pharmacy
1,184
Capitation
537
Other
$ 232.15
44.01
24.38
11.05
74.5% $ 12,682
2,563
14.1
1,360
7.8
468
3.6
$ 229.63
46.40
24.63
8.48
74.3% $ 10,993
2,213
15.0
1,218
8.0
350
2.7
$ 217.84
43.84
24.13
6.94
74.4%
15.0
8.2
2.4
Total
$ 15,137
$ 311.59
100.0% $ 17,073
$ 309.14
100.0% $ 14,774
$ 292.75
100.0%
The determination of our liability for fee-for-service claims incurred but not paid (“IBNP”) is particularly important to
the determination of our financial position and results of operations in any given period and requires the application
of a significant degree of judgment by our management.
Molina Healthcare, Inc. 2018 Form 10-K | 76
As a result, the determination of IBNP is subject to an inherent degree of uncertainty. Our IBNP claims reserve
represents our best estimate of the total amount we will ultimately pay with respect to claims incurred as of the
balance sheet date. We estimate our IBNP monthly using actuarial methods based on several factors. The factors
we consider when estimating our IBNP include, without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
claims receipt and payment experience (and variations in that experience),
changes in membership,
provider billing practices,
health care service utilization trends,
cost trends,
product mix,
seasonality,
prior authorization of medical services,
benefit changes,
known outbreaks of disease or increased incidence of illness such as influenza,
provider contract changes,
changes to Medicaid fee schedules, and
the incidence of high dollar or catastrophic claims.
Our assessment of these factors is then translated into an estimate of our IBNP liability at the relevant measuring
point through the calculation of a base estimate of IBNP, a further provision for adverse claims development, and an
estimate of the administrative costs of settling all claims incurred through the reporting date. The base estimate of
IBNP is derived through application of claims payment completion factors and trended PMPM cost estimates.
For the fourth 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.
For the three months of service immediately prior to the reporting date, actual claims paid are a less 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 a blend of
estimated completion factors and trended PMPM cost estimates. The PMPM costs estimates are designed to reflect
recent trends in payments and expense, utilization patterns, authorized services, pharmacy utilization and other
relevant factors.
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 development in our claim payments for which the base actuarial model is not intended to and does not
account. We refer to this additional liability as the provision for adverse claims development. The provision for
adverse claims development is a component of our overall determination of the adequacy of our IBNP, and
averages between 8% to 10% of 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 are based,
modifications and upgrades to our claims processing systems and practices, and increasing medical costs.
Because of the complexity of our business, the number of states in which we operate, and the need to account for
different health care benefit packages among those states, we make an overall assessment of IBNP after
considering the base actuarial model reserves and the provision for adverse claims development.
The development of our IBNP estimate is a continuous process that we monitor and update monthly as additional
claims payment information becomes available. As additional information becomes known to us, we adjust our
actuarial model accordingly. 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 claim reserves would materially decrease reported earnings for the period in which the adjustment is made.
There are many related factors working in conjunction with one another that determine the accuracy of our
estimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to
quantify the impact that any single factor has on a change in estimate. Given the variability inherent in the reserving
Molina Healthcare, Inc. 2018 Form 10-K | 77
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.
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 report reinsurance premiums as a
reduction to premium revenue, while related reinsurance recoveries are reported as a reduction to medical care
costs. Reinsurance premiums amounted to $16 million, $20 million and $30 million for the years ended December
31, 2018, 2017, and 2016, respectively. Reinsurance recoveries amounted to $33 million, $24 million and $65
million for the years ended December 31, 2018, 2017, and 2016, respectively. Reinsurance recoverable of $31
million, $16 million, and $61 million, as of December 31, 2018, 2017, and 2016, respectively, is included in
“Receivables” in the accompanying consolidated balance sheets.
Marketplace Cost Share Reduction (“CSR”)
In the year ended December 31, 2018, we recognized a benefit of approximately $81 million in reduced medical
care costs related to 2017 dates of service, as a result of the federal government’s confirmation that the
reconciliation of 2017 Marketplace CSR subsidies would be performed on an annual basis. In the fourth quarter of
2017, we had assumed a nine-month reconciliation of this item pending confirmation of the time period to which the
2017 reconciliation would be applied.
Premium Deficiency Reserves on Loss Contracts
We assess the profitability of our medical care policies to identify groups of contracts where current operating
results or forecasts indicate probable future losses. If anticipated future variable costs exceed anticipated future
premiums and investment income, a premium deficiency reserve is recognized. No premium deficiency reserves
were recorded as of December 31, 2018 and 2017.
Taxes Based on Premiums
Health Insurer Fee (“HIF”). 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. Within our Medicaid program, 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, and such HIF revenue is recognized ratably
throughout the year. The Consolidated Appropriations Act of 2016 provided for a HIF moratorium in 2017. Therefore,
there were no health insurer fees reimbursed, nor health insurer fees incurred, in 2017.
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 expenses in the consolidated statements of
operations.
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. 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.
Molina Healthcare, Inc. 2018 Form 10-K | 78
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 Adopted
Revenue Recognition (Topic 606). See discussion above, in “Revenue Recognition.”
Comprehensive Income. In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU
2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02
allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax
effects resulting from the Tax Cuts and Jobs Act (“TCJA”), which was enacted on December 22, 2017. ASU 2018-02
is effective beginning January 1, 2019; we early adopted this ASU effective January 1, 2018. The effect of applying
the guidance resulted in an immaterial impact to beginning retained earnings, as presented in the accompanying
consolidated statements of stockholders’ equity.
Restricted Cash. In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires us to include
in our consolidated statements of cash flows the changes in the balances of cash, cash equivalents, restricted cash
and restricted cash equivalents. We adopted ASU 2016-18 on January 1, 2018. We have applied the guidance
retrospectively to all periods presented. Such retrospective adoption resulted in a $104 million and $93 million
reclassification of restricted cash and cash equivalents from “Investing activities,” to the beginning and ending
balances of cash and cash equivalents in our consolidated statements of cash flows for the years ended December
31, 2017 and 2016, respectively. There was no impact to our consolidated statements of operations, balance
sheets, or stockholders’ equity. The reconciliation of cash and cash equivalents to cash, cash equivalents, and
restricted cash and cash equivalents is presented at the beginning of this note.
Recent Accounting Pronouncements Not Yet Adopted
Software Licenses. In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for
capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective
beginning January 1, 2020 and can be applied either retrospectively or prospectively to all implementation costs
incurred after the date of adoption; early adoption is permitted. We are evaluating the effect of this guidance.
Credit Losses. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial
Instruments. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the
revised guidance requires companies to recognize an allowance for credit losses for the difference between the
amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect
over the instrument’s contractual life. ASU 2016-13 is effective beginning January 1, 2020 and must be adopted as
a cumulative effect adjustment to retained earnings; early adoption is permitted. We are in the early stages of
evaluating the effect of this guidance.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as modified by:
•
•
•
•
ASU 2017-03, Transition and Open Effective Date Information;
ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842;
ASU 2018-10, Codification Improvements to Topic 842, Leases; and
ASU 2018-11, Leases (Topic 842): Targeted Improvements.
Molina Healthcare, Inc. 2018 Form 10-K | 79
Under Topic 842, an entity will be required to recognize assets and liabilities for the rights and obligations created by
leases on the entity’s balance sheet for both financing and operating leases. Topic 842 also requires new
disclosures that depict the amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. We will
adopt Topic 842 effective January 1, 2019, using the modified retrospective method. Under this method, we will
recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained
earnings on January 1, 2019. In addition, we have elected the transition option provided under ASU 2018-11, which
allows entities to continue to apply the legacy guidance in Topic 840, Leases, including its disclosure requirements,
in the comparative periods presented in the year of adoption.
Under Topic 842, we will record right-of-use assets and liabilities relating primarily to leases of office space for
administrative and health plan operations. Specifically, on January 1, 2019, we expect to record operating lease
right-of-use assets of approximately $80 million to $90 million, and operating lease liabilities of approximately $90
million to $100 million. In addition, in connection with the transition provisions relating to failed sale-leaseback
transactions, we expect to record finance lease right-of-use assets of approximately $230 million to $240 million;
record finance lease liabilities of approximately $230 million to $240 million; reduce property, equipment, and
capitalized software net, by approximately $75 million to $95 million; reduce lease financing obligations by
approximately $195 million to $205 million; and record an increase of approximately $80 million to $100 million to
opening retained earnings.
3. Net Income (Loss) Per Share
The following table sets forth the calculation of basic and diluted net income (loss) per share:
Year Ended December 31,
2017
(In millions, except net income (loss) per share)
2016
2018
Numerator:
Net income (loss)
Denominator:
Shares outstanding at the beginning of the period
Weighted-average number of shares issued:
Exchange of 1.625% Convertible Notes (1)
Conversion of 1.625% Convertible Notes (1)
Stock-based compensation
Denominator for basic net income (loss) per share
Effect of dilutive securities:
1.125% Warrants (1)
1.625% Convertible Notes (1)
Stock-based compensation
Denominator for diluted net income (loss) per share
Net income (loss) per share: (2)
Basic
Diluted
Potentially dilutive common shares excluded from calculations: (1)
1.125% Warrants (1)
1.625% Convertible Notes (1)
Stock-based compensation
_______________________________
$
707
$
(512) $
59.3
1.4
0.2
0.2
61.1
4.8
0.4
0.3
66.6
55.8
0.1
—
0.5
56.4
—
—
—
56.4
$
$
11.57
10.61
$
$
(9.07) $
(9.07) $
—
—
—
1.9
0.4
0.3
52
55.1
—
—
0.3
55.4
0.5
—
0.3
56.2
0.93
0.92
—
—
—
Molina Healthcare, Inc. 2018 Form 10-K | 80
(1) For more information regarding the 1.625% Convertible Notes, refer to Note 11, “Debt.” For more information and definitions
regarding the 1.125% Warrants, refer to Note 14, “Stockholders' Equity.” 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 (loss) per share because to do so would have been anti-dilutive.
(2) Source data for calculations in thousands.
4. Fair Value Measurements
We consider the carrying amounts of current assets and current liabilities (not including derivatives and the 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 —
securities is based on quoted market prices for identical securities in active markets.
Observable Inputs. Level 1 financial instruments are actively traded and therefore the fair value for these
Level 2 —
Directly or Indirectly Observable Inputs. 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.
Unobservable Inputs. Level 3 financial instruments are valued using unobservable inputs that represent
Level 3 —
management’s best estimate of what market participants would use in pricing the financial instrument at the
measurement date. Our Level 3 financial instruments consist primarily of derivative financial instruments.
The derivatives 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, 2018, 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 12,
“Derivatives,” the 1.125% Call Option asset and the 1.125% Conversion Option liability were designed such that
changes in their fair values offset, with minimal impact to the consolidated statements of operations. Therefore, the
sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.
The net changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the
years ended December 31, 2018, and 2017.
Our financial instruments measured at fair value on a recurring basis at December 31, 2018, were as follows:
Corporate debt securities
U.S. Treasury notes
Government-sponsored enterprise securities (GSEs)
Municipal securities
Asset-backed securities
Certificates of deposit
Other
Subtotal - current investments
1.125% Call Option derivative asset
Total assets
1.125% Conversion Option derivative liability
Total liabilities
Total
Level 1
Level 2
Level 3
$
1,123 $
(In millions)
— $
1,123 $
181
163
114
82
14
4
1,681
476
—
—
—
—
—
—
—
—
181
163
114
82
14
4
1,681
—
$
$
$
2,157
$
— $
1,681
$
476
476
$
$
— $
— $
— $
— $
—
—
—
—
—
—
—
—
476
476
476
476
Molina Healthcare, Inc. 2018 Form 10-K | 81
Our financial instruments measured at fair value on a recurring basis at December 31, 2017, were as follows:
Corporate debt securities
U.S. Treasury notes
GSEs
Municipal securities
Asset-backed securities
Certificates of deposit
Subtotal - current investments
Corporate debt securities
U.S. Treasury notes
Subtotal - current restricted investments
1.125% Call Option derivative asset
Total assets
1.125% Conversion Option derivative liability
Total liabilities
Fair Value Measurements – Disclosure Only
Total
Level 1
Level 2
Level 3
$
1,588 $
(In millions)
— $
1,588 $
388
253
141
117
37
2,524
101
68
169
522
—
—
—
—
—
—
—
—
—
—
388
253
141
117
37
2,524
101
68
169
—
$
$
$
3,215
$
— $
2,693
$
522
522
$
$
— $
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
522
522
522
522
The carrying amounts and estimated fair values of our senior notes are classified as Level 2 financial instruments.
Fair value for these securities is determined using a market approach based on quoted market prices for similar
securities in active markets or quoted prices for identical securities in inactive markets.
5.375% Notes
4.875% Notes
1.125% Convertible Notes (1),(2)
Credit Facility (2)
1.625% Convertible Notes (2)
December 31, 2018
December 31, 2017
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
$
$
694
326
240
—
—
(In millions)
$
674
301
732
—
—
$
692
325
496
300
157
730
329
1,052
300
220
$
1,260 $
1,707
$
1,970
$
2,631
_______________________________
(1) The fair value of the 1.125% Conversion Option derivative liability (the embedded cash conversion option), which is included
in the fair value amounts presented above, amounted to $476 million and $522 million as of December 31, 2018 and 2017,
respectively. See further discussion at Note 11, “Debt,” and Note 12, “Derivatives.”
(2) For more information on debt repayments in the year ended December 31, 2018, refer to Note 11, “Debt.”
