Molina Healthcare Annual Report 2020

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FY2020 Annual Report · Molina Healthcare

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ANNUAL REPORT
2020

Company Profile

Molina Healthcare, Inc., a FORTUNE 500 company, provides managed healthcare services under the Medicaid and

Medicare programs and through the state insurance marketplaces. Through its locally operated health plans, Molina

Healthcare served approximately 4.0 million members as of December 31, 2020. For more information about Molina

Healthcare, please visit molinahealthcare.com.

Membership Profile
Membership by Line of Business

Premiums by Line of Business

89%
Medicaid

78%
Medicaid

8%
Marketplace

3%
Medicare

8%
Marketplace

14%
Medicare

Historical Highlights
Premium Revenue
($ Millions)

After-Tax Margin1

Diluted Net Income (Loss) per Share

‘16

‘17

‘18

‘19

‘20

16,445

‘16

0.3%

‘16

$0.92

18,854

‘17

(2.6%)

‘17

($9.07)

17,612

16,208

18,299

‘18

‘19

‘20

3.7%

4.4%

3.5%

4.4%

‘18

‘19

‘20

$10.61

$11.47

$11.23

1 After-Tax Margin represents net income (loss) as a percentage
of total revenue

Annual Meeting

The annual meeting of stockholders will be held on Thursday, May 6, 2021, at 10:00 a.m. Eastern Time live via the
internet at www.virtualshareholdermeeting.com/MOH2021

Molina Healthcare | Annual Report 2020

To Our Shareholders:

We are pleased to report that we delivered strong results for all our stakeholders this year, despite the unprecedented

challenges created by the global pandemic.

We made high quality, affordable health care seamlessly available to some four million individuals, many of them in

exceptionally vulnerable circumstances. At the same time, we achieved objectives across each dimension of our growth

strategy by retaining all of our existing Medicaid contracts, winning a new state contract, executing on meaningfully

accretive acquisitions, and producing organic growth.

Our earnings per share, when adjusted to exclude the impacts of

COVID, comfortably exceeded our full year guidance. Our growth

strategy hit full stride with the acquisitions of Magellan Complete

Care, Passport Health Plan, and Affinity Health Plan. The Magellan

Complete Care acquisition closed at the end of 2020 and we ensured

a smooth transition for these 200,000 members in five states.

The Passport acquisition allowed us to hit the ground running in

Kentucky with over 300,000 members following our successful

RFP bid. We expect to close the Affinity transaction soon, expanding

our New York presence. Combined these three acquisitions are

expected to produce approximately $6 billion of annualized

premium revenue.

“Our growth strategy

hit full stride with the

acquisitions of Magellan

Complete Care, Passport

Health Plan, and Affinity

Health Plan.”

As we look to the future, our confidence in the growth, earnings power, and resilience of our business remains high, despite

the near-term challenges and distortions caused by the global pandemic. The intrinsic growth characteristics of both our

new and existing businesses are exceptionally strong.

Our management team has demonstrated its ability to deliver, and will remain unrelenting, yet disciplined, in pursuit of

growth through winning new states, expanding market share in our existing states, increasing penetration in high-acuity

populations, and executing on accretive acquisitions in our core businesses. We will work to sustain best-in-class operating

metrics and margins, drive top-line growth, and remain focused on our value-creating mission.

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 mission, as demonstrated by your continued ownership.

Sincerely,

Joseph M. Zubretsky
President and Chief Executive Officer

Molina Healthcare | Annual Report 2020

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

(Mark One)

Form 10-K

☒

☐

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020

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

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.001 Par Value

MOH

New York Stock Exchange

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. ☒ Yes ☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ☐ Yes ☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted 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 such files). ☒ Yes ☐ No

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 ☒ Accelerated filer ☐ Non-accelerated filer

☐ Smaller reporting company ☐ Emerging growth 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 has filed a report on and attestation to its management’s assessment
of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act
(15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). ☐ Yes ☒ No

The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2020, the last
business day of our most recently completed second fiscal quarter, was approximately $10.5 billion (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, 2020).

As of February 12, 2021, approximately 58,000,000 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 2021 Annual Meeting of Stockholders to be held on May 6,
2021, are incorporated by reference into Part III of this Form 10-K, to the extent described therein.

MOLINA HEALTHCARE, INC. 2020 FORM 10-K

TABLE OF CONTENTS

Item Number

Business......................................................................................................................................................

1A. Risk Factors................................................................................................................................................

Part I

Page

1B. Unresolved Staff Comments....................................................................................................................... Not Applicable.

Properties....................................................................................................................................................

Legal Proceedings......................................................................................................................................

Mine Safety Disclosures.............................................................................................................................. Not Applicable.

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

Selected Consolidated Financial Data........................................................................................................ Not Applicable.

Part II

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

7A. Quantitative and Qualitative Disclosures About Market Risk......................................................................

Financial Statements and Supplementary Data..........................................................................................

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... Not Applicable.

9A. Controls and Procedures............................................................................................................................

9B. Other Information........................................................................................................................................

Part III

10.

Directors, Executive Officers and Corporate Governance..........................................................................

11.

12.

13.

14.

Executive Compensation............................................................................................................................

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....

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

Principal Accountant Fees and Services.....................................................................................................

15.

Exhibits and Financial Statement Schedules..............................................................................................

Part IV

16.

Form 10-K Summary .................................................................................................................................. Not Applicable.

Signatures

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 “guidance,” “future,” “anticipates,” “believes,” “estimates,”
“expects,” “growth,” “intends,” “plans,” “predicts,” “projects,” “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:

•

•
•

•

the impact of the COVID-19 pandemic and its associated or indirect effects on our business, operations, and
financial results;
the numerous political, judicial, and market-based uncertainties associated with the Affordable Care Act (the
“ACA”), including the ultimate outcome of the California et al. v Texas et al. matter currently pending for decision
before the United States Supreme Court;
significant budget pressures on state governments from diminished tax revenues incidental to the COVID-19
pandemic and their efforts to reduce rates or limit rate increases, to impose profit caps or risk corridors, or to
recoup previously paid premium amounts on a retroactive basis;
the market dynamics surrounding the ACA Marketplaces, including issues impacting enrollment, risk adjustment
estimates and results, the potential for disproportionate enrollment of higher acuity members, and the
discontinuation of premium tax credits;
the outcome of the legal proceedings in Kentucky with regard to the Medicaid contract award to our Kentucky
health plan and our acquisition of certain assets of Passport;
the success of our efforts to retain existing or awarded government contracts, and the success of any bid
submissions in response to requests for proposal, including our contracts in Ohio, California, and Texas;
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;
the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth,
repay our outstanding indebtedness at maturity, and meet our general liquidity needs;
our ability to consummate, integrate, and realize benefits from acquisitions, including the completed acquisitions
of Magellan Complete Care and Passport, and announced acquisition of Affinity;
effective management of our medical costs;
our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated
with COVID-19;
cyber-attacks, ransomware attacks, or other privacy or data security incidents resulting in an inadvertent
unauthorized disclosure of protected information;
the ability to manage our operations, including maintaining and creating adequate internal systems and controls
relating to authorizations, approvals, provider payments, and the overall success of our care management
initiatives;
our 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;
our 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;
our estimates of amounts owed for such cost expenditure floors, administrative cost and profit ceilings, premium
stabilization programs, profit-sharing arrangements, and risk adjustment provisions and requirements;
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;

Molina Healthcare, Inc. 2020 Form 10-K | 1

•

•
•
•

•

•
•
•

•

•
•
•
•
•
•

the interpretation and implementation of at-risk premium rules and state contract performance requirements
regarding the achievement of certain quality measures, and our ability to recognize revenue amounts
associated therewith;
the success and renewal of our 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 our health plans;
efforts by states to recoup previously paid and recognized premium amounts;
complications, member confusion, eligibility redeterminations, or enrollment backlogs related to the renewal of
Medicaid coverage;
fraud, waste and abuse matters, government audits or reviews, comment letters, or potential investigations, and
any fine, sanction, enrollment freeze, corrective action plan, monitoring program, or premium recovery that may
result therefrom;
our exit from Puerto Rico, including the payment in full of our outstanding accounts receivable, the effective run-
out of claims, and the return of our capital;
changes with respect to our provider contracts and the loss of providers;
approval by state regulators of dividends and distributions by our health plan subsidiaries;
changes in funding under our 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;
the relatively small number of states in which we operate health plans, including the greater scale and revenues
of our California, Ohio, Texas, and Washington health plans;
the failure to comply with the financial or other covenants in our credit agreement or the indentures governing
our outstanding notes;
the sufficiency of funds on hand to pay the amounts due upon maturity of our 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;
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. 2020 Form 10-K | 2

OVERVIEW

ABOUT MOLINA HEALTHCARE

Molina Healthcare, Inc., a FORTUNE 500 company, provides managed healthcare services under the Medicaid and
Medicare programs, and through the state insurance marketplaces (the “Marketplace”). 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.

Through our locally operated health plans in 15 states, we served approximately 4.0 million members as of
December 31, 2020. In addition, in connection with our acquisition of Magellan Complete Care on December 31,
2020, we added approximately 200,000 members, and now operate health plans in 18 states. These health plans
are generally operated by our respective wholly owned subsidiaries in those states, and licensed as health
maintenance organizations (“HMOs”).

FINANCIAL HIGHLIGHTS

Premium Revenue

Total Revenue

Medical Care Ratio (“MCR”) (1)

After-Tax Margin (2)

Net Income per Diluted Share

_______________________

2020

2019

(Dollars in millions, except per-share amounts)

$18,299

$19,423

86.5%

3.5%

$11.23

$16,208

$16,829

85.8%

4.4%

$11.47

(1) Medical care ratio represents medical care costs as a percentage of premium revenue.
(2) After-tax margin represents net income as a percentage of total revenue.

2020 EXECUTIVE SUMMARY

In 2020, we drove strong operating performance in a challenging COVID-19 pandemic environment, particularly in
the following areas:

COVID-19 Response

• Operated remotely for majority of the year in unprecedented pandemic environment;
•
•

Effected transition of workforce to remote status in March while maintaining or improving operating metrics;
Addressed workforce hardships by implementing assistance programs, including dependent-care and other
stipends, and a short-term incentive program for eligible non-executive employees; and
Did not reduce workforce.

•

Health Plan Portfolio

•

•
•

Announced health plan acquisitions including Magellan Complete Care (in Arizona, Florida, Massachusetts,
New York, Virginia and Wisconsin), Affinity (in New York) and Passport (in Kentucky), representing
annualized aggregate premium revenues exceeding $6 billion;
Closed on acquisitions of Magellan Complete Care, Passport and YourCare (in New York);
Established a dedicated integration management function to help ensure that we achieve the expected
business results;
Exited Puerto Rico operations without financial hardship; and

•
• Won the Medicaid contract request for proposal (“RFP”) in Kentucky, and successfully protested the

outcome of the Medicaid RFP awards for certain regions of Texas, preserving our Medicaid membership in
that state.

Molina Healthcare, Inc. 2020 Form 10-K | 3

Other Notable Achievements

• Organized, announced and initially funded the “MolinaCares” Molina Healthcare Charitable Foundation, an

independent charitable organization;
Drove over 20% improvement in annual employee engagement survey;
Completed capital structure overhaul with the issuance of two high-yield senior notes amounting to $1.5
billion, in the aggregate, and increased credit facility capacity to $1 billion; and
Further bolstered senior and middle management talent.

•
•

•

Our business footprint, as of December 31, 2020, is illustrated below.

OUR SEGMENTS

The Health Plans reportable segment includes our regulated health plan operating segments, along with the
recently acquired Magellan Complete Care health plans operating segment. Because this acquisition closed on
December 31, 2020, Magellan Complete Care’s operating results were insignificant to our consolidated results of
operations for the year ended December 31, 2020. Management will continue to evaluate the composition of its
operating and reportable segments for future filings. The Other segment, which is insignificant to our consolidated
results of operations, includes certain corporate amounts not associated with or allocated to the Health Plans
segment.