5. Investments
We consider all of our investments classified as current assets to be available-for-sale. The following tables
summarize our current investments as of the dates indicated:
Molina Healthcare, Inc. 2018 Form 10-K | 82
Corporate debt securities
U.S. Treasury notes
GSEs
Municipal securities
Asset-backed securities
Certificates of deposit
Other
Total current investments
Corporate debt securities
U.S. Treasury notes
GSEs
Municipal securities
Asset-backed securities
Certificates of deposit
Subtotal - current investments
Corporate debt securities
U.S. Treasury notes
Subtotal - current restricted investments
Amortized
December 31, 2018
Gross
Unrealized
Cost
Gains
Losses
Estimated
Fair Value
$
1,131
$
(In millions)
— $
8 $
1,123
181
164
115
83
14
4
—
—
—
—
—
—
—
1
1
1
—
—
181
163
114
82
14
4
$
1,692
$
— $
11 $
1,681
Amortized
Cost
December 31, 2017
Gross
Unrealized
Gains
Losses
Estimated
Fair Value
$
$
$
1,591
389
255
142
117
37
2,531
101
68
169
2,700 $
(In millions)
1 $
—
—
—
—
—
1
—
—
—
1 $
4 $
1
2
1
—
—
8
—
—
—
8 $
1,588
388
253
141
117
37
2,524
101
68
169
2,693
The contractual maturities of our current investments as of December 31, 2018 are summarized below:
Due in one year or less
Due after one year through five years
Amortized
Cost
Estimated
Fair Value
(In millions)
1,000 $
692
997
684
1,692 $
1,681
$
$
As discussed further in Note 11, “Debt,” the 4.875% Notes’ indenture required us to hold a portion of the net
proceeds from their issuance in a segregated account to be used to settle the conversion of the 1.625% Convertible
Notes. Prior to September 30, 2018, this account was reported as a current asset, entitled “Restricted investments,”
in the accompanying consolidated balance sheets. Because this account was used to settle the conversion of the
1.625% Convertible Notes in the third quarter of 2018, current restricted investments, as of December 31, 2018,
was reduced to zero.
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, 2018, 2017 and 2016 were insignificant.
We have determined that unrealized losses at December 31, 2018 and 2017 are temporary in nature, because the
change in market value for these securities resulted from fluctuating interest rates, rather than a deterioration of the
creditworthiness of the issuers. So long as we maintain the intent and ability to hold these securities to maturity, we
are unlikely to experience losses. In the event that we dispose of these securities before maturity, we expect that
realized losses, if any, will be insignificant.
Molina Healthcare, Inc. 2018 Form 10-K | 83
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 continuous loss position for 12 months or more as of December
31, 2018.
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
$
$
509
$
—
—
—
509
$
3
—
—
—
3
285
$
—
—
—
$
412
127
87
68
285
$
694
$
5
1
1
1
8
298
76
90
52
516
Corporate debt securities
GSEs
Municipal securities
Asset backed securities
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 continuous loss position for 12 months or more as of December
31, 2017.
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
$
$
1,297
470
173
—
1,940
$
$
3
1
1
—
5
561
89
69
—
719
$
$
94 $
—
95
38
227
$
1
—
1
1
3
69
—
47
48
164
Corporate debt securities
U.S. Treasury notes
GSEs
Municipal securities
6. Receivables
Receivables consist primarily of amounts due from government 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 insignificant. Any amounts determined
to be uncollectible are charged to expense when such determination is made.
Premiums and other receivables
Pharmacy administrative services receivables
Pharmacy rebate receivables
Health insurer fee reimbursement receivables
December 31,
2018
2017
(In millions)
855
179
155
141
$
1,330
$
695
—
154
22
871
7. Property, Equipment, and Capitalized Software, Net
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.
Molina Healthcare, Inc. 2018 Form 10-K | 84
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.
A summary of property, equipment, and capitalized software is as follows:
Capitalized software
Furniture and equipment
Building and improvements
Land
Total cost
Less: accumulated amortization - capitalized software
Less: accumulated depreciation and amortization - building and improvements, furniture
and equipment
Total accumulated depreciation and amortization
Property, equipment, and capitalized software, net
December 31,
2018
2017
(In millions)
$
$
373
231
154
16
774
(320)
(213)
(533)
$
241
$
The following table presents all depreciation and amortization recognized in our consolidated statements of
operations, whether the item appears as depreciation and amortization, or as cost of service revenue.
Recorded in depreciation and amortization:
Amortization of capitalized software
Depreciation of property and equipment
Amortization of intangible assets
Subtotal
Recorded in cost of service revenue:
Amortization of capitalized software
Amortization of deferred contract costs
Subtotal
2018
Year Ended December 31,
2017
(In millions)
2016
$
42 $
64 $
36
21
99
19
9
28
42
31
137
28
13
41
Total depreciation and amortization recognized
$
127
$
178
$
417
289
161
16
883
(308)
(233)
(541)
342
62
45
32
139
22
21
43
182
8. Goodwill and Intangible Assets, Net
Goodwill
The following table presents the changes in the carrying amounts of goodwill, by segment, for the year ended
December 31, 2018. The 2017 goodwill impairment losses were reported as “Impairment losses” in the
accompanying consolidated statements of operations. See Note 18, “Segments,” for a discussion of the change in
our reportable segments in 2018.
Molina Healthcare, Inc. 2018 Form 10-K | 85
Historical goodwill, gross
Accumulated impairment losses at December 31, 2017
Balance, December 31, 2017
Sale of subsidiary
Balance, December 31, 2018
Accumulated impairment losses at December 31, 2018
Impairment Analysis Results
Health Plans
Other
Total
(In millions)
445
$
233
$
(302)
143
—
(190)
43
(43)
143
$
— $
678
(492)
186
(43)
143
302
$
190
$
492
$
$
$
2018. We performed a qualitative goodwill assessment of our reporting units, which resulted in no goodwill
impairment losses in the year ended December 31, 2018.
2017 – Health Plans Segment. We performed quantitative goodwill assessments using the discounted cash flows
and asset liquidation methods, which resulted in Health Plans segment goodwill impairment losses of $244 million
in the year ended December 31, 2017, primarily due to the following:
• Medicaid contract terminations announced in early 2018 at our Florida and New Mexico health plans; and
•
Future cash flow projections insufficient to produce an estimated fair value in excess of the Illinois health
plan’s carrying amount.
2017 – Other Segment. Our recently divested Molina Medicaid Solutions and Pathways businesses are reported in
the Other segment. The quantitative goodwill assessments of these reporting units, using the discounted cash flows
method, resulted in goodwill impairment losses of $190 million in the year ended December 31, 2017, primarily due
to the following:
• Management’s conclusion that Molina Medicaid Solutions would provide fewer future benefits for its support
of the Health Plans segment; and
• Management’s conclusion that Pathways would not provide future benefits relating to the integration of its
operations with the Health Plans segment to the extent previously expected.
2016. We performed a quantitative goodwill assessment of our reporting units using the discounted cash flows
method, which resulted in no impairment losses in the year ended December 31, 2016.
Intangible Assets, Net
The following table provides the details of identified intangible assets, by major class, for the periods indicated:
Intangible assets:
Contract rights and licenses
Provider networks
Balance at December 31, 2018
Intangible assets:
Contract rights and licenses
Provider networks
Balance at December 31, 2017
Cost
Accumulated
Amortization
(In millions)
Carrying
Amount
$
$
$
$
201
$
162
$
20
12
221
$
174
$
201
$
141
$
20
11
221
$
152
$
39
8
47
60
9
69
Based on the balances of our identifiable intangible assets as of December 31, 2018, we estimate that our
intangible asset amortization will be approximately $18 million in 2019, $14 million in 2020, $5 million in 2021, and
$3 million in 2022 and 2023. For a presentation of our intangible assets by reportable segment, refer to Note 18,
“Segments.”
Molina Healthcare, Inc. 2018 Form 10-K | 86
Impairment Analysis Results
2018. No impairment charges relating to intangible assets were recorded in the year ended December 31, 2018.
See Note 15, “Restructuring and Separation Costs,” for a description of certain long-lived assets written off in 2018,
in connection with our 2017 Restructuring Plan.
2017 – Health Plans Segment. As a result of the impairment indicators described above for the Florida and New
Mexico reporting units of the Health Plans segment in 2017, we performed undiscounted cash flows analyses of the
reporting units, which resulted in Health Plans segment intangible asset impairment losses of $25 million in the year
ended December 31, 2017.
2017 – Other Segment. As a result of management’s conclusion that Pathways would not provide future benefits
relating to the integration of its operations with the Health Plans segment to the extent previously expected, we
computed an undiscounted cash flows analysis of reporting units, which resulted in Other segment intangible asset
impairment losses of $11 million.
2016. No significant impairment charges relating to long-lived assets, including intangible assets, were recorded in
the year ended December 31, 2016.
9. Restricted Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and
deposits required by government authorities primarily in certificates of deposit and U.S. Treasury securities. We
also maintain restricted investments as protection against the insolvency of certain capitated providers. The use of
these funds is limited as required by regulation in the various states in which we operate, or as needed in the event
of insolvency of capitated providers. Therefore, such investments are reported as “Restricted investments” in the
accompanying consolidated balance sheets. We have the ability to hold these 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. The following table presents the balances of restricted investments:
Florida
New Mexico
Ohio
Puerto Rico
Other
Total Health Plans segment
December 31,
2018
2017
(In millions)
32 $
43
12
10
23
31
43
12
10
23
120
$
119
$
$
The contractual maturities of our held-to-maturity restricted investments, which are carried at amortized cost, which
approximates fair value, as of December 31, 2018 are summarized below.
Due in one year or less
Due after one year through five years
Amortized
Cost
Estimated
Fair Value
(In millions)
$
$
105
$
15
120
$
105
15
120
10. Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable as of the dates indicated.
Molina Healthcare, Inc. 2018 Form 10-K | 87
Fee-for-service claims incurred but not paid (“IBNP”)
Pharmacy payable
Capitation payable
Other
December 31,
2018
2017
2016
(In millions)
1,562
$
1,717
$
1,352
115
52
232
112
67
296
112
37
428
1,961
$
2,192
$
1,929
$
$
“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 operations. Non-risk provider payables amounted to $107
million, $122 million and $225 million, as of December 31, 2018, 2017, and 2016, respectively.
The following table presents the components of the change in our medical claims and benefits payable 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) less than the actual amount of the liability based on information (principally the payment of
claims) developed since that liability was first reported.
Medical claims and benefits payable, beginning balance
Components of medical care costs related to:
Current period
Prior periods (1)
Total medical care costs
Change in non-risk provider payables
Payments for medical care costs related to:
Current period
Prior periods
Total paid
Medical claims and benefits payable, ending balance
$
$
2018
Year Ended December 31,
2017
(In millions)
1,929
$
$
2,192
15,478
(341)
15,137
17,037
36
17,073
13
(106)
13,671
1,710
15,381
1,961
$
15,130
1,574
16,704
2,192
$
2016
1,685
14,966
(192)
14,774
58
13,304
1,284
14,588
1,929
________________
(1)
Includes the 2018 benefit of the 2017 Marketplace CSR reimbursement of $81 million.
The following tables provide information about incurred and paid claims development as of December 31, 2018, as
well as cumulative claims frequency and the total of incurred but not paid claims liabilities. The cumulative claim
frequency is measured by claim event, and includes claims covered under capitated arrangements.
Incurred Claims and Allocated Claims Adjustment Expenses
Benefit Year
2016
2017
2018
Total IBNP
Cumulative
number of
reported claims
(Unaudited)
(Unaudited)
$
15,064
$
15,093
17,037
2016
2017
2018
(In millions)
$
$
$
15,057
16,728
15,478
47,263 $
18
57
1,477
1,552
105
119
105
Molina Healthcare, Inc. 2018 Form 10-K | 88
Cumulative Paid Claims and Allocated Claims Adjustment Expenses
Benefit Year
2016
2017
2018
(Unaudited)
(Unaudited)
(In millions)
$
13,403
$
2016
2017
2018
14,952
$
15,130
$
15,039
16,752
13,671
45,462
The following table represents a reconciliation of claims development to the aggregate carrying amount of the
liability for medical claims and benefits payable.
Incurred claims and allocated claims adjustment expenses
Less: cumulative paid clams and allocated claims adjustment
expenses
All outstanding liabilities before 2016
Non-risk provider payables and other
Medical claims and benefits payable
2018
(In millions)
$
$
47,263
(45,462)
10
150
1,961
Our estimates of medical claims and benefits payable recorded at December 31, 2017, 2016 and 2015 developed
favorably (unfavorably) by approximately $341 million, $(36) million and $192 million in 2018, 2017 and 2016,
respectively.
The favorable prior year development recognized in 2018 includes a benefit of approximately $81 million in reduced
medical care costs relating to Marketplace CSR subsidies for 2017 dates of service. The remainder of the favorable
prior period development was primarily due to lower than expected utilization of medical services by our Medicaid
and Marketplace members and improved operating performance. The differences between our original estimates in
2017 and the ultimate costs in 2018 were not discernable until additional information was provided to us in 2018
and the effect became clearer over time as claim payments were processed.
The unfavorable prior year development in 2017 was primarily due to higher than expected costs for settling certain
claims with certain providers in states where we had recently commenced operations, such as in Illinois and Puerto
Rico, or had instituted significant changes due to provider contract changes, such as in Florida and New Mexico.
The differences between our original estimates in 2016 and the ultimate costs in 2017 were not discernable until
additional information was provided to us in 2017 and the effect became clearer over time as claim payments were
processed.
The favorable prior year development we recognized in 2016 was primarily due to reprocessing a significant
number of claims in 2016 for provider submission of claims that were not compliant with new diagnostic coding
requirements instituted in late 2015; several high-dollar claims at our New Mexico health plan that were settled for
amounts lower than we initially estimated; recoveries on certain outpatient facility claims at our Washington health
plan; and lower than expected claims costs for Medicaid Expansion members that were new to our California health
plan in 2015. The differences between our original estimates in 2015 and the ultimate costs in 2016 were not
discernable until additional information was provided to us in 2016 and the effect became clearer over time as claim
payments were processed.
Molina Healthcare, Inc. 2018 Form 10-K | 89
11. Debt
As of December 31, 2018, contractual maturities of debt for the years ending December 31 were as follows. All amounts
represent the principal amounts of the debt instruments outstanding.
Total
2019
2020
2021
2022
2023
Thereafter
5.375% Notes
4.875% Notes
1.125% Convertible Notes
$
700
330
252
$
— $
— $
— $
700
$
— $
(In millions)
$
1,282 $
— $
—
—
—
252
252
—
—
—
—
—
—
$
— $
700
$
— $
—
330
—
330
All of our debt is held at the parent which is reported, for segment purposes, in “Other.” The following table
summarizes our outstanding debt obligations and their classification in the accompanying consolidated balance
sheets:
Current portion of long-term debt:
1.125% Convertible Notes, net of unamortized discount
1.625% Convertible Notes, net of unamortized discount
Lease financing obligations
Debt issuance costs
Non-current portion of long-term debt:
5.375% Notes
4.875% Notes
Credit Facility
Debt issuance costs
Lease financing obligations
December 31,
2018
2017
(In millions)
$
241
$
—
1
(1)
241
700
330
—
(10)
1,020
197
$
1,458
$
499
157
1
(4)
653
700
330
300
(12)
1,318
198
2,169
Interest cost recognized relating to our convertible senior notes, the 1.125% Convertible Notes and the 1.625%
Convertible Notes, was as follows:
Contractual interest at coupon rate
Amortization of the discount
Credit Agreement
2018
Years Ended December 31,
2017
(In millions)
2016
$
$
6 $
21
27 $
11 $
32
43 $
11
30
41
In January 2017, we entered into an amended Credit Agreement, which provides for an unsecured $500 million
revolving credit facility (the “Credit Facility”). The Credit Facility has a term of five years and all amounts outstanding
(other than the Term Loan, as described below) will be due and payable on January 31, 2022. In May 2018, we
repaid the $300 million outstanding borrowings under the Credit Facility. As of December 31, 2018, no amounts
were outstanding under the Credit Facility, and outstanding letters of credit amounting to $7 million reduced our
remaining borrowing capacity under the Credit Facility to $493 million.
Borrowings under our Credit Agreement, including both the Credit Facility and the Term Loan, bear interest based,
at our election, on a base rate or other defined rate, plus in each case the applicable margin. In addition to interest
Molina Healthcare, Inc. 2018 Form 10-K | 90
payable on the principal amount of indebtedness outstanding from time to time under the Credit Agreement, we are
required to pay a quarterly commitment fee.
Subsequent Event
On January 31, 2019, we entered into a Sixth Amendment to the Credit Agreement that provides for the following:
•
•
•
A delayed draw term loan facility in an aggregate principal amount of $600 million (the “Term Loan”), under
which we may request up to ten advances, each in a minimum principal amount of $50 million, until 18
months after January 31, 2019 (“Delayed Draw Commitment Period”). The Term Loan will amortize in
quarterly installments, commencing on the last day of the first fiscal quarter after the Delayed Draw
Commitment Period, equal to the principal amount of the Term Loan outstanding on the last day of the
Delayed Draw Commitment Period multiplied by an amortization payment percentage ranging from 1.25%
to 2.50% (depending on the applicable fiscal quarter) for each fiscal quarter. We will pay a delayed draw
ticking fee in an amount equal to 37.5 basis points (0.375%) per annum of the undrawn amount of the Term
Loan commencing on January 31, 2019, and continuing until the last day of the Delayed Draw Commitment
Period, payable quarterly. All amounts outstanding under the Term Loan will be due and payable on
January 31, 2024;
Addition of definitions for various terms that apply to the Term Loan; and
Various other amendments relating to the administration of the Credit Agreement.
In addition, effective as of January 31, 2019, Molina Pathways, LLC was automatically and unconditionally released
as a guarantor under the Credit Agreement. As a result, as of January 31, 2019, no guarantors were parties to the
Credit Agreement.
The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and
an interest coverage ratio. As of December 31, 2018, we were in compliance with all financial and non-financial
covenants under the Credit Agreement and other long-term debt.
5.375% Notes due 2022
We have $700 million aggregate principal amount of senior notes (the “5.375% Notes”) outstanding as of December
31, 2018, which are due November 15, 2022, unless earlier redeemed. Interest on the 5.375% Notes is payable
semiannually in arrears on May 15 and November 15. As noted above, effective January 31, 2019, none of our
subsidiaries is a guarantor of the 5.375% Notes.
The 5.375% Notes are senior unsecured obligations of Molina and rank equally in right of payment with all existing
and future senior debt, and senior to all existing and future subordinated debt of Molina. The 5.375% Notes contain
customary non-financial covenants and change in control provisions.
4.875% Notes due 2025
We have $330 million aggregate principal amount of senior notes (the “4.875% Notes”) outstanding as of December
31, 2018, which are due June 15, 2025, unless earlier redeemed. Interest on the 4.875% Notes is payable
semiannually in arrears on June 15 and December 15. As noted above, effective January 31, 2019, none of our
subsidiaries is a guarantor of the 4.875% Notes.
The 4.875% Notes are senior unsecured obligations of Molina, respectively, and rank equally in right of payment
with all existing and future senior debt, and senior to all existing and future subordinated debt of Molina. The
4.875% Notes contain customary non-financial covenants and change of control provisions.
1.125% Cash Convertible Senior Notes due 2020
In the second, third and fourth quarters of 2018, we entered into privately negotiated note purchase agreements
with certain holders of our outstanding 1.125% cash convertible senior notes due January 15, 2020 (the “1.125%
Convertible Notes”). In each case, the difference between the principal amount extinguished and our cash
payments primarily represented the settlement of the 1.125% Convertible Notes’ embedded cash conversion option
feature at fair value (which is a derivative liability we refer to as the 1.125% Conversion Option). Activity during the
year was as follows:
•
•
•
In the fourth quarter of 2018, we repaid $62 million aggregate principal amount of the 1.125% Convertible
Notes, plus accrued interest, for a total cash payment of $202 million.
In the third quarter of 2018, we repaid $140 million aggregate principal amount of the 1.125% Convertible
Notes, plus accrued interest, for a total cash payment of $483 million.
In the second quarter of 2018, we repaid $96 million aggregate principal amount of the 1.125% Convertible
Notes, plus accrued interest, for a total cash payment of $228 million.
Molina Healthcare, Inc. 2018 Form 10-K | 91
In the year ended December 31, 2018, we have recorded an aggregate net loss on debt extinguishment of $12
million for the 1.125% Convertible Notes purchases, primarily relating to the acceleration of the debt discount. This
loss is reported in “Other expenses (income), net” in the accompanying consolidated statements of operations. No
common shares were issued in connection with these transactions.
In connection with each of the 1.125% Convertible Notes purchases, we also entered into privately negotiated
termination agreements with each of the counterparties in 2018, to partially terminate the Call Spread Overlay,
defined and further discussed in Notes 12, “Derivatives,” and 14, “Stockholders' Equity.” The net cash proceeds
from the Call Spread Overlay partial termination transactions partially offset the cash paid to settle the 1.125%
Convertible Notes.
Following the transactions described above, we have $252 million aggregate principal amount of 1.125%
Convertible Notes outstanding at December 31, 2018. Interest is payable semiannually in arrears on January 15
and July 15. The 1.125% Convertible 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% Convertible 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% Convertible 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% Convertible Notes is 24.5277 shares of our common stock per
$1,000 principal amount, or 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% Convertible Notes, equal to the settlement amount, determined in the manner set forth in the indenture. We
may not redeem the 1.125% Convertible Notes prior to the maturity date. Holders may convert their 1.125%
Convertible 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% Convertible 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% Convertible Notes are convertible by the holders within one year of December 31, 2018, until they
mature; therefore, they are reported in current portion of long-term debt.
Concurrent with the issuance of the 1.125% Convertible Notes, the 1.125% Conversion Option was separated from
the 1.125% Convertible Notes and accounted for separately as a derivative liability, with changes in fair value
reported in our consolidated statements of operations until the 1.125% Conversion Option settles or expires. This
initial liability simultaneously reduced the carrying value of the 1.125% Convertible Notes’ principal amount
(effectively an original issuance discount), which is amortized to the principal amount through the recognition of
non-cash interest expense over the expected life of the debt. The effective interest rate approximating what we
would have incurred had nonconvertible debt with otherwise similar terms been issued is approximately 6%. As of
December 31, 2018, the 1.125% Convertible Notes have a remaining amortization period of one year, and their ‘if-
converted’ value exceeded their principal amount by approximately $581 million and $406 million as of December
31, 2018 and 2017, respectively.
1.625% Convertible Senior Notes due 2044
Conversion. On July 11, 2018, we announced notice of our election to redeem the remaining $64 million aggregate
principal amount of the 1.625% convertible senior notes due 2044 (the “1.625% Convertible Notes”) on August 20,
2018 (the “Redemption Date”), pursuant to the terms of the indenture. Also pursuant to the indenture, the 1.625%
Convertible Notes were convertible until August 17, 2018, at a conversion rate of 17.2157 shares of our common
stock per $1,000 principal amount equal to the settlement amount (as defined in the related indenture), or
approximately $58.09 per share of our common stock. At December 31, 2017, the equity component of the 1.625%
Convertible Notes, including the impact of deferred taxes, was $12 million.
Molina Healthcare, Inc. 2018 Form 10-K | 92
Through August 17, 2018, we received conversion notices from substantially all of the remaining holders of the
1.625% Convertible Notes outstanding. Under the conversions, we paid cash for the remaining $64 million
aggregate principal amount and delivered 0.6 million shares of our common stock to the converting holders on the
settlement dates in September 2018.
Exchange. In March 2018, we entered into separate, privately negotiated, synthetic exchange agreements with
certain holders of our outstanding 1.625% Convertible Notes, under which we exchanged $97 million aggregate
principal amount and accrued interest for 1.8 million shares of our common stock. We recorded a loss on debt
extinguishment, including transaction fees, of $10 million, primarily relating to the inducement premium paid to the
bondholders, which is recorded in “Other expenses (income), net” in the accompanying consolidated statements of
operations. We did not receive any proceeds from the transaction.
In December 2017, we entered into separate, privately negotiated, synthetic exchange agreements with certain
holders of our outstanding 1.625% Convertible Notes, under which we exchanged $141 million aggregate principal
amount and accrued interest for 2.6 million shares of our common stock. We recorded a loss on debt
extinguishment, including transaction fees, of $14 million, primarily relating to the inducement premium paid to the
bondholders, which is recorded in “Other expenses (income), net” in the accompanying consolidated statements of
operations. We did not receive any proceeds from the transaction.
Cross-Default Provisions
The indentures governing the 4.875% Notes, the 5.375% Notes and the 1.125% Convertible Notes contain cross-
default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of
the amount specified in the applicable indenture.
Bridge Credit Agreement
In January 2018, we entered into a bridge credit agreement with several banks, which was subsequently terminated
in August 2018.
Lease Financing Obligations
Molina Center and Ohio Exchange. In 2013, we entered into a sale-leaseback transaction for the Molina Center and
our Ohio health plan office building located in Columbus, Ohio, also known as the Ohio Exchange. Based on certain
lease terms, we retained continuing involvement with these leased properties. Rent increases 3% per year through
the initial term, which expires in 2038. The lease provides for six five-year renewal options, with renewal rent to be
the higher of the 3% annual escalator or the then-fair market value.
6th and Pine. Also in 2013, we entered into a construction and lease transaction for two office buildings in Long
Beach, California (“6th and Pine”). Due to our participation in the construction project, we retained continuing
involvement in the properties. Rent increases 3.4% per year through the initial term, which expires in 2029. The
lease provides for two five-year renewal options, with renewal rent to be determined based on the then-fair market
value.
Because of our continuing involvement in the leasing transactions, as noted above, the sale of these properties did
not qualify for sales recognition and we remain the owner of the properties under these leases for accounting
purposes as of December 31, 2018. The assets are therefore included in our consolidated balance sheets, and are
depreciated over their remaining useful lives. The lease financing obligations are amortized over the initial lease
terms, such that there will be no gain or loss recorded if the leases are not extended beyond their expiration dates.
Payments under the leases adjust the lease financing obligations, and the imputed interest is recorded to interest
expense in our consolidated statements of operations. Aggregate interest expense under these leases amounted to
$17 million in each of the years ended December 31, 2018, 2017 and 2016. For information regarding the future
minimum lease obligations, refer to Note 17, “Commitments and Contingencies” and Note 2, “Significant Accounting
Policies,” Recent Accounting Pronouncements Not Yet Adopted, Leases.
Molina Healthcare, Inc. 2018 Form 10-K | 93
12. 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:
Balance Sheet Location
2018
2017
December 31,
Derivative asset:
1.125% Call Option
Current assets: Derivative asset
Derivative liability:
1.125% Conversion Option
Current liabilities: Derivative liability
(In millions)
476
$
522
476
$
522
$
$
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 operations, and reported in “Other
expenses (income), net.” Gains and losses for our derivative financial instruments are presented individually in the
accompanying consolidated statements of cash flows, “Supplemental cash flow information.”
1.125% Convertible Notes Call Spread Overlay. Concurrent with the issuance of the 1.125% Convertible 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% Convertible
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% Convertible 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% Convertible Notes), these transactions are intended to offset cash payments in excess of the principal
amount of the 1.125% Convertible Notes due upon any conversion of such notes.
In the second, third and fourth quarters of 2018, in connection with the 1.125% Convertible Notes purchases
(described in Note 11, “Debt”), we entered into privately negotiated termination agreements with each of the
Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate
principal amount of the 1.125% Convertible Notes purchased.
•
•
•
In the fourth quarter of 2018, this resulted in our receipt of $146 million for the settlement of the 1.125% Call
Option (which is a derivative asset), and the payment of $130 million for the partial termination of the
1.125% Warrants, for an aggregate net cash receipt of $16 million from the Counterparties.
In the third quarter of 2018, this resulted in our receipt of $343 million for the settlement of the 1.125% Call
Option, and the payment of $306 million for the partial termination of the 1.125% Warrants, for an
aggregate net cash receipt of $37 million from the Counterparties.
In the second quarter of 2018, this resulted in our receipt of $134 million for the settlement of the 1.125%
Call Option, and the payment of $113 million for the partial termination of the 1.125% Warrants, for an
aggregate net cash receipt of $21 million from the Counterparties.
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 4, “Fair Value Measurements.”
1.125% Conversion Option. The embedded cash conversion option within the 1.125% Convertible Notes is
accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements
of operations 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 4, “Fair Value Measurements.”