Refer to Notes to Consolidated Financial Statements, Note 16, “Segments,” for further information, including
segment revenue and profit information, and Note 2, “Significant Accounting Policies” for premium revenue
information by health plan.

Molina Healthcare, Inc. 2020 Form 10-K | 4

MEMBERSHIP BY HEALTH PLAN

California

Florida

Illinois

Kentucky

Michigan

Ohio

Texas

Washington
Other (1)
Total (2)

As of December 31,

2020

2019

593,000

140,000

302,000

337,000

400,000

352,000

357,000

977,000

574,000

565,000

132,000

224,000

—

362,000

288,000

341,000

832,000

587,000

4,032,000

3,331,000

__________________
(1)

“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, South Carolina, Utah, and Wisconsin health
plans, which were individually insignificant to our consolidated operating results for the periods presented.

(2) The 2020 totals for both “Membership by Health Plan,” and “Membership by Program,” do not include approximately

200,000 Magellan Complete Care members from the acquisition closed on December 31, 2020.

MEMBERSHIP BY PROGRAM

Medicaid

Medicare

Marketplace
Total (2)

MISSION

As of December 31,

2020

2019

3,599,000

2,956,000

115,000

318,000

101,000

274,000

4,032,000

3,331,000

We improve the health and lives of our members by delivering high-quality healthcare.

VISION

We will distinguish ourselves as the low cost, most effective and reliable health plan delivering government-
sponsored care.

STRATEGY

Our growth strategy continues to be anchored by our capital allocation priorities: first, organic growth of our core
businesses; second, inorganic growth through accretive acquisitions; and third, programmatically returning excess
capital to shareholders, for example, in the form of targeted share repurchase programs. The key capabilities that
enable our growth strategy follow:

Low Cost: We provide low-cost health plans to our state customers for Medicaid, and to our members in the MMP
and Marketplace programs.

High Quality and Appropriate Access to Care: We provide our members effective and appropriate access to care at
the right time and in the right setting.

Reliable Service and Seamless Experience: We offer our state customers, members, and providers reliable service
and a seamless experience.

Molina Healthcare, Inc. 2020 Form 10-K | 5

OUR BUSINESS

MEDICAID

Overview

Medicaid was established in 1965 under the U.S. Social Security Act to provide healthcare and long-term care
services and support to low-income Americans. Although jointly funded by federal and state governments, Medicaid
is a state-operated and state-implemented program. Subject to federal laws and regulations, states have significant
flexibility to structure their own programs in terms of eligibility, benefits, delivery of services, and provider payments.
As a result, there are 56 separate Medicaid programs—one for each U.S. state, each U.S. territory, and the District
of Columbia.

The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each
state’s federal medical assistance percentage (“FMAP”). A state’s FMAP is calculated annually and varies inversely
with average personal income in the state. The approximate average FMAP across all jurisdictions is currently 60%,
and currently ranges from a federally established FMAP floor of 50% to as high as 78%. See further discussion
regarding the FMAP below in “COVID-19 Pandemic—Federal Economic Stabilization Programs.”

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 healthcare 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 typically have terms of three to five years, 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 Significant Contracts

Our consolidated Medicaid premium revenue constituted 73% of our total revenue in the year ended December 31,
2020. Our Medicaid contracts with each of the states of California, Ohio, Texas and Washington accounted for
approximately 10% or more of our consolidated Medicaid premium revenues in each of the years ended December
31, 2020, and 2019. The current status of each of these contracts is described below.

California. Our managed care contracts with the California Department of Health Care Services (“DHCS”) cover six
regions in northern and southern California (including Los Angeles County, California, as a subcontractor to another
health plan holding a direct contract with the state). These contracts are effective through December 31, 2021,
which we expect to be renewed annually until the effectiveness of new forms of contract following RFP awards.
DHCS has publicly indicated it expects to release the final Medicaid RFP in 2021, for implementation in January
2024. Our California Medicaid contracts represented premium revenue of approximately $1,694 million, or 12%, of
our consolidated Medicaid premium revenue in 2020.

Ohio. Our managed care contract with the Ohio Department of Medicaid (“ODM”) is effective through July 1, 2021.
In September 2020, the ODM released the RFP for the Ohio Medicaid program, which will be regionally based on
the current three regions (Central/Southeast, Northeast and West). Health plans were able to bid on one or all
regions, and be awarded one or all regions. As of February 16, 2021, ODM had not announced the winning bidders

Molina Healthcare, Inc. 2020 Form 10-K | 6

for the RFP. Our Ohio Medicaid contract represented approximately $2,231 million, or 16%, of our consolidated
Medicaid premium revenue in 2020.

Texas. In March 2020, the Texas Health and Human Services Commission (“HHSC”) notified our Texas health plan
that HHSC had upheld our protest and had canceled all previously awarded contracts associated with the re-
procurement awards announced in October 2019 for the ABD program (known in Texas as “STAR+PLUS”). In
addition, HHSC canceled the pending re-procurement associated with the TANF and CHIP programs (known in
Texas as “STAR/CHIP”). HHSC has indicated that the STAR+PLUS RFP will be posted in late 2021 or early 2022,
with awards estimated to be announced in the second quarter of 2022, and start of operations in the fourth quarter
of 2023. HHSC has also indicated that the STAR/CHIP RFP will be posted in the fourth quarter of 2022, with awards
estimated to be announced in late 2022 or early 2023, and start of operations in the third quarter of 2024. Our Texas
Medicaid contracts represented approximately $2,151 million, or 15%, of consolidated Medicaid premium revenue in
2020.

Washington. Our managed care contract with the Washington State Health Care Authority (“HCA”) covers all ten
regions of the state’s Apple Health Integrated Managed Care program, and is effective through December 31, 2021.
We expect the HCA to exercise its renewal option for at least one year, through December 31, 2022. Our
Washington Medicaid contract represented approximately $2,804 million, or 20%, of consolidated Medicaid
premium revenue in 2020.

A loss of any of our significant Medicaid contracts could have a material adverse effect on our business, financial
condition, cash flows, and results of operations.