As of December 31, 2018, 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% Convertible Notes may be converted within twelve
months of December 31, 2018, as described in Note 11, “Debt.”
Molina Healthcare, Inc. 2018 Form 10-K | 94
13. Income Taxes
Income tax expense (benefit) is determined using an estimated annual effective tax rate, which generally differs
from the U.S. federal statutory rate primarily because of state taxes, nondeductible expenses such as the HIF,
goodwill impairment, certain compensation, and other general and administrative expenses. The effective tax rate
was not impacted by the HIF in 2017, given the 2017 HIF moratorium. 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.
The TCJA, in part, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. TCJA’s
change in the federal rate required that we revalue deferred tax assets and liabilities based on the rates at which
they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable
state tax rate. We applied the guidance in SEC Staff Accounting Bulletin No. 118 when accounting for the
enactment-date effects of the TCJA in 2017 and throughout 2018.
As of December 31, 2017, we recorded a provisional amount of $54 million for the revaluation of deferred tax
assets and liabilities because we had not yet completed our accounting for all of the enactment-date income tax
effects of the TJCA under ASC 740, Income Taxes. Upon further analysis of certain aspects of the TCJA and
refinement of our calculations in the year ended December 31, 2018, we reduced this provisional amount by $4
million, which is included as a component of income tax expense in the accompanying consolidated statement of
operations. As of December 31, 2018, the accounting for all of the enactment-date income tax effects of the TCJA is
complete.
Income tax expense (benefit) consisted of the following:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
2018
Year Ended December 31,
2017
(In millions)
2016
$
272
$
(9) $
18
8
298
(3)
(3)
—
(6)
3
—
(6)
(85)
(9)
—
(94)
Income tax expense (benefit)
$
292
$
(100) $
134
3
(6)
131
19
2
1
22
153
Molina Healthcare, Inc. 2018 Form 10-K | 95
A reconciliation of the U.S. federal statutory income tax rate to the combined effective income tax rate is as follows:
Statutory federal tax (benefit) rate
State income provision (benefit), net of federal
Nondeductible health insurer fee (“HIF”)
Nondeductible compensation
Nondeductible goodwill impairment
Worthless stock deduction
Revaluation of net deferred tax assets
Change in purchase agreement that increased tax basis in assets
Other
Effective tax (benefit) rate
Year Ended December 31,
2017
2016
2018
21.0%
1.2
7.3
0.7
—
(1.0)
(0.4)
—
0.4
29.2%
(35.0)%
(0.7)
—
2.8
6.6
—
8.8
—
1.1
(16.4)%
35.0%
1.6
37.0
3.1
—
—
—
(2.2)
0.3
74.8%
Our effective tax rate is based on expected income (loss), 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.
Deferred tax assets and liabilities are classified as non-current. Significant components of our deferred tax assets
and liabilities as of December 31, 2018 and 2017 were as follows:
Accrued expenses
Reserve liabilities
Other accrued medical costs
Net operating losses
Fixed assets and intangibles
Unearned premiums
Lease financing obligation
Tax credit carryover
Other
Valuation allowance
Total deferred income tax assets, net of valuation allowance
Prepaid expenses
Basis in debt
Total deferred income tax liabilities
Net deferred income tax asset
December 31,
2018
2017
$
(In millions)
32 $
7
12
16
30
9
30
12
3
(28)
123
(6)
—
(6)
117
$
$
15
11
16
27
23
19
30
15
3
(41)
118
(6)
(9)
(15)
103
At December 31, 2018, we had state net operating loss carryforwards of $332 million, which begin expiring in 2027.
At December 31, 2018, we had California research and development and enterprise zone tax credit carryovers of
$14 million, which will begin to expire in 2024.
We evaluate the need for a valuation allowance taking into consideration the ability to carry back and carry forward
tax credits and losses, available tax planning strategies and future income, including reversal of temporary
differences. We have determined that as of December 31, 2018, $28 million of deferred tax assets did not satisfy
the recognition criteria. Therefore, we decreased our valuation allowance by $13 million, from $41 million at
December 31, 2017, to $28 million as of December 31, 2018.
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
Molina Healthcare, Inc. 2018 Form 10-K | 96
be due. These reserves are established when we believe that certain positions might be challenged despite our
belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and
circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve
provisions and changes to reserves that are considered appropriate.
The roll forward of our unrecognized tax benefits is as follows:
Gross unrecognized tax benefits at beginning of period
Increases in tax positions for current year
Increases in tax positions for prior years
Decreases in tax positions for prior years
Lapse in statute of limitations
Gross unrecognized tax benefits at end of period
2018
Year Ended December 31,
2017
(In millions)
2016
$
$
(13) $
(9)
—
—
2
(20) $
(11) $
(1)
(4)
3
—
(13) $
(9)
(1)
(1)
—
—
(11)
The total amount of unrecognized tax benefits at December 31, 2018, 2017 and 2016 that, if recognized, would
affect the effective tax rates is $18 million, $12 million, and $9 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 $3 million
due to the 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, 2018, 2017 and 2016
were insignificant.
We may be subject to federal examination for calendar years 2015 through 2017. With a few exceptions, which are
immaterial in the aggregate, we no longer are subject to state, local, and Puerto Rico tax examinations for years
before 2014. We are not aware of any material adjustments that may be proposed.
14. Stockholders' Equity
1.625% Convertible Notes
Conversion. As described in Note 11, “Debt,” we issued 0.6 million shares of our common stock in connection with
the conversion of the 1.625% Convertible Notes in the third quarter of 2018.
Exchange. As described in Note 11, “Debt,” we issued 1.8 million shares and 2.6 million shares of our common
stock in connection with the exchange of the 1.625% Convertible Notes in March 2018 and December 2017,
respectively.
1.125% Warrants
In connection with the Call Spread Overlay transaction described in Note 12, “Derivatives,” in 2013, we issued 13.5
million warrants with a strike price of $53.8475 per share. Under certain circumstances, beginning in April 2020, if
the price of our common stock exceeds the strike price of the 1.125% Warrants, we will be obligated to issue shares
of our common stock 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 (Loss) Per Share,” for dilution information for the periods presented. We will
not receive any additional proceeds if the 1.125% Warrants are exercised. Following the transactions described
below, 6.2 million of the 1.125% Warrants remain outstanding.
As described in Note 12, “Derivatives,” in the second, third and fourth quarters of 2018, we entered into privately
negotiated termination agreements with each of the Counterparties to terminate the respective portion of the Call
Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible
Notes repaid. In each case, additional paid-in capital was reduced for the same amount paid to the Counterparties
for the termination of the 1.125% Warrants.
•
•
In the fourth quarter of 2018, we paid $130 million to the Counterparties for the termination of 1.5 million of
the 1.125% Warrants outstanding.
In the third quarter of 2018, we paid $306 million to the Counterparties for the termination of 3.4 million of
the 1.125% Warrants outstanding.
Molina Healthcare, Inc. 2018 Form 10-K | 97
•
In the second quarter of 2018, we paid $113 million to the Counterparties for the termination of 2.4 million of
the 1.125% Warrants outstanding.
Share-Based Compensation
At December 31, 2018, we had employee equity incentives outstanding under our 2011 Equity Incentive Plan
(“2011 Plan”). The 2011 Plan provides for the award of restricted stock (“RSAs”), performance stock (“PSAs”),
performance stock units (“PSUs”), 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.
In connection with the 2011 Plan and employee stock purchase plan, approximately 365,000 shares and 857,000
shares of common stock were purchased or vested, net of shares used to settle employees’ income tax obligations,
during the years ended December 31, 2018, and 2017, respectively.
Except as noted below, we record share-based compensation as “General and administrative expenses” in the
accompanying consolidated statements of operations. Total share-based compensation expense was as follows:
2018
Year Ended December 31,
2017
(In millions)
2016
RSAs, PSAs and PSUs
Employee stock purchase plan and stock
options
Pretax
Charges
$
Net-of-Tax
Amount
Pretax
Charges
Net-of-Tax
Amount
Pretax
Charges
Net-of-Tax
Amount
17 $
17 $
39 $
35 $
20 $
10
9
7
5
6
$
27 $
26 $
46 $
40 $
26 $
17
5
22
RSAs, PSAs and PSUs 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. Certain
PSUs may vest in their entirety at the end of three-year performance periods, if their performance conditions are
met. We generally recognize expense for RSAs, PSAs and PSUs on a straight-line basis.
Activity for such awards in the year ended December 31, 2018 is summarized below:
Unvested balance as of December 31, 2017
Granted
Vested
Forfeited
Unvested balance as of December 31, 2018
RSAs
PSAs
PSUs
Total
Shares
Weighted
Average
Grant Date
Fair Value
401,804
363,740
(192,609)
(173,140)
399,795
84,762
—
(32,929)
(48,701)
3,132
91,828
214,952
—
(105,397)
201,383
578,394
$
578,692
(225,538)
(327,238)
604,310
$
58.35
75.38
59.08
63.69
71.50
As of December 31, 2018, there was $35 million of total unrecognized compensation expense related to unvested
RSAs, PSAs and PSUs, which we expect to recognize over a remaining weighted-average period of 2.6 years, 0.2
years and 2.0 years, respectively. This unrecognized compensation cost assumed an estimated forfeiture rate of
16.1% for non-executive employees as of December 31, 2018, based on actual forfeitures over the last 4 years.
Molina Healthcare, Inc. 2018 Form 10-K | 98
The total grant date fair value of awards granted and vested is presented in the following table:
2018
Year Ended December 31,
2017
(In millions)
2016
Granted:
RSAs
PSAs
PSUs
Vested:
RSAs
PSAs
PSUs
$
$
$
$
28 $
—
16
44 $
15 $
3
—
18 $
20 $
—
16
36 $
23 $
15
9
47 $
19
15
—
34
22
—
—
22
During the year ended December 31, 2017, the vesting of 133,957 RSAs, 153,574 PSAs and 139,272 PSUs was
accelerated in connection with the termination of our former Chief Executive Officer and former Chief Financial
Officer in May 2017. The incremental charge relating to this acceleration, or $23 million, is reported in
“Restructuring and separation costs” in the accompanying consolidated statements of operations. This amount is
included in the 2017 “Pretax Charges” in the table above.
Stock Options. Stock option awards generally have an exercise price equal to the fair market value of our common
stock on the date of grant, 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. Stock option activity for the year ended December
31, 2018 is summarized below:
Shares
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
Weighted
Average
Remaining
Contractual
term
(In millions)
(Years)
Stock options outstanding as of December 31, 2017
405,000
$
64.79
Granted
Exercised
—
—
Stock options outstanding as of December 31, 2018
405,000
Stock options exercisable and expected to vest as of
December 31, 2018
Exercisable as of December 31, 2018
405,000
155,000
—
—
64.79
64.79
$
$
60.69 $
21
21
9
8.5
8.5
8.0
The weighted-average grant date fair value per share of stock options awarded in 2017 was $41.43. We estimate
the fair value of each stock option award on the grant date using the Black-Scholes option pricing model. To
determine the fair value of the stock options awarded in 2017 we applied a risk-free interest rate of 2.3%, expected
volatility of 38.4%, dividend yield of 0% and expected life of 8.4 years. No stock options were granted in 2018 and
2016.
Also as of December 31, 2018, there was $9 million of total unrecognized compensation expense related to
unvested stock options, which we expect to recognize over a weighted-average period of 1.8 years. The total
intrinsic value of options exercised during the years ended December 31, 2017, and 2016 was $2 million, and $1
million, respectively. No stock options were exercised in 2018. The following is a summary of information about
stock options outstanding and exercisable at December 31, 2018:
Molina Healthcare, Inc. 2018 Form 10-K | 99
Range of Exercise Prices
$33.02
$67.33
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
Number
Exercisable
Weighted-
Average
Exercise
Price
4.2
8.9
$
33.02
67.33
30,000
$
125,000
155,000
33.02
67.33
Number
Outstanding
30,000
375,000
405,000
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, 2018, 2017, and
2016, the inputs to this model were as follows: risk-free interest rates of approximately 0.4% to 1.9%; expected
volatilities ranging from approximately 31% to 44%, dividend yields of 0%, and an average expected life of 0.5
years. We issued approximately 216,000, 351,000 and 410,000 shares of our common stock under the ESPP
during the years ended December 31, 2018, 2017, and 2016, respectively. The 2011 ESPP provides for the
issuance of up to three million shares of common stock.
15. Restructuring and Separation Costs
Restructuring and separation costs are reported by the same name in the accompanying consolidated statements
of operations.
IT Restructuring Plan
Following the 2017 Restructuring Plan noted below, our new executive team has focused on a margin recovery plan
that includes identification and implementation of various profit improvement initiatives. To that end, we began the
implementation of a plan to restructure our information technology department (the “IT Restructuring Plan”) in the
third quarter of 2018. On February 4, 2019, we entered into a master services agreement with Infosys Limited
pursuant to which Infosys will manage certain of our information technology infrastructure services including, among
other things, our information technology operations, end-user services, and data centers.
Expected Costs
In addition to $9 million incurred in the last half of 2018, we expect to incur approximately $11 million for the IT
Restructuring Plan in 2019. We expect such costs to consist primarily of one-time termination benefits and other
costs in the Other segment. We expect the IT Restructuring Plan to be completed by the end of 2019.
Costs Incurred
We have incurred expenses under the IT Restructuring Plan as follows:
Other
Reconciliation of Liability
Year Ended December 31, 2018
One-Time
Termination
Benefits
Other
Restructuring
Costs
Consulting Fees
Total
(In millions)
$
7 $
2 $
9
For those restructuring costs that require cash settlement (such as one-time termination benefits and consulting
fees), the following table presents a roll-forward of the accrued liability, which is reported in “Accounts payable and
Molina Healthcare, Inc. 2018 Form 10-K | 100
accrued liabilities” in the accompanying consolidated balance sheets.