Other Developments

Magellan Complete Care. On December 31, 2020, we closed on our acquisition of 100% of the outstanding equity
interests of the Magellan Complete Care line of business of Magellan Health, Inc., for total purchase consideration
of approximately $1,037 million. Total purchase consideration paid in cash amounted to $1,008 million, which
consisted of the base purchase price of $850 million, plus approximately $158 million in preliminary closing
adjustments, primarily relating to excess regulatory capital. Total purchase consideration also included assumed
liabilities of $29 million. Magellan Complete Care is a managed care organization serving members in six states,
including Medicaid members in Arizona and statewide in Virginia, and integrated acute care members in Florida.
Through its Senior Whole Health branded plans, Magellan Complete Care provides fully integrated plans for
Medicaid and Medicare dual beneficiaries in Massachusetts, as well as managed long-term care in New York. As of
December 31, 2020, Magellan Complete Care served approximately 200,000 members in its managed care plans.
Magellan Complete Care also provides consultative services to participants who self-direct their care through
Wisconsin’s long-term services and supports (“LTSS”) program. For the year ended December 31, 2020, Magellan
Complete Care’s total 2020 revenue was approximately $2.9 billion.

New York. In September 2020, we entered into a definitive agreement to acquire substantially all the assets of
Affinity Health Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various
adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as
early as the second quarter of 2021.

On July 1, 2020, we closed on the acquisition of certain assets of YourCare Health Plan, Inc., a Medicaid health
plan operating in certain regions of New York, for a cash purchase price of $42 million.

Kentucky. In May 2020, our Kentucky health plan was selected as an awardee pursuant to the statewide Medicaid
managed care RFP issued by the Kentucky Cabinet for Health and Family Services, Department of Medicaid
Services. On September 1, 2020, we closed on the acquisition of certain assets of Passport Health Plan, Inc., a
Medicaid health plan, for a purchase price of $66 million. Effective on that same date, the Kentucky Medicaid
agency approved the novation of Passport’s Medicaid contract to Molina Healthcare of Kentucky, Inc., thereby
ensuring continuity of care for Passport’s 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 typically afforded to the member at the time of first enrollment and, at a minimum, annually thereafter. In
some of the states in which we operate, 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.

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

Molina Healthcare, Inc. 2020 Form 10-K | 7

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 12 million low-income elderly and disabled people qualify for both the
Medicare and Medicaid programs (“dual eligible” individuals). 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 supports, and by
helping to cover Medicare’s premiums and cost-sharing requirements. Together, these two programs help to shield
very low-income Medicare beneficiaries from potentially unaffordable out-of-pocket medical and long-term care
costs. To coordinate care and deliver services 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, as described further
below.

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 three years.

Status of MMP Contracts

Our California, Illinois and Ohio MMP contracts are effective through December 31, 2022, which represented
aggregate premium revenue of approximately $947 million in 2020. Our South Carolina and Texas MMP contracts
are effective through December 31, 2023, which represented aggregate premium revenue of approximately $492
million in 2020.

In Michigan, we have a one-year contract extension effective through December 31, 2021, which represented
premium revenue of approximately $281 million in 2020. The state has submitted a formal letter of intent to extend
the contract for five years through 2026; the five-year contract extension is under development.

Other Developments

In December 2020, CMS announced its introduction of a new direct contracting model aimed at utilizing Medicaid
Managed Care Organizations (“MCOs”) to increase holistic care coordination and improve outcomes for the dually
eligible population. The new model will roll out in January 2022, with requests for applications expected to be
released in early 2021. Participating MCO-based direct contracting entities will have new incentives to provide
whole-person care and better serve their full-benefit dually eligible enrollees.

Member Enrollment and Marketing

Our Medicare members may be enrolled through auto-assignment, as described above in “Medicaid—Member
Enrollment and Marketing,” or by enrolling in our plans with the assistance of insurance agents employed by Molina,
outside brokers, or via the Internet.

Molina Healthcare, Inc. 2020 Form 10-K | 8

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 Affordable Care Act (“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, our
plans remove financial barriers to quality care and seek to minimize members' out-of-pocket expenses. In 2021, we
are participating in the Marketplace in all our markets except Idaho, Illinois, Kentucky, New York, and the Magellan
Complete Care markets in Arizona, Massachusetts, and Virginia.

In 2021, we expect Marketplace enrollment to grow approximately 25%, to a total of 400,000 members at the end of
2021.This would represent premium revenue growth of approximately $485 million in 2021.

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.

Other Developments

Special Enrollment Period. In January 2021, President Biden issued the Executive Order on Strengthening Medicaid
and the Affordable Care Act. As a result of the order, a new three-month special enrollment period will be launched
to allow uninsured and under-insured individuals to obtain Marketplace coverage. The special enrollment period will
be open from February 15, 2021 to May 15, 2021.

Marketplace Risk Corridor Judgment. In April 2020, the United States Supreme Court held that §1342 of the
Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor
amounts calculated by that statute, and that impacted insurers may sue the federal government in the U.S. Court of
Federal Claims to recover damages for breach of that obligation. In June 2020, the Claims Court granted us
judgment in the amount of $128 million for 2014, 2015, and 2016 Marketplace risk corridor claims, which we
received in October 2020. Consistent with the timing of the cash receipt, the gain was recognized in our fourth
quarter 2020 financial results and reported in “Marketplace risk corridor judgment” in our consolidated statements of
income. The judgment did not create additional Minimum MLR rebates.

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 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 the applicable FFM and SBM.

Molina Healthcare, Inc. 2020 Form 10-K | 9

BASIS FOR PREMIUM RATES

The following table presents our consolidated premium revenue by program for the periods indicated:

Medicaid

Medicare

Marketplace

Total

Medicaid

Year Ended December 31,

2020

2019

(In millions)

14,265 $

12,466

2,512

1,522

2,243

1,499

18,299 $

16,208

Under our Medicaid contracts, state government agencies pay our health plans fixed PMPM rates that vary by state,
line of business, demographics and, in most instances, health risk factors. CMS requires these rates to be
actuarially sound. In exchange for the payment received, Molina arranges, pays for, and manages healthcare
services provided to Medicaid beneficiaries. Therefore, our health plans are at risk for the medical costs associated
with their members’ healthcare. Payments to us under each of our Medicaid contracts are subject to each state’s
annual appropriation process. The amount of the premiums paid to our health plans may vary substantially between
states and among various government programs. For the year ended December 31, 2020, Medicaid program
PMPM premium revenues ranged from $190.00 to $1,560.00.

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 health plan star rating and member demographics, including county
residence 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, including any federal budget
cuts or tax changes applicable to Medicare. 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 and MMP contracts generate higher average PMPM revenues and healthcare costs.
For the year ended December 31, 2020, Medicare program PMPM premium revenues ranged from $1,060.00 to
$3,150.00.

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 utilization of services and unit costs,
anticipated member risk acuity and related federal risk adjustment transfer amounts, and non-benefit expenses
such as administrative costs, taxes, and fees. The premium rates are filed for approval with the various state and
federal authorities in accordance with the rules and regulations applicable to the ACA individual market, including,
but not limited to, minimum loss ratio thresholds and adjustments for permissible rate variations by age, geographic
area, and variations in plan design. In the year ended December 31, 2020, Marketplace program PMPM premium
revenues ranged from $310.00 to $590.00, excluding the risk corridor judgment described above.

COVID-19 PANDEMIC

As the COVID-19 pandemic continues to evolve, its ultimate impact to our business, results of operations, financial
condition and cash flows is uncertain and difficult to predict. Specific trends and uncertainties related to our Health
Plans segment follow.

Federal Economic Stabilization Programs

As a result of the pandemic, various stabilization programs were enacted beginning in March 2020, which may
impact our business directly or indirectly, including the following:

Coronavirus Preparedness and Response Supplemental Appropriations Act. Enacted on March 6, 2020,
this legislation provided $8.3 billion in COVID-19 response funding for developing a vaccine and preventing
further spread of the virus.

Molina Healthcare, Inc. 2020 Form 10-K | 10

Families First Coronavirus Response Act. Enacted on March 18, 2020, this legislation provided $100 billion
in worker assistance, temporarily increased each qualifying state and territory’s FMAP by 6.2% beginning
January 1, 2020, and waived cost sharing for COVID-19 testing. The federal government guarantees
matching funds to states for qualifying Medicaid expenditures based on each state’s FMAP. The enhanced
FMAP rate has been extended through the end of the second quarter of 2021. The accompanying
requirement that bans the loss of coverage from state eligibility redeterminations has been extended
through the end of April 2021. Redetermination is the process through which Medicaid enrollees
demonstrate whether they continue to meet the requirements for participation in the Medicaid program, in
particular maximum household income. This is likely a positive indicator for continued membership gains,
and to provide more support for an actuarially sound rate environment.

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Enacted on March 27, 2020, the
CARES Act provided an estimated $2 trillion to fight the COVID-19 pandemic and stimulate the U.S.
economy. This assistance included loans and support to major industries, including airlines and small
businesses, direct payments to individuals and families, and $175 billion in relief funds to hospitals and
other healthcare providers.

Paycheck Protection Program and Health Care Enhancement Act. Enacted on April 24, 2020, this
legislation provided $310 billion for the depleted Paycheck Protection Program, and additional funding for
hospitals and testing.

Coronavirus Response and Relief Supplemental Appropriations Act. Enacted on December 27, 2020, this
$900 billion economic stimulus package was attached to a $1.4 trillion omnibus spending bill to fund the
U.S. government through September 30, 2021. The legislation aims to support the U.S. economy by
reauthorizing and providing additional funding for the fiscal support programs established by the CARES
Act, and included small business relief funding of $325 billion, $82 billion in school funding, $69 billion for
vaccine procurement and distribution, direct payments to individuals and families, and extended
unemployment benefits, among other relief funding.

Due to the uncertainty as to the duration and breadth of the COVID-19 pandemic, we are unable to reasonably
estimate the ultimate impact of the economic stabilization programs to our business, financial condition, and
operating results.

Health Plan Operations

The pandemic has impacted our business, and we currently expect it to further impact our business in the areas
described below. In 2020, the combination of COVID-related impacts netted to a significant negative impact on
earnings.

Medical Care Costs and Demand for Healthcare Services. Beginning in early 2020 the pandemic, along with the
related quarantine and social distancing measures, reduced demand for certain routine and non-critical medical
services, while at the same time increased demand for other medical services, such as COVID-19 testing and
emergency services. Early in the second quarter of 2020, we began to experience significantly lower utilization in a
variety of cost categories, representing approximately two-thirds of our total medical cost spend, with utilization
levels increasing slowly as the year progressed. We experienced several significant COVID-related impacts on
medical care costs in 2020 as follows:

•

Direct costs to care for COVID patients totaled $205 million in 2020, as a resurgence of COVID infections
and episodes occurred in places such as Texas and California, and also disproportionately impacted certain
of our Marketplace members.
In 2020, utilization was curtailed, and generally remained below normal levels for the remainder of the year.
The effect of the curtailed utilization, net of the direct cost to care discussed above, reduced medical care
costs and increased pretax earnings by approximately $420 million.
Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new
Medicaid members since March 31, 2020, and we believe that the acuity of that population is lower than our
average.

With regard to the recently approved vaccines, all such vaccines are purchased by the federal government, at no
cost to us or our members. For our Medicaid and Marketplace members, we will cover the costs to administer the
vaccine, which we do not expect to be significant. The costs to administer the vaccine to our Medicare members is
generally covered by CMS.

Molina Healthcare, Inc. 2020 Form 10-K | 11

Medicaid Premium Actions. In 2020, various states enacted temporary premium refunds and related actions in
response to the reduced demand for medical services stemming from COVID-19, which resulted in a reduction of
our medical margin. In some cases, these premium actions were retroactive to earlier periods in 2020, or as early
as the beginning of the states’ fiscal years in 2019. Beginning in the second quarter of 2020, we have recognized
retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably
estimable. We recognized $564 million related to these retroactive premium refunds, in the aggregate, in 2020,
including approximately $37 million related to MMP plans.