Accrued as of December 31, 2017
Charges
Cash payments
Accrued as of December 31, 2018
2017 Restructuring Plan
One-Time
Termination
Benefits
Other
Restructuring
Costs
(In millions)
Total
$
$
— $
7
(2)
5 $
— $
2
(1)
1 $
—
9
(3)
6
Following a management-initiated, broad operational assessment in early 2017, our board of directors approved,
and we committed to, a comprehensive restructuring and profitability improvement plan in June 2017 (the “2017
Restructuring Plan”). Key activities under this plan to date have included:
•
•
•
•
•
Streamlining of our organizational structure to eliminate redundant layers of management, consolidate
regional support services, and other staff reductions to improve efficiency and the speed and quality of
decision making;
Re-design of core operating processes such as provider payment, utilization management, quality
monitoring and improvement, and information technology, to achieve more effective and cost-efficient
outcomes;
Remediation of high-cost provider contracts and enhancement of high quality, cost-effective networks;
Restructuring, including selective exits, of direct delivery operations; and
Partnering with the lowest-cost, most effective vendors.
Costs Incurred
In our 2017 Annual Report on Form 10-K, we reported that we had incurred approximately $234 million of costs
associated with the 2017 Restructuring Plan in 2017. In the year ended December 31, 2018, we incurred an
additional $37 million in such costs, primarily resulting from a write-off of costs associated with a terminated
utilization and care management project that was inconsistent with the goals of the 2017 Restructuring Plan. We
also recorded nominal amounts for one-time termination benefits, and true-ups of certain lease contract termination
costs recorded in 2017. As of December 31, 2018, we had incurred $271 million in total costs under the 2017
Restructuring Plan. We completed all activities under the 2017 Restructuring Plan in 2018, with the exception of the
cash settlement of lease termination liabilities. We expect to continue to settle those liabilities through 2025, unless
the leases are terminated sooner.
The following table presents the major types of such costs by segment. Current and long-lived assets include
current and non-current capitalized project costs, and capitalized software determined to be unrecoverable.
Year Ended December 31, 2018
Other Restructuring Costs
Separation
Costs -
Former
Executives
One-Time
Termination
Benefits
Write-offs of
Current and
Long-lived
Assets
Consulting
Fees
Contract
Termination
Costs
Total
$
$
— $
—
— $
— $
5
5 $
(In millions)
(1) $
20
19 $
— $
1
1 $
12 $
—
12 $
11
26
37
Health Plans
Other
Molina Healthcare, Inc. 2018 Form 10-K | 101
Separation
Costs -
Former
Executives
Year Ended December 31, 2017
Other Restructuring Costs
One-Time
Termination
Benefits
Write-offs of
Long-lived
Assets
Consulting
Fees
Contract
Termination
Costs
Total
$
$
— $
36
36 $
33 $
34
67 $
(In millions)
16 $
45
61 $
— $
44
44 $
24 $
2
26 $
73
161
234
Health Plans
Other
As of December 31, 2018, we had incurred cumulative restructuring costs under the 2017 Restructuring Plan as
follows:
Separation
Costs -
Former
Executives
One-Time
Termination
Benefits
Write-offs of
Current and
Long-lived
Assets
Consulting
Fees
Contract
Termination
Costs
Total
Other Restructuring Costs
Health Plans
Other
$
$
— $
36
36 $
33 $
39
72 $
Reconciliation of Liability
(In millions)
15 $
65
80 $
— $
45
45 $
36 $
2
38 $
84
187
271
For those restructuring and separation costs that require cash settlement (primarily separation costs not including
equity incentives, termination benefits, consulting fees and contract termination costs), the following table presents
a roll-forward of the accrued liability, which is reported primarily in “Accounts payable and accrued liabilities” in the
accompanying consolidated balance sheets. Certain contract termination cost accruals are non-current, recorded in
“Other long-term liabilities.”
Accrued as of December 31, 2017
Adjustments
Charges
Cash payments
Accrued as of December 31, 2018
Separation
Costs -
Former
Executives
One-Time
Termination
Benefits
Other
Restructuring
Costs
Total
$
$
2 $
—
—
(2)
(In millions)
11 $
(1)
6
(15)
35 $
11
2
(31)
— $
1 $
17 $
48
10
8
(48)
18
16. Employee Benefits
We sponsor defined contribution 401(k) plans that cover substantially all employees of our company and its
subsidiaries. Eligible employees are permitted to contribute up to the maximum amount allowed by law. We
generally match up to the first 4% of compensation contributed by employees. Expense recognized in connection
with our contributions to the 401(k) plans amounted to $36 million, $43 million, and $36 million in the years ended
December 31, 2018, 2017, and 2016, respectively.
We also have a non-qualified 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.
Molina Healthcare, Inc. 2018 Form 10-K | 102
17. Commitments and Contingencies
Regulatory Capital Requirements 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. The National Association of Insurance Commissioners (“NAIC”), has adopted rules 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, Florida and
New York, have adopted these rules. Such requirements, if adopted by California, Florida and New York, may
increase the minimum capital required for those states. Regulators in some states may also enforce capital
requirements that require the retention of net worth in excess of amounts formally required by statute or regulation.
As of December 31, 2018, our health plans had aggregate statutory capital and surplus of approximately $2,388
million compared with the required minimum aggregate statutory capital and surplus of approximately $1,040
million. All of our health plans were in compliance with the minimum capital requirements at December 31, 2018.
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.
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 on 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 $2,262 million at
December 31, 2018, and $1,691 million at December 31, 2017. 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 $170 million and
$696 million as of December 31, 2018 and 2017, respectively.
Legal Proceedings
The health care industry is subject to numerous laws and regulations of federal, state, and local governments.
Compliance with these laws and regulations can be subject to government review and interpretation, as well as
regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and
regulations include significant fines 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.
Steamfitters Local 449 Pension Plan v. Molina Healthcare, Inc., et al. On October 5, 2018, the Steamfitters Local
449 Pension Plan filed its first amended class action securities complaint in the Central District Court of California
against the Company and its former executive officers, J. Mario Molina, John C. Molina, Terry P. Bayer, and Rick
Hopfer, Case 2:18-cv-03579. The amended complaint purports to seek recovery on behalf of all persons or entities
who purchased Molina common stock between October 31, 2014, and August 2, 2017, for alleged violations under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. The plaintiff alleges the defendants misled investors regarding the scalability of the Company’s
administrative infrastructure during the identified class period. On December 13, 2018, the Court granted the
Company’s motion to dismiss in its entirety and closed the case. On January 9, 2019, plaintiffs appealed to the
United States Court of Appeals for the Ninth Circuit. Plaintiff’s opening brief is due April 10, 2019, the Company’s
response is due May 10, 2019, and Plaintiff’s reply is due May 31, 2019. Oral argument will likely occur within 9-12
months after the briefing is completed. The Company believes it has meritorious defenses to the alleged claims and
intends to defend the matter vigorously. At this time, we are not able to estimate a possible loss or range of loss that
Molina Healthcare, Inc. 2018 Form 10-K | 103
may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our
financial condition, results of operations, or cash flows.
States’ Budgets
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid, Medicare, and
CHIP programs. The states in which we operate our health plans regularly face significant budgetary pressures.
Lease Obligations
We lease administrative facilities and certain equipment under non-cancelable operating leases expiring at various
dates through 2026. 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 operating leases and lease financing
obligations consist of the following amounts:
2019
2020
2021
2022
2023
Thereafter
Lease
Financing
Obligations
Operating
Leases
(In millions)
Total
$
19 $
46 $
19
20
21
21
311
411
$
$
34
24
16
12
15
147
$
65
53
44
37
33
326
558
Rental expense related to operating leases amounted to $62 million, $75 million, and $64 million for the years
ended December 31, 2018, 2017, and 2016, respectively. The amounts reported in “Lease Financing Obligations”
above represent our contractual lease commitments for the properties described in Note 11, “Debt” under the
subheading “Lease Financing Obligations.”
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.
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.
18. Segments
We currently have two reportable segments: our Health Plans segment and our Other segment. We manage the
vast majority of our operations through our Health Plans segment. Our Other segment includes the historical results
of the Pathways behavioral health subsidiary, which we sold in the fourth quarter of 2018, and certain corporate
amounts not allocated to the Health Plans segment. Effective in the fourth quarter of 2018, we reclassified the
Molina Healthcare, Inc. 2018 Form 10-K | 104
historical results relating to our Molina Medicaid Solutions (“MMS”) segment, which we sold in the third quarter of
2018, to the Other segment. Previously, results for MMS were reported in a stand-alone segment.
Refer to Note 1, “Organization and Basis of Presentation,” for further details on the sales of Pathways and MMS.
We regularly evaluate the appropriateness of our reportable segments, particularly in light of organizational
changes, acquisition and divestiture activity, and changing laws and regulations. Therefore, these reportable
segments may change in the future.
Description of Earnings Measures for Reportable Segments
Margin is the appropriate earnings measure for our reportable segments, based on how our chief operating decision
maker currently reviews results, assesses performance, and allocates resources.
Margin for our Health Plans segment is referred to as “Medical margin,” which represents the amount earned by the
segments 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, and is one of the key metrics used to assess the
performance of the segments. Therefore, the underlying medical margin is the most important measure of earnings
reviewed by the chief operating decision maker.
2018
Total revenue
Margin
Goodwill, and intangible assets, net
Total assets
2017
Total revenue
Margin
Goodwill, and intangible assets, net
Total assets
2016
Total revenue
Margin
Goodwill, and intangible assets, net
Total assets
Health Plans
Other
(In millions)
Consolidated
$
18,471
$
2,475
190
6,165
419
43
—
989
18,890
2,518
190
7,154
$
19,352
$
531
$
19,883
1,781
212
6,347
29
43
2,124
1,810
255
8,471
$
17,234
$
548
$
17,782
1,671
513
5,897
54
247
1,552
1,725
760
7,449
The following table reconciles margin by segment to consolidated income (loss) before income tax expense
(benefit):
2018
Year Ended December 31,
2017
(In millions)
2016
Margin:
Health Plans
Other
Total margin
Add: other operating revenues (1)
Less: other operating expenses (2)
Less: loss on sales of subsidiaries, net of gain
Operating income (loss)
Less: other expenses, net
Income (loss) before income tax expense (benefit)
$
______________________
$
2,475
$
1,781
$
43
2,518
871
(2,243)
(15)
1,131
132
999
$
29
1,810
508
1,671
54
1,725
798
(2,873)
(2,217)
—
(555)
57
(612) $
—
306
101
205
Molina Healthcare, Inc. 2018 Form 10-K | 105
(1) Other operating revenues include premium tax revenue, health insurer fees reimbursed, investment income and other
revenue.
(2) Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fees,
depreciation and amortization, impairment losses, and restructuring and separation costs.
19. Quarterly Results of Operations (Unaudited)
The following table summarizes quarterly unaudited results of operations for the years ended December 31, 2018
and 2017.
Total revenue
Margin
Gain (loss) on sales of subsidiaries
Restructuring and separation costs
Net income
Net income per share (1):
Basic
Diluted
Total revenue
Margin
Impairment losses
Restructuring and separation costs
Net income (loss)
Net income (loss) per share (1):
Basic
Diluted
_______________________________
For The Quarter Ended
March 31,
2018
June 30,
2018
Sept. 30,
2018
December 31,
2018
(In millions, except per-share data)
$
4,646
$
4,883
$
4,697
$
4,664
615
—
25
107
673
—
8
202
566
37
5
197
664
(52)
8
201
$
$
1.79 $
1.64 $
3.29 $
3.02 $
3.22 $
2.90 $
3.24
3.01
For The Quarter Ended
March 31,
2017
June 30,
2017
Sept. 30,
2017
December 31,
2017
(In millions, except per-share data)
$
4,904
$
4,999
$
5,031
$
4,949
546
—
—
77
254
72
43
(230)
564
129
118
(97)
446
269
73
(262)
$
$
1.38 $
1.37 $
(4.10) $
(4.10) $
(1.70) $
(1.70) $
(4.59)
(4.59)
(1) The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method and is based on
the weighted-average common share equivalents outstanding during each quarter. Accordingly, the sum of the quarterly net
income (loss) per share may not agree to the total for the year. Certain potentially dilutive common shares issuable are not
included in the computation of diluted net income (loss) per share because to do so would be anti-dilutive.
Molina Healthcare, Inc. 2018 Form 10-K | 106
20. Condensed Financial Information of Registrant
The condensed balance sheets as of December 31, 2018 and 2017, and the related condensed statements of
operations, comprehensive income (loss) and cash flows for each of the three years in the period ended December
31, 2018 for our parent company Molina Healthcare, Inc. (the “Registrant”), are presented below.
Condensed Balance Sheets
December 31,
2018
2017
(In millions, except share
data)
ASSETS
Current assets:
Cash and cash equivalents
Investments
Restricted investments
Receivables
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
Advances to related parties and other assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable
Accounts payable and accrued liabilities
Current portion of long-term debt
Derivative liability
Total current liabilities
Long-term debt
Lease financing obligations
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.001 par value; 150 million shares authorized; outstanding:
62 million shares at December 31, 2018 and 60 million shares at December 31, 2017
Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and
outstanding
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
See accompanying notes.
$
$
$
$
70 $
100
—
2
90
47
476
785
176
13
2,768
39
40
3,821 $
4 $
223
241
476
944
1,020
197
13
2,174
—
—
643
(8)
1,012
1,647
3,821 $
504
192
169
2
148
103
522
1,640
223
15
2,306
17
32
4,233
3
178
653
522
1,356
1,318
198
24
2,896
—
—
1,044
(5)
298
1,337
4,233
Molina Healthcare, Inc. 2018 Form 10-K | 107
Revenue:
Management fees
Investment income and other revenue
Total revenue
Expenses:
Medical care costs
General and administrative expenses
Depreciation and amortization
Restructuring and separation costs
Impairment losses
Total operating expenses
Gain on sale of subsidiary
Operating income (loss)
Interest expense
Condensed Statements of Operations
Year Ended December 31,
2018
2017
2016
(In millions)
$
1,138 $
1,317
$
17
1,155
8
1,007
69
35
—
1,119
37
73
114
17
(58)
(14)
(44)
751
707
16
1,333
16
1,082
93
153
39
1,383
—
(50)
117
(61)
(106)
8
(114)
(398)
$
(512) $
1,062
16
1,078
73
899
95
—
—
1,067
—
11
101
—
(90)
(24)
(66)
118
52
Other expense (income)
Loss before income tax (benefit) expense and equity in net earnings
(losses) of subsidiaries
Income tax (benefit) expense
Net loss before equity in net earnings (losses) of subsidiaries
Equity in net earnings (losses) of subsidiaries
Net income (loss)
$
Condensed Statements of Comprehensive Income (Loss)
Net income (loss)
Other comprehensive (loss) income:
Unrealized investment (loss) gain
Less: effect of income taxes
Other comprehensive (loss) income, net of tax
Comprehensive income (loss)
Year Ended December 31,
2018
2017
2016
$
$
(In millions)
707
$
(512) $
(3)
(1)
(2)
(5)
(2)
(3)
705
$
(515) $
52
3
1
2
54
See accompanying notes.