It is possible that certain states could increase the level of existing premium refunds, and it is also possible that
other states could implement some form of retroactive premium refund in the future. Due to these uncertainties, the
ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments,
which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.

Our position on rate adequacy has been consistent:

• We do not intend, nor do we want, to keep state Medicaid money that was supposed to be spent on medical

•

benefits but was not due to utilization curtailment caused by COVID;
In many of our legacy Medicaid states, there are already mechanisms in place to protect against a surplus
margin, as there are Minimum MLRs in seven of our states and profit caps in two others; and

• Once the COVID-19 pandemic abates, we believe that the traditional process of establishing prospective
actuarially sound rates based on a credible medical cost baseline and cost trend off that baseline will
resume.

In addition to Medicaid premium actions, COVID may impact premium revenue in our Medicare and Marketplace
programs. For these programs, which utilize risk adjustment methodologies, medical care patterns disrupted by
COVID may temporarily affect our ability to obtain complete member health status information.

Member Enrollment. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately
415,000 new Medicaid members since March 31, 2020, when we first began to report on the impacts of the
pandemic. We believe this membership increase was mainly due to the suspension of redeterminations.

It remains unclear how high the COVID-related membership peak will be, how quickly it will fall as the economy
recovers, and where it will ultimately settle. However it does now appear that since unemployment nationally has
fallen to 6.3% as of January 2021, the initial industry estimates of unemployment-related Medicaid membership
increases were somewhat overstated. On a related note, the declaration of the extension of the public health
emergency period to April 2021, with a potential extension from the Biden administration for the public health
emergency to remain in place for all of 2021, will also likely have an impact. Therefore, we are currently unable to
predict the timing or amount of the expected increases in enrollment. Increased membership would increase our
premium revenue, but would also likely result in a significant increase in medical care claims and related costs. We
believe that we have the scalability necessary to both serve new members, and ably partner with our state
customers for increases in membership.

Capital and Financial Resources. Refer to “Liquidity and Financial Condition” below for a discussion of our capital
and financial resources.

We continue to monitor and assess the estimated operating and financial impact of the COVID-19 pandemic, and as
it evolves, we continue to process, assemble, and assess member utilization information. We believe that our cash
resources, borrowing capacity available under the Credit Agreement, and cash flow generated from operations will
be sufficient to withstand the financial impact of the pandemic, and will enable us to continue to support our
operations, regulatory requirements, debt repayment obligations, and capital expenditures for the foreseeable
future.

LEGISLATIVE AND POLITICAL ENVIRONMENT

PRESSURES ON MEDICAID FUNDING

Due to states’ budget challenges, including shortfalls resulting from the COVID-19 pandemic, 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 healthcare and, if enacted, could have a material adverse effect on our
business, financial condition, cash flows, or results of operations. These proposals include elements such as the
following, as well as numerous other potential changes and reforms:

Molina Healthcare, Inc. 2020 Form 10-K | 12

•

•
•

Changes in 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; and
Limiting the amount of lifetime benefits for Medicaid beneficiaries.

AFFORDABLE CARE ACT

Status of Constitutionality Court Case

In December 2018, in a case brought by the state of Texas and nineteen other states, a federal judge in Texas held
that the individual mandate of the Affordable Care Act (the “ACA”) is unconstitutional. He further held that since the
individual mandate is inseverable from the entire body of the ACA, the entire ACA is unconstitutional. The effect of
his ruling was stayed pending the appeal of the ruling to the Fifth Circuit Court of Appeals. In December 2019, a
three-judge panel of the Fifth Circuit Court of Appeal, in a two to one decision, affirmed the District Court’s ruling that
the individual mandate is unconstitutional, but remanded the case back to the District Court for further consideration
of the severability issue. The intervenor defendant states led by California subsequently appealed the case to the
U.S. Supreme Court, and the Supreme Court heard oral arguments in the case on November 10, 2020. The
Supreme Court’s decision is expected by June 2021. If the Supreme Court were to rule that the individual mandate
is unconstitutional, and that the individual mandate is not severable from the balance of the ACA, or that the entirety
of the ACA is unconstitutional, that ruling could have a material adverse effect on our business, financial condition,
cash flows, or results of operations.

As of December 31, 2020, we served a significant number of members enrolled in programs created by the ACA,
including approximately 771,000 Medicaid Expansion members and 318,000 Marketplace members. In the year
ended December 31, 2020, premium revenue associated with these members amounted to $4,904 million, and
contributed Medical Margin of $826 million.

Other Proposed Changes and Reforms

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.

The passage of any of these changes or other reforms could have a material adverse effect on our business,
financial condition, cash flows, or 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, 2020, 13 of our health plans were accredited by the National Committee for Quality Assurance
(“NCQA”), of which 12 of those health plans also received the Multicultural Health Care Distinction, which is
awarded to organizations that meet or exceed NCQA’s rigorous requirements for multicultural healthcare.

For the states where our health plans are accredited by the NCQA and/or have Medicare Star Ratings, the table
below presents such 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.

Molina Healthcare, Inc. 2020 Form 10-K | 13

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.

__________________

* NCQA Health Insurance Plan Ratings for 2020-2021 (Medicaid) have not been released due to

COVID-19.

PROVIDERS

We arrange healthcare 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. Under capitation payment arrangements, healthcare providers receive
fixed, pre-arranged monthly payments per enrolled member, whereas under fee-for-service payment arrangements,
healthcare providers are paid a fee for each particular service rendered. 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,

Molina Healthcare, Inc. 2020 Form 10-K | 14

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.

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 illustrates consolidated medical care costs by type for the periods indicated:

Year Ended December 31,

2020

2019

Amount

PMPM

% of
Total

Amount

PMPM

% of
Total

(In millions, except PMPM amounts)

Fee-for-service

11,590 $

261.30

73.3 % $

10,453 $

256.34

75.1 %

Pharmacy

Capitation
Other (1)
Total

2,012

1,459

759

45.37

32.88

17.10

12.7

9.2

4.8

1,681

1,149

622

41.23

28.17

15.25

12.1

8.3

4.5

15,820 $

356.65

100.0 % $

13,905 $

340.99

100.0 %

_____________________

(1)

“Other” includes all medically-related administrative costs, certain provider incentive costs, provider claims, and other
healthcare 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 mission is to improve the health and lives of our members by delivering high-quality healthcare. We believe our
singular focus on government-sponsored healthcare enables us to identify and implement efficiencies that
distinguish us as the low-cost, high-quality health plan of choice. We emphasize primary care physicians as the
central point of delivery for routine and preventive care, coordination of referrals to specialists, and appropriate
assessment of the need for hospital care. This model has proved to be an effective method of coordinating medical
care for our members.

Utilization Management

Our goal is to optimize access to low-cost, high-quality care. This is achieved by sound clinical policy based on
current evidence-based practices. Additionally, we continuously monitor utilization patterns and strive to identify new
opportunities to reduce cost and improve quality of care. Our utilization management process serves as a bridge to
identify at-risk members for referral into internally developed case management programs such as “Transitions of
Care,” which facilitates post-discharge safety and appropriate outcomes.

Population Management

We believe high-quality, affordable care is achieved through a variety of programs tailored to our members’
emerging needs. Individuals are identified for interventions, and programs are customized, based on predictive
analytics and our member assessment process. These tools ensure that the appropriate level of services and
support are provided to address physical health, behavioral health, and social determinants of health. This
comprehensive and customized approach is designed to help members achieve their goals and improve their
overall quality of life.

Pharmacy Management

Our pharmacy programs are designed to make us a trusted partner in improving member health and healthcare
affordability. We strategically partner with 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 about our formulary
products, clinical programs, and the importance of cost-effective care.

Molina Healthcare, Inc. 2020 Form 10-K | 15

INFORMATION TECHNOLOGY

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. In 2019, we entered into an agreement
with a third-party vendor who manages certain of our information technology services including, among other things,
our infrastructure operations, end-user services, data centers, public cloud and application management. As a result
of the agreement, we were able to reduce our administrative expenses, while improving the reliability of our
information technology functions, and maintain targeted levels of service and operating performance. A segment of
these services are provided on our premises, while other portions of the services are performed at the vendor’s
facilities.

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, changing customer preferences, acquisitions and increased
security risks.

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, marketing, purchasing, risk management, actuarial, finance, accounting, compliance, legal and public
relations.

COMPETITIVE CONDITIONS AND ENVIRONMENT

We face varying levels of competition. Healthcare 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.

Medicaid

The Medicaid managed care industry is subject to ongoing changes as a result of healthcare 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, UnitedHealth Group
Incorporated, Anthem, Inc., Aetna Inc., and other large not-for-profit healthcare organizations. Competition can vary
considerably from state to state.

Medicare

The Medicare market is highly competitive across the country, with large competitors, such as UnitedHealth Group
Incorporated, Humana Inc., and Aetna Inc., holding significant market share.

Molina Healthcare, Inc. 2020 Form 10-K | 16

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 healthcare 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 AND THE HITECH ACT

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 healthcare 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.

In 2009, the Health Information Technology for Economic and Clinical Health Act (“HITECH”) imposed requirements
on uses and disclosures of health information; included requirements for HIPAA business associate agreements;
extended parts of HIPAA privacy and security provisions to business associates; added data breach notification
requirements for covered entities and business associates and reporting requirements to the U.S. Department of
Health and Human Services (“HHS”) and, in some cases, to the media; strengthened enforcement; and imposed
higher financial penalties for HIPAA violations. In the conduct of our business, depending on the circumstances, we
may act as either a covered entity and/or a business associate. HIPAA privacy regulations do not preempt more
stringent state laws and regulations that may apply to us.

We maintain a HIPAA compliance program, which we believe complies with HIPAA privacy and security regulations,
and have dedicated resources to monitor compliance with this program.

Healthcare 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 healthcare 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 determined 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 healthcare 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.

Molina Healthcare, Inc. 2020 Form 10-K | 17

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 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 healthcare companies to have to
defend a false claim action, pay fines, or be excluded from the Medicare, Medicaid, or other state or federal
healthcare programs as a result of an investigation arising out of such action.

LICENSING AND SOLVENCY

Our health plans are generally licensed by the insurance departments in the states in which they operate, except
the following: our California health plan is licensed by the California Department of Managed Health Care; one of
our New York health plans is licensed as a prepaid health services plan by the New York State Department of
Health; and our Massachusetts Plan acquired on December 31, 2020, is regulated as a risk-bearing entity by the
Massachusetts Executive Office of Health and Human Services.

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 15, “Commitments and Contingencies—
Regulatory Capital Requirements and Dividend Restrictions.”

HUMAN CAPITAL

As of December 31, 2020, we had approximately 10,500 employees, and added approximately 2,500 employees
from the Magellan Complete Care and Passport acquisitions, effective January 1, 2021. Our employee base is
multicultural and reflects the diverse membership we serve.

Over the past few years, management has launched a workplace modernization program that regularly introduces
new human capital programs related to development, compensation and other workplace practices. We believe this
workplace modernization program will allow us to achieve our overarching goal to become a destination employer in
the government-sponsored healthcare industry.

Examples of recent programs include a cash bonus plan for all non-executive employees, improvements to our
employee benefits, development resources for all employees, enhanced employee recognition programs, and the
launch of a formal diversity, equity, and inclusion program. Additionally, we routinely engage with employees through
use of engagement surveys, to evaluate employee satisfaction and obtain feedback on various facets of employee-
related matters including workplace modernization programs.

Management continually evaluates human capital opportunities such as employee retention, engagement,
succession planning and talent pipelines, performance rating distributions, and associated compensation actions.
The board of directors is updated regularly on employee engagement, key executive vacancies, succession
planning and workplace modernization progress.

We also offer formal leadership development programs such as new leader orientation, executive onboarding, front-
line leadership essentials, and experienced leader training. We have targeted development plans for critical roles in
the organization with an emphasis on leadership and business skills.

We invest in our workforce by offering competitive salaries and wages, as well as other employee benefits. Our
compensation programs are designed to attract, retain, motivate, and reward employees, and recruit new
employees. In addition, to foster a stronger sense of ownership and align the interests of employees with
shareholders, we offer employees ownership in Molina through an employee stock purchase program, and grant
eligible employees equity-based compensation under our equity incentive plan.