Molina Healthcare, Inc. 2018 Form 10-K | 108
Condensed Statements of Cash Flows
Year Ended December 31,
2018
2017
2016
(In millions)
Operating activities:
Net cash provided by operating activities
$
118
$
166
$
55
Investing activities:
Capital contributions to subsidiaries
Dividends received from subsidiaries
Purchases of investments
Proceeds from sales and maturities of investments
Purchases of property, equipment and capitalized software
Net cash received from sale of subsidiaries
Change in amounts due to/from affiliates
Other, net
Net cash provided by (used in) investing activities
Financing activities:
Repayment of credit facility
Repayment of principal amount of 1.125% Convertible Notes
Cash paid for partial settlement of 1.125% Conversion Option
Cash received for partial settlement of 1.125% Call Option
Cash paid for partial termination of 1.125% Warrants
Repayment of principal amount of 1.625% Convertible Notes
Proceeds from senior notes offerings, net of issuance costs
Proceeds from borrowings under credit facility
Other, net
Net cash (used in) provided by financing activities
Net (decrease) increase in cash, cash equivalents, and restricted cash and
cash equivalents
Cash, cash equivalents, and restricted cash and cash equivalents at
beginning of period
Cash, cash equivalents, and restricted cash and cash equivalents at end of
period
(145)
298
(136)
388
(22)
242
6
—
631
(300)
(298)
(623)
623
(549)
(64)
—
—
19
(1,192)
(443)
513
(370)
286
(331)
156
(67)
—
(49)
—
(375)
—
—
—
—
—
—
325
300
11
636
427
86
$
70 $
513
$
See accompanying notes.
(386)
101
(115)
188
(125)
—
(18)
6
(349)
—
—
—
—
—
—
—
—
20
20
(274)
360
86
Notes to Condensed Financial Information of Registrant
Note A - Basis of Presentation
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 our subsidiaries pursuant to
administrative services agreements that include, but are not limited to, information technology, product development
and administration, underwriting, claims processing, customer service, certain care management services, human
Molina Healthcare, Inc. 2018 Form 10-K | 109
resources, legal, marketing, purchasing, risk management, actuarial, underwriting, finance, accounting, legal and
public relations. 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 2018, 2017, and 2016 for these services
amounted to $1,137 million, $1,317 million, and $1,062 million, respectively, and are included in operating revenue.
The Registrant and its subsidiaries are included in the consolidated federal and state income tax returns filed by the
Registrant. Income taxes are allocated to each subsidiary in accordance with an intercompany tax allocation
agreement. The agreement allocates income taxes in an amount generally equivalent to the amount which would
be expensed by the subsidiary if it filed a separate tax return. Net operating loss benefits are paid to the subsidiary
by the Registrant to the extent such losses are utilized in the consolidated tax returns.
Note C - 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 business combinations. Such amounts have been recorded as an
increase in investment in the respective subsidiaries.
Molina Healthcare, Inc. 2018 Form 10-K | 110
21. Supplemental Condensed Consolidating Financial Information
On November 10, 2015, the Parent issued $700 million aggregate principal amount of the 5.375% Notes in a
private placement to institutional investors. The 5.375% Notes were registered with the SEC in September 2016.
Pursuant to the terms of the indenture governing the 5.375% Notes (the “Indenture”), the 5.375% Notes are
required to be guaranteed by each of the Parent’s existing and future direct and indirect domestic restricted
subsidiaries that guarantee the Parent’s Credit Agreement. At the time of issuance, there were two subsidiaries of
the Parent that guaranteed the Notes: MMS and Molina Medical Management, Inc. (“MMM”).
On November 1, 2015, the Parent acquired all of the outstanding ownership interests of Pathways Health and
Community Support LLC (“Pathways”). As a result of that acquisition, and pursuant to the terms of the Indenture,
effective February 16, 2016, Pathways and 15 of its subsidiaries were added as guarantors of the 5.375% Notes.
Subsequently, effective January 3, 2017, MMM and 14 Pathways subsidiaries were released as guarantors of the
5.375% Notes, leaving MMS, Pathways, and Molina Pathways, LLC as the only subsidiary guarantors. MMS and
Pathways were released as guarantors effective September 30, 2018, and October 19, 2018, respectively, in
connection with their divestitures. Accordingly, as of December 31, 2018, Molina Pathways, LLC was the sole
wholly owned subsidiary guarantor of the 5.375% Notes, on a full and unconditional basis. As discussed in Note 11,
“Debt,” effective as of January 31, 2019, Molina Pathways, LLC was released as a guarantor of the 5.375% Notes.
For all periods presented, the following condensed consolidating financial statements present Molina Healthcare,
Inc. (as “Parent Issuer”), Molina Pathways, LLC (as “Other Guarantor”), the subsidiary non-guarantors (as “Non-
Guarantors”) and “Eliminations,” according to the guarantor structure as assessed as of and for the year ended
December 31, 2018.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Parent Issuer
Other
Guarantor
Year Ended December 31, 2018
Non-
Guarantors
(In millions)
Eliminations Consolidated
Revenue:
Total revenue
Expenses:
Medical care costs
Cost of service revenue
General and administrative expenses
Premium tax expenses
Health insurer fees
Depreciation and amortization
Restructuring and separation costs
Total operating expenses
Gain (loss) on sales of subsidiaries
Operating income (loss)
Interest expense
Other expense
(Loss) income before income tax (benefit)
expense
Income tax (benefit) expense
Net (loss) income before equity in net
earnings (losses) of subsidiaries
Equity in net earnings (losses) of
subsidiaries
Net income (loss)
$
1,155
$
3 $
18,884
$
(1,152) $
18,890
8
—
1,007
—
—
69
35
1,119
37
73
114
17
(58)
(14)
(44)
$
751
707
$
—
—
4
—
—
—
—
4
(52)
(53)
—
—
(53)
(11)
(42)
(5)
15,129
364
1,474
417
348
30
11
17,773
—
1,111
1
—
1,110
317
793
—
(47) $
793
$
—
—
(1,152)
—
—
—
—
(1,152)
—
—
—
—
—
—
—
(746)
(746) $
15,137
364
1,333
417
348
99
46
17,744
(15)
1,131
115
17
999
292
707
—
707
Molina Healthcare, Inc. 2018 Form 10-K | 111
Parent Issuer
Other
Guarantor
Year Ended December 31, 2017
Non-
Guarantors
(In millions)
Eliminations Consolidated
$
1,333
$
2 $
19,904
$
(1,356) $
19,883
16
—
1,082
—
93
153
39
1,383
(50)
56
(106)
8
(114)
(398)
—
—
2
—
—
—
—
2
—
—
—
—
—
17,058
492
1,865
438
44
81
431
(1)
—
(1,355)
—
—
—
—
17,073
492
1,594
438
137
234
470
20,409
(1,356)
20,438
(505)
1
(506)
(108)
(398)
—
—
—
—
—
(555)
57
(612)
(100)
(512)
—
(512)
Net loss
$
(512) $
Parent Issuer
(164)
(164) $
8
(390) $
554
554
$
Other
Guarantor
Year Ended December 31, 2016
Non-
Guarantors
(In millions)
Eliminations Consolidated
$
1,078
$
— $
17,786
$
(1,082) $
17,782
Revenue:
Total revenue
Expenses:
Medical care costs
Cost of service revenue
General and administrative expenses
Premium tax expenses
Depreciation and amortization
Restructuring and separation costs
Impairment losses
Total operating expenses
Operating loss
Total other expenses, net
Loss before income taxes
Income tax expense (benefit)
Net loss before equity in net (losses)
earnings of subsidiaries
Equity in net (losses) earnings of
subsidiaries
Revenue:
Total revenue
Expenses:
Medical care costs
Cost of service revenue
General and administrative expenses
Premium tax expenses
Health insurer fees
Depreciation and amortization
Total operating expenses
Operating income (loss)
Total other expenses, net
(Loss) income before income taxes
Income tax (benefit) expense
Net (loss) income before equity in
earnings of subsidiaries
Equity in net earnings of subsidiaries
73
—
899
—
—
95
1,067
11
101
(90)
(24)
(66)
118
—
—
2
—
—
—
2
(2)
—
(2)
(1)
(1)
2
14,702
485
1,573
468
217
44
(1)
—
(1,081)
—
—
—
14,774
485
1,393
468
217
139
17,489
(1,082)
17,476
297
—
297
178
119
—
—
—
—
—
—
(120)
(120) $
306
101
205
153
52
—
52
Molina Healthcare, Inc. 2018 Form 10-K | 112
Net income
$
52 $
1 $
119
$
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Parent Issuer
Year Ended December 31, 2018
Non-
Guarantors
Other
Guarantor
Eliminations
Consolidated
Net income (loss)
Other comprehensive loss, net of tax
Comprehensive income (loss)
$
$
707
$
(2)
705
$
(47) $
—
(47) $
793
$
(2)
791
$
(746) $
2
(744) $
707
(2)
705
(In millions)
Parent Issuer
Year Ended December 31, 2017
Non-
Guarantors
Other
Guarantor
Eliminations
Consolidated
Net loss
Other comprehensive loss, net of tax
Comprehensive loss
$
$
(512) $
(164) $
(390) $
554
$
(3)
—
(2)
2
(515) $
(164) $
(392) $
556
$
(512)
(3)
(515)
(In millions)
Parent Issuer
Year Ended December 31, 2016
Non-
Guarantors
Other
Guarantor
Eliminations
Consolidated
Net income
Other comprehensive income, net of tax
Comprehensive income
$
$
52 $
2
54 $
1 $
—
1 $
119
$
(120) $
1
(1)
120
$
(121) $
52
2
54
(In millions)
Molina Healthcare, Inc. 2018 Form 10-K | 113
CONDENSED CONSOLIDATING BALANCE SHEETS
Parent Issuer
Other
Guarantor
December 31, 2018
Non-
Guarantors
(In millions)
Eliminations Consolidated
Current assets:
Cash and cash equivalents
Investments
Receivables
Due from (to) affiliates
Prepaid expenses and other current
assets
Derivative asset
Total current assets
Property, equipment, and capitalized
software, net
Goodwill and intangible assets, net
Restricted investments
Investment in subsidiaries, net
Deferred income taxes
Other assets
ASSETS
$
70 $
100
2
90
47
476
785
176
13
—
2,768
39
40
3,821 $
$
2 $
—
—
7
29
—
38
—
—
—
(5)
—
—
33 $
2,754 $
1,581
1,328
(97)
73
—
5,639
65
177
120
—
78
5
6,084 $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable
Amounts due government agencies
Accounts payable and accrued liabilities
Deferred revenue
Current portion of long-term debt
Derivative liability
Total current liabilities
Long-term debt and lease financing
obligations
Other long-term liabilities
Total liabilities
Total stockholders’ equity
$
$
4 $
—
223
—
241
476
944
1,217
13
2,174
1,647
3,821 $
— $
—
—
—
—
—
—
—
—
—
33
33 $
1,957 $
967
167
211
—
—
3,302
20
32
3,354
2,730
6,084 $
— $
—
—
—
—
—
—
—
—
—
(2,763)
—
(21)
(2,784) $
— $
—
—
—
—
—
—
(20)
(1)
(21)
(2,763)
(2,784) $
2,826
1,681
1,330
—
149
476
6,462
241
190
120
—
117
24
7,154
1,961
967
390
211
241
476
4,246
1,217
44
5,507
1,647
7,154
Molina Healthcare, Inc. 2018 Form 10-K | 114
CONDENSED CONSOLIDATING BALANCE SHEETS
Parent Issuer
Other
Guarantor
ASSETS
December 31, 2017
Non-
Guarantors
(In millions)
Eliminations Consolidated
Current assets:
Cash and cash equivalents
Investments
Restricted investments
Receivables
Due from (to) affiliates
Prepaid expenses and other current
assets
Derivative asset
Total current assets
Property, equipment, and capitalized
software, net
Goodwill and intangible assets, net
Restricted investments
Investment in subsidiaries, net
Deferred income taxes
Other assets
$
$
504 $
192
169
2
148
103
522
1,640
223
15
—
2,306
17
32
4,233 $
— $
—
—
—
2
2
—
4
—
—
—
75
—
—
79 $
2,682 $
2,332
—
869
(150)
150
—
5,883
119
240
119
—
101
110
6,572 $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable
Amounts due government agencies
Accounts payable and accrued liabilities
Deferred revenue
Current portion of long-term debt
Derivative liability
Total current liabilities
Long-term debt and lease financing
obligations
Deferred income taxes
Other long-term liabilities
Total liabilities
Total stockholders’ equity
$
$
3 $
—
178
—
653
522
1,356
1,516
—
24
2,896
1,337
4,233 $
— $
—
1
—
—
—
1
—
—
—
1
78
79 $
2,189 $
1,542
188
282
16
—
4,217
—
15
37
4,269
2,303
6,572 $
— $
—
—
—
—
(16)
—
(16)
—
—
—
(2,381)
(15)
(1)
(2,413) $
— $
—
(1)
—
(16)
—
(17)
—
(15)
—
(32)
(2,381)
(2,413) $
3,186
2,524
169
871
—
239
522
7,511
342
255
119
—
103
141
8,471
2,192
1,542
366
282
653
522
5,557
1,516
—
61
7,134
1,337
8,471
Molina Healthcare, Inc. 2018 Form 10-K | 115
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Parent Issuer
Other
Guarantor
Year Ended December 31, 2018
Non-
Guarantors
(In millions)
Eliminations Consolidated
Operating activities:
Net cash provided by (used in) operating
activities
Investing activities:
Purchases of investments
Proceeds from sales and maturities of
investments
Purchases of property, equipment and
capitalized software
Net cash received from sales of
subsidiaries
Capital contributions to subsidiaries
Dividends received from subsidiaries
Change in amounts due to/from affiliates
Other, net
Net cash provided by investing activities
Financing activities:
Repayment of credit facility
Repayment of principal amount of 1.125%
Convertible Notes
Cash paid for partial settlement of 1.125%
Conversion Option
Cash received for partial settlement of
1.125% Call Option
Cash paid for partial termination of
1.125% Warrants
Repayment of principal amount of 1.625%
Convertible Notes
Other, net
Net cash used in financing activities
Net (decrease) increase in cash, cash
equivalents, and restricted cash and
cash equivalents
Cash, cash equivalents, and restricted
cash and cash equivalents at beginning
of period
Cash, cash equivalents, and restricted
cash and cash equivalents at end of
period
$
118
(2)
(430)
— $
(314)
(136)
388
(22)
242
(145)
298
6
—
631
(300)
(298)
(623)
623
(549)
(64)
19
(1,192)
(443)
513
—
—
—
—
—
—
4
—
4
—
—
—
—
—
—
—
—
2
—
(1,308)
2,057
(8)
(52)
145
(298)
(10)
(18)
508
—
—
—
—
—
—
(1)
(1)
77
2,777
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,444)
2,445
(30)
190
—
—
—
(18)
1,143
(300)
(298)
(623)
623
(549)
(64)
18
(1,193)
(364)
3,290
$
70 $
2 $
2,854
$
— $
2,926
Molina Healthcare, Inc. 2018 Form 10-K | 116
Operating activities:
Net cash provided by operating activities $
Investing activities:
Purchases of investments
Proceeds from sales and maturities of
investments
Purchases of property, equipment and
capitalized software
Capital contributions to subsidiaries
Dividends received from subsidiaries
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 borrowings under credit
facility
Other, net
Net cash provided by financing activities
Net increase (decrease) in cash, cash
equivalents, and restricted cash and
cash equivalents
Cash, cash equivalents, and restricted
cash and cash equivalents at
beginning of period
Cash, cash equivalents, and restricted
cash and cash equivalents at end of
period
Parent Issuer
Other
Guarantor
Year Ended December 31, 2017
Non-
Guarantors
(In millions)
Eliminations
Consolidated
166
(331)
156
(67)
(370)
286
(49)
—
(375)
325
300
11
636
427
86
—
—
—
—
2
—
(2)
—
—
—
—
—
—
—
—
638
— $
804
(2,366)
1,603
(19)
368
(286)
51
(38)
(687)
—
—
—
—
(49)
2,826
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,697)