We also offer a comprehensive suite of benefits to all eligible employees, including, among others:

•
•
•

•

Comprehensive health insurance coverage for employees working 30 hours or more per week;
401(k) matching contributions of up to 100% on the first 4% contributed by the employee;
Personal time off that provides employees with paid time away from work, combining vacation and sick
leave;
COVID-19 time off that provides employees with up to 80 hours of paid time away from work to recover from
COVID-19;

Molina Healthcare, Inc. 2020 Form 10-K | 18

•

Volunteer time off that provides employees with paid time away from work to build strong community
partnerships and connect with the people we serve;
Employee wellness programs that provide tools and incentives to live a healthy life focusing on physical,
emotional, financial and work well-being;
Up to ten dependent-care back-up visits per year for a low co-pay, and five hours of homework and tutoring
support per child per month at no cost;
Employee assistance program benefits that provides up to six confidential counseling sessions per rolling
12-month period and includes assistance with physical, emotional, and financial related matters; and
Employee discount and other programs, including tuition reimbursement.

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 U.S. Securities and Exchange Commission (“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 Form 10-K 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 in the following section 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 adversely affect our business. In addition to the risks relating to the COVID-19 pandemic that are
specifically described in these risk factors, the effects of the COVID-19 pandemic may also have the effect of
significantly heightening many of the other risks associated with our business, including those described below. 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 INDUSTRY

Our business, financial condition, cash flows, and results of operations will continue to be impacted by the
COVID-19 pandemic, and the extent of such impact cannot be reasonably foreseen at this time.

We currently expect that the COVID-19 pandemic will continue to impact our business, financial condition, cash
flows, and results of operations in a number of ways, including the following:

•

It will have an adverse impact on the health of an indeterminate number of our members, resulting in
increases in their medical care costs, as well as increased costs related to testing and vaccination
protocols;
Uncertainty and variability associated with the demand for medical services may lead states to pursue
retroactive rate refunds (as has already occurred in certain instances), or to impose medical cost risk
corridors or rate cuts that exceed the ultimate demand for medical services;
Disrupted care patterns, as a result of the pandemic, may temporarily affect the ability to obtain complete
member health status information, impacting future revenue in our Medicare and Marketplace lines of
business, which utilize risk adjustment methodologies;

Molina Healthcare, Inc. 2020 Form 10-K | 19

•

As a result of the pandemic’s impact on the national economy, state tax revenues have declined
significantly and may not recover in 2021, resulting in the extension of risk corridors or rate cuts, and also
threatening the ability of states to make timely monthly capitation payments to us;
The reduced demand for certain routine and non-critical medical services has created financial stress for
certain providers and could result in the insolvency of such providers;
The pandemic may continue to cause increased volatility in the capital markets and such volatility could
have a negative impact on our ability to access those markets on acceptable terms;

• We will continue to incur increased costs associated with the measures we are currently implementing and

•

planning to implement to mitigate the implications of the COVID-19 pandemic;
The continuing work-from-home status of our workforce may heighten the risk of a cybersecurity incident or
HIPAA (as defined below) breach; and
The pandemic may impact the ability of our outsourced information technology service providers, and other
third-party vendors, to perform contracted services.

Due to the uncertainty around the duration and breadth of the COVID-19 pandemic and its broad cascading effects,
the ultimate impact on our business, financial condition, cash flows, and operating results cannot be reasonably
estimated at this time.

We operate in an uncertain political and judicial environment which creates uncertainties with regard to our
future prospects.

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 regularly face significant budgetary pressures. State budgetary
pressures may result in unexpected Medicaid, CHIP, or Medicare rate cuts which could reduce our revenues and
profit margins. For example, in 2020, various states enacted temporary premium refunds and related actions in
response to the reduced demand for medical services stemming from COVID-19, which resulted in a reduction of
our medical margin. In some cases, these premium actions were retroactive to earlier periods in 2020, or as early
as the beginning of the states’ fiscal years in 2019. Beginning in the second quarter of 2020, we have recognized
retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably
estimable. We recognized $564 million related to these retroactive premium actions, in the aggregate, in 2020. It is
possible that certain states could increase the level of existing premium refunds, and it is also possible that other
states could implement some form of retroactive premium refund in the future. Due to these uncertainties, the
ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments,
which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.

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
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, 2020,
our membership included approximately 62,000 integrated MMP members, representing approximately 2% of our
total membership. However, the capitation paid to us for dual eligibles is significantly higher than the capitation paid
for other members, representing 9% of our total premium revenues in 2020. If the states running the MMP pilot
programs conclude that the demonstration pilot programs are not delivering better coordinated care and reduced

Molina Healthcare, Inc. 2020 Form 10-K | 20

costs, they could decide to discontinue or substantially alter such programs, resulting in a reduction to our premium
revenues.

If state regulators do not approve payments of dividends and distributions by our subsidiaries, it may
negatively affect our ability to meet our debt service and other obligations.

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 general, our health plans must
give thirty days’ advance notice and the opportunity to disapprove “extraordinary” dividends to the respective state
departments of insurance for amounts that exceed either (a) ten percent of surplus or net worth at the prior year end
or (b) the net income for the prior year, depending on the respective state statute. The discretion of the state
regulators, if any, in approving or disapproving a dividend is not clearly defined. Our health plans generally must
provide notice to the applicable state regulator prior to paying a dividend or other distribution to us. Our parent
company received $635 million and $1,373 million in dividends from our regulated health plan subsidiaries during
2020 and 2019, 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 have a material
adverse effect on our business, financial condition, cash flows, or results of operations.

Our use and disclosure of personally identifiable information and other non-public information, including
protected health information or PHI, is subject to federal and state privacy and security regulations, and our
failure to comply with those regulations or to adequately secure the information we hold could result in
significant liability or reputational harm.

State and federal laws and regulations including, but not limited to, the Health Insurance Portability and
Accountability Act, as amended by the Health Information Technology for Economic and Clinical Health Act, and all
regulations promulgated thereunder (collectively, “HIPAA