1,759
(86)
—
—
—
(38)
(1,062)
325
300
11
636
378
2,912
$
513
$
— $
2,777
$
— $
3,290
Molina Healthcare, Inc. 2018 Form 10-K | 117
Operating activities:
Net cash provided by (used in) operating
activities
Investing activities:
Purchases of investments
Proceeds from sales and maturities of
investments
Purchases of property, equipment and
capitalized software
Net cash paid in business combinations
Capital contributions to subsidiaries
Dividends received from subsidiaries
Change in amounts due to/from affiliates
Other, net
Net cash (used in) provided by investing
activities
Financing activities:
Other, net
Net cash provided by (used in) financing
activities
Net increase (decrease) in cash, cash
equivalents, and restricted cash and
cash equivalents
Cash, cash equivalents, and restricted
cash and cash equivalents at
beginning of period
Cash, cash equivalents, and restricted
cash and cash equivalents at end of
period
Year Ended December 31, 2016
Parent Issuer
Other
Guarantor
Non-
Guarantors
(In millions)
Eliminations
Consolidated
$
55
(115)
188
(125)
—
(386)
101
(18)
6
(349)
20
20
(274)
360
(1)
—
—
—
—
7
—
(6)
—
1
—
—
—
—
619
— $
673
(1,814)
1,778
(51)
(48)
379
(101)
24
(25)
142
(1)
(1)
760
2,066
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,929)
1,966
(176)
(48)
—
—
—
(19)
(206)
19
19
486
2,426
$
86 $
— $
2,826
$
— $
2,912
Molina Healthcare, Inc. 2018 Form 10-K | 118
CONTROLS AND PROCEDURES
MANAGEMENT’S EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to provide reasonable
assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to provide
reasonable assurance that information required to be disclosed by us in reports we file or submit under the
Exchange Act is accumulated and communicated to our management, including our principal executive officer and
principal financial officer or persons performing similar functions, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes
that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of any possible controls and procedures.
Under the supervision and with the participation of our management, including our chief executive officer and our
chief financial officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures as
of the end of the period covered by this Form 10-K pursuant to Rule 13a-15(b) and Rule 15d-15(b) of the Exchange
Act. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure
controls and procedures were effective as of December 31, 2018, at the reasonable assurance level. In addition,
management concluded that our consolidated financial statements included in this Annual Report on Form 10-K are
fairly stated in all material respects in accordance with U.S. generally accepted accounting principles (“GAAP”) for
each of the periods presented herein.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Management 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. Our internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with authorizations of our management and directors,
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements prepared for external purposes in accordance with
GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of the effectiveness of our internal control over financial reporting
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.
Management concluded that we maintained effective internal control over financial reporting as of
December 31, 2018, based on criteria described in Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Ernst & Young, LLP, the independent registered public accounting firm who audited our Consolidated Financial
Statements included in this Form 10-K, has issued a report on our internal control over financial reporting, which is
included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act) during the quarter ended December 31, 2018, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Molina Healthcare, Inc. 2018 Form 10-K | 119
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Molina Healthcare, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Molina Healthcare, Inc.’s internal control over financial reporting as of December 31, 2018, 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). In our opinion, Molina
Healthcare, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of Molina Healthcare, Inc. as of December 31, 2018 and
2017 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and
cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report
dated February 19, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 19, 2019
Molina Healthcare, Inc. 2018 Form 10-K | 120
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Molina Healthcare, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Molina Healthcare, Inc. (the Company) as of
December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income
(loss), stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2018, and
the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018, 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) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, 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 19, 2019, expressed
an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an
opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2000.
Los Angeles, California
February 19, 2019
Molina Healthcare, Inc. 2018 Form 10-K | 121
OTHER INFORMATION
Principal Accounting Officer Designation
Maurice S. Hebert was designated as our Principal Accounting Officer for purposes of the Securities Exchange Act
of 1934, as amended, effective as of February 19, 2019. There is no family relationship between or among Mr.
Hebert and any director, executive officer, or person nominated or chosen by the Company to become an executive
officer of the Company, and there are no transactions that would be required to be reported pursuant to Item 404(a)
of Regulation S-K. For further information, see “Directors, Executive Officers, and Corporate Governance” below.
Amendments to Certificate of Incorporation and Bylaws
On February 18, 2019, in response to feedback from our institutional stockholders, our Board of Directors approved
amendments to the Company's Certificate of Incorporation, as amended, in order to declassify our Board of
Directors over a three-year period. The amendments will be submitted for adoption by our stockholders at our 2019
annual meeting of stockholders.
In connection with the amendments, our Board of Directors approved an amendment and restatement of the
Company’s Bylaws that affected a number of changes. The amendment and restatement deleted Section 3.3(c) of
the Bylaws, which provided that any director may be removed at any time only for cause by an affirmative vote of
the holders of two-thirds of the shares then entitled to vote in the election of directors. Delaware corporate law
provides that, unless otherwise provided in the certificate of incorporation, members of a board that is classified
may be removed only for cause. Accordingly, as long as our Board of Directors remains classified, members of the
Board will be removable for cause by the holders of a majority of our outstanding shares entitled to vote at an
election of directors. If the proposed amendments to the Certificate of Incorporation are adopted by our
stockholders, when the Board has ceased to be classified after the three year phase-in period, members of the
Board will be removable with or without cause by the holders of a majority of our outstanding shares entitled to vote
at an election of directors.
The amendment and restatement also amended the following provisions of the Bylaws:
•
•
Section 2.4, which relates to making available a list of stockholders in connection with stockholder meetings, in
order to conform to applicable provisions of the Delaware General Corporation Law; and
Section 5.1, in order to delete the requirement that the executive officers of the company include a Chief
Operating Officer.
The Sixth Amended and Restated Bylaws of the company, which reflect the above amendments, became effective
upon approval by our Board of Directors. A copy of the Sixth Amended and Restated Bylaws of the Company is
included as Exhibit 3.3 hereto and is incorporated herein by reference.
Amended and Restated Change in Control Severance Plan
On February 18, 2019, our Board of Directors approved an amendment and restatement of the Company’s Change
in Control Severance Plan (the “Original Plan”), as set forth in the Molina Healthcare, Inc. Amended and Restated
Change in Control Severance Plan (the “Amended and Restated Plan”).
The Amended and Restated Plan provides that all employees with positions of vice president and above, including
our named executive officers, are eligible to receive certain separation benefits in the event of a qualifying
termination of employment within two years following a change in control of the Company. The Amended and
Restated Plan left unchanged the provisions of the Original Plan providing that senior vice presidents and above
would be entitled to receive two times (2x) their base salary, vice presidents would be entitled to receive one times
(1x) their base salary, and all participants would be entitled to receive a prorated target bonus for the year of
termination and accelerated vesting of all of their time-based equity awards.
The Amended and Restated Plan amends the accelerated vesting provision with respect to performance-based
equity compensation that participants were eligible to receive under the Original Plan. Pursuant to the Original Plan,
participants would have been entitled to full vesting of all performance-based equity compensation. The Amended
and Restated Plan provides that the participant’s performance-based equity compensation shall become vested
based upon the greater of: (1) target performance, based on the assumption that such target performance had been
achieved, or (2) the projected final achievement of the performance metric through the measurement period,
provided that where applicable, such projected final achievement shall be based on straight-line extrapolation of
actual achievement (as of the termination date) through the end of the respective performance metric period; except
Molina Healthcare, Inc. 2018 Form 10-K | 122
to the extent vesting is determined by reference to any completed fiscal year, then actual performance for such
completed fiscal year shall be used.
In addition, the Amended and Restated Plan amends the post-termination continued healthcare and life insurance
benefit that participants were eligible to receive under the Original Plan. The Original Plan provided that, in the
event of a qualifying termination, participants would be entitled to continued health care, dental, and life insurance
benefits under the Company’s applicable benefits programs for 24 months following the date of termination, and
would be eligible for COBRA continuation coverage following such period. The Amended and Restated Plan
provides that if the participant elects continued healthcare coverage under COBRA, the Company will, for a period
of up to 18 months following the participant’s termination of employment, subsidize a portion of the participant’s
COBRA premiums in an amount equal to the difference between the full cost for such COBRA coverage and the
amount that the participant would be required to pay for such coverage as an active employee. The Amended and
Restated Plan does not provide a continued life insurance benefit.
The Amended and Restated Plan makes certain additional changes to the Original Plan, including the addition of a
clawback provision that would allow the Company to recoup severance benefits paid or provided to a participant
who violates the nondisparagement, confidentiality, or nonsolicitation provisions set forth therein.
The named executive officers are entitled to receive such separation benefits under the Amended and Restated
Plan only to the extent that such separation benefits would be in addition to or in excess of the benefits provided
under their employment/change of control agreements.
The foregoing summary of the Amended and Restated Plan does not purport to be complete and is subject to, and
qualified in its entirety by, the full text of the Amended and Restated Plan. A copy of the Amended and Restated
Plan is included as Exhibit 10.1 hereto and is incorporated herein by reference.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
The following sets forth certain information regarding our executive officers, including the business experience of
each executive officer during the past five years:
Name
Age
Position
Joseph M. Zubretsky
Thomas L. Tran
Jeff D. Barlow
James E. Woys
Mark L. Keim
Pamela S. Sedmak
Maurice S. Hebert
62
62
56
60
53
57
56
President and Chief Executive Officer
Chief Financial Officer
Chief Legal Officer and Corporate Secretary
Executive Vice President, Health Plan Services
Executive Vice President, Strategic Planning, Corporate Development & Transformation
Executive Vice President, Health Plan Operations
Chief Accounting Officer
Mr. Zubretsky has served as President and Chief Executive Officer since November 6, 2017. He served as the
President and Chief Executive Officer of The Hanover Insurance Group, Inc. from June 2016 to October 2017. Prior
to that, Mr. Zubretsky served almost nine years at Aetna, Inc., where he most recently served as Chief Executive
Officer of Healthagen Holdings, a group of healthcare services and information technology companies at Aetna,
from January 2015 to October 2015. Prior to that, he served as a Senior Executive Vice President leading Aetna’s
National Businesses from 2013 to 2014, and served as Aetna’s Chief Financial Officer from 2007 to 2013. None of
the entities where Mr. Zubretsky was previously employed is a parent, subsidiary, or other affiliate of the Company.
Mr. Tran has served as Chief Financial Officer since June 2018. He served as the Chief Financial Officer and Chief
Operating Officer of Sentry Data Systems from 2014 to 2018. Prior to that, Mr. Tran served as Chief Financial
Officer of WellCare Health Plans from 2008 to 2014. None of the entities where Mr. Tran was previously employed
is a parent, subsidiary, or other affiliate of the Company.
Mr. Barlow has served as Chief Legal Officer and Corporate Secretary since 2010.
Mr. Woys has served as Executive Vice President, Health Plan Services since May 2018. Mr. Woys spent 30 years
at Health Net where he most recently served as the Executive Vice President and Chief Financial and Operating
Molina Healthcare, Inc. 2018 Form 10-K | 123
Officer. None of the entities where Mr. Woys was previously employed is a parent, subsidiary, or other affiliate of the
Company.
Mr. Keim has served as Executive Vice President, Strategic Planning, Corporate Development and Transformation
since January 2018. Most recently, he served as executive vice president of corporate development and strategy
for The Hanover Insurance Group. Prior to The Hanover Insurance Group, Mr. Keim spent six years with Aetna
where he led major strategic initiatives. Before Aetna, he was senior vice president of strategy and business
development at GE Capital. None of the entities where Mr. Keim was previously employed is a parent, subsidiary, or
other affiliate of the Company.
Ms. Sedmak has served as Executive Vice President, Health Plan Operations since February 2018. Ms. Sedmak
brings more than 25 years of Medicaid managed care leadership experience in operations, strategy, and finance.
Most recently, she was a senior adviser at McKinsey & Company, serving clients in the health care services and
global corporate finance practice areas. Prior to McKinsey, she served as president and CEO for Aetna Medicaid/
Dual Eligibles. Before Aetna, Ms. Sedmak held C-level leadership positions at Blue Cross and Blue Shield of
Minnesota, CareSource and General Electric. None of the entities where Ms. Sedmak was previously employed is a
parent, subsidiary, or other affiliate of the Company.
Mr. Hebert has served as Chief Accounting Officer since September 2018. He joins the Company from Tufts Health
Plan, where he served as Senior Vice President of Finance from 2016 to 2018. Prior to that, Mr. Hebert served as
Chief Accounting Officer at WellCare Health Plans from 2010 to 2016. None of the entities where Mr. Hebert was
previously employed is a parent, subsidiary, or other affiliate of the Company.
Each executive officer serves at the pleasure of the board of directors.
The remaining information called for by Item 10 of Form 10-K is incorporated by reference to “Election of Directors,”
“Corporate Governance and Board of Directors Matters,” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in our definitive proxy statement for our 2019 Annual Meeting of Stockholders.
Molina Healthcare, Inc. 2018 Form 10-K | 124
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The consolidated financial statements and exhibits listed below are filed as part of this Form 10-K.
(1)
The financial statements included in 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.
Molina Healthcare, Inc. 2018 Form 10-K | 125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the undersigned
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on
the 19th day of February, 2019.
MOLINA HEALTHCARE, INC.
By:
/s/ Joseph M. Zubretsky
Joseph M. Zubretsky
Chief Executive Officer
(Principal Executive Officer)
Molina Healthcare, Inc. 2018 Form 10-K | 126
Pursuant to the requirements of the Securities Exchange Act of 1934, 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. Zubretsky
Joseph M. Zubretsky
/s/ Thomas L. Tran
Thomas L. Tran
/s/ Maurice S. Hebert
Maurice S. Hebert
/s/ Garrey E. Carruthers
Garrey E. Carruthers, Ph.D.
/s/ Daniel Cooperman
Daniel Cooperman
/s/ Charles Z. Fedak
Charles Z. Fedak
/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
/s/ Richard C. Zoretic
Richard C. Zoretic
Chief Executive Officer, President and Director
February 19, 2019
(Principal Executive Officer)
Chief Financial Officer and Treasurer
February 19, 2019
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
Chairman of the Board
February 19, 2019
Director
February 19, 2019
Molina Healthcare, Inc. 2018 Form 10-K | 127
INDEX TO EXHIBITS
The following exhibits, which are furnished with this Annual Report on Form 10-K (this “Form 10-K”) or incorporated
herein by reference, are filed as part of this annual report.
The agreements included or incorporated by reference as exhibits to this 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 Form 10-K not misleading.
Number
2.1
2.2
2.3
2.4
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
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.
Membership Interest Purchase Agreement, dated as of
October 19, 2018, by and among Pyramid Health Holdings,
LLC, Molina Pathways, LLC, and Molina Healthcare, Inc.**
Purchase and Sale Agreement, dated as of June 26, 2018, by
and between Molina Healthcare, Inc. and DXC Technology
Company**
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 as Exhibit 2.2 to registrant’s Form 10-K filed
February 26, 2016.
Filed as Exhibit 2.1 to registrant’s Form 10-Q
filed November 1, 2018.
Filed as Exhibit 2.1 to registrant’s Form 8-K filed
June 27, 2018.
Filed as Exhibit 3.2 to registrant’s Registration
Statement on Form S-1 filed December 30, 2002.
Filed as Appendix A to registrant’s Definitive
Proxy Statement on Form DEF 14A filed March
25, 2013.
Sixth Amended and Restated Bylaws of Molina Healthcare,
Inc.
Filed herewith.
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
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
Indenture dated November 10, 2015, by and among Molina
Healthcare, Inc., the guarantor parties thereto and U.S. Bank
National Association, as Trustee
Form of 5.375% Senior Notes due 2022
Form of Guarantee pursuant to Indenture, dated as of
November 10, 2015, by and among Molina Healthcare, Inc.,
the guarantors party thereto and U.S. Bank National
Association, as Trustee
Included in Exhibit 4.1 to registrant’s Form 8-K
filed September 8, 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.
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.
Molina Healthcare, Inc. 2018 Form 10-K | 128
Number
4.10
4.11
4.12
4.13
*10.1
Description
Method of Filing
First Supplemental Indenture, dated as of February 16, 2016,
by and among Molina Healthcare, Inc., the guarantors party
thereto and U.S. Bank National Association, as trustee
Indenture, dated June 6, 2017, by and among Molina
Healthcare, Inc., the Guarantors party thereto and U.S. Bank
National Association, as Trustee.
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
February 18, 2016.
Filed as Exhibit 1.1 to registrant’s Form 8-K filed
June 6, 2017.
Form of Notes (included in Exhibit 4.1 to registrant’s Form 8-K
filed June 6, 2017).
Filed as Exhibit 1.1 to registrant’s Form 8-K filed
June 6, 2017.
Form of Guarantees (included in Exhibit 4.1 to registrant’s
Form 8-K filed June 6, 2017).
Filed as Exhibit 1.1 to registrant’s Form 8-K filed
June 6, 2017.
Molina Healthcare, Inc. Amended and Restated Change in
Control Severance Plan
Filed herewith.
*10.2
2011 Equity Incentive Plan
*10.3
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.
*10.4
*10.5
*10.6
*10.7
2011 Equity Incentive Plan - Form of Stock Option Agreement
(Director)
Filed as Exhibit 10.2 to registrant’s Form 10-Q
filed May 4, 2017.
2011 Equity Incentive Plan - Form of Restricted Stock Award
Agreement (Employee)
Filed as Exhibit 10.3 to registrant’s Form 10-Q
filed May 4, 2017.
2011 Equity Incentive Plan - Form of Performance Unit Award
Agreement 1 (Executive Officer)
Filed as Exhibit 10.4 to registrant’s Form 10-Q
filed May 4, 2017.
2011 Equity Incentive Plan - Form of Performance Unit Award
Agreement 2 (Executive Officer)
Filed as Exhibit 10.5 to registrant’s Form 10-Q
filed May 4, 2017.
*10.8
Employment Agreement with Jeff Barlow dated June 14, 2013
Filed as Exhibit 10.3 to registrant’s Form 8-K filed
June 14, 2013.
*10.9
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.
*10.10
Form of Indemnification Agreement
Filed as Exhibit 10.14 to registrant’s Form 10-K
filed March 14, 2007.
*10.11
*10.12
*10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Employment Agreement, dated October 9, 2017, by and
between Molina Healthcare, Inc. and Joseph M. Zubretsky.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
October 10, 2017.
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 10.1 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.
Molina Healthcare, Inc. 2018 Form 10-K | 129
Number
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
+10.36
21.1
23.1
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.
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.
Guarantor Joinder Agreement, dated February 16, 2016, by
and among the guarantors party thereto and SunTrust Bank,
as Administrative Agent
Purchase Agreement, dated May 22, 2017, by and among the
Company, the guarantors party thereto and SunTrust
Robinson Humphrey, Inc., as representative of the several
initial purchasers named in Schedule A thereto.
Commitment Letter, dated December 4, 2017, by and among
Molina Healthcare, Inc., SunTrust Bank and SunTrust
Robinson Humphrey, Inc.
Amended and Restated Commitment Letter, dated as of
January 2, 2018, by and among Molina Healthcare, Inc.,
SunTrust Bank, SunTrust Robinson Humphrey, Inc., Barclays
Bank PLC, MUFG, Bank of America, N.A., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, and Morgan Stanley
Senior Funding, Inc.
Bridge Credit Agreement, dated as of January 2, 2018, by and
among Molina Healthcare, Inc., as the Borrower, Molina
Information Systems, LLC, Molina Pathways LLC and
Pathways Health and Community Support LLC, as the
Guarantors, SunTrust Bank, Barclays Bank PLC, The Bank of
Tokyo-Mitsubishi UFJ, Ltd., Bank of America, N.A., and
Morgan Stanley Senior Funding, Inc., as Lenders,
and SunTrust Bank, as Administrative Agent.
Capitated Medical Group/IPA Provider Services Agreement,
effective May 1, 2013, by and between Molina Healthcare of
California and Pacific Healthcare IPA
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.
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 10.1 to registrant’s Form 10-Q
filed October 30, 2013.
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
May 23, 2017.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
December 7, 2017.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
January 2, 2018.
Filed as Exhibit 10.2 to registrant’s Form 8-K filed
January 2, 2018.
Filed as Exhibit 10.42 to registrant’s Form 10-K
filed February 26, 2016.
Filed as Exhibit 10.43 to registrant’s Form 10-K
filed February 26, 2016.
Filed as Exhibit 10.44 to registrant’s Form 10-K
filed February 26, 2016.
Offer Letter, dated May 4, 2018, by and between Molina
Healthcare, Inc. and Thomas L. Tran.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
May 24, 2018.
Sixth Amendment to Credit Agreement, dated as of January
31, 2019, by and among Molina Healthcare, Inc., the
Guarantors party thereto, the Lenders party thereto and
SunTrust Bank, in its capacity as Administrative Agent,
including the amended and restated Credit Agreement
attached as Exhibit A thereto, the amended and restated
Schedule I to the Credit Agreement attached as Exhibit B
thereto and the amended and restated Exhibit 2.5 to the
Credit Agreement attached as Exhibit C thereto.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
January 31, 2019.
Molina Healthcare, Inc. Amended and Restated Deferred
Compensation Plan (2018)
Filed as Exhibit 10.2 to registrant’s Form 10-Q
filed August 1, 2018.
Master Services Agreement for Information Technology
Services, dated February 4, 2019, by and between Molina
Healthcare, Inc. and Infosys Limited.
List of subsidiaries
Filed herewith.
Filed herewith.
Consent of Independent Registered Public Accounting Firm
Filed herewith.
Molina Healthcare, Inc. 2018 Form 10-K | 130
Number
Description
Method of Filing
31.1
31.2
32.1
32.2
Section 302 Certification of Chief Executive Officer
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.
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.
Certain schedules and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of
Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange
Commission upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities
and Exchange Commission under Rule 24b-2. The omitted confidential material has been filed separately. The
location of the redacted confidential information is indicated in the exhibit as “[redacted]”.
Molina Healthcare, Inc. 2018 Form 10-K | 131
Corporate Information
Board of Directors
Dale B. Wolf
Chairman of the Board
Garrey E. Carruthers, Ph.D.
Chancellor Emeritus, New Mexico
State University
Daniel Cooperman
Former General Counsel,
Oracle Corp. and Apple, Inc.
Charles Z. Fedak, CPA, MBA
Founder, Charles Z. Fedak
& Co., CPAs
Steven J. Orlando, CPA
Founder, Orlando Company
Ronna E. Romney
Director, Park-Ohio
Holding Corporation
Richard M. Schapiro
Chief Executive Officer,
SchapiroCo., LLC
Joseph M. Zubretsky
President and Chief Executive Officer,
Molina Healthcare, Inc.
Richard C. Zoretic
Director, Babel Health &
Aveanna Healthcare
Officers and Key Executives
Joseph M. Zubretsky
President and
Chief Executive Officer
Thomas L. Tran
Chief Financial Officer
and Treasurer
Jeff D. Barlow
Chief Legal Officer and
Corporate Secretary
Pamela S. Sedmak
Executive Vice President,
Health Plan Operations
James E. Woys
Executive Vice President,
Health Plan Services
Mark L. Keim
Executive Vice President,
Strategic Planning,
Corporate Development &
Transformation
Lawrence D. Anderson
Executive Vice President,
Chief Human Resources
Officer
Maurice S. Hebert
Chief Accounting Officer
Corporate Data
Annual
Meeting
The annual meeting of stockholders will be held on Wednesday, May 8, 2019, at 10:00 a.m. Eastern Time at:
Park Hyatt New York (The Onyx Room)
153 W. 57th Street, New York, NY 10019
(646) 774-1234 (phone)
Corporate
Headquarters
Molina Healthcare, Inc.
200 Oceangate, Suite 100, Long Beach, CA 90802
(562) 435-3666 (phone); (562) 437-1335 (fax)
molinahealthcare.com
Common
Stock
Transfer
Agent
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
6201 15th Avenue, Brooklyn, NY 11219
(800) 937-5449 (phone); 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) 977-3729 (fax); ey.com
NYSE
Disclosures
The certifications of our Chief Executive Officer and Chief Financial Officer required under the Sarbanes-Oxley Act
are filed as exhibits to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Forward-Looking
Statements
This annual report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Any statements in this document that relate to prospective events or developments are forward-looking statements. Words such as
“believes,” “expects,” “will,” and similar expressions are intended to identify forward-looking statements about the expected future
business and financial performance of Molina Healthcare. Forward-looking statements are based on management’s current
expectations and assumptions, which are subject to numerous risks, uncertainties, and potential changes in circumstances that are
difficult to predict. Any of our forward-looking statements may turn out to be wrong, and thus you should not place undue reliance
on any forward-looking statements, which speak only as of the date they were made. For a list and description of some of the risks
and uncertainties to which our forward-looking statements are subject, please refer to the discussion in this Annual Report under the
caption, “Item 1A. Risk Factors,” as well as to the additional risk factors described from time to time in our 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.
200 Oceangate, Suite 100
Long Beach, CA 90802
(562) 435-3666 (phone) – (562) 437-1335 (fax)
molinahealthcare.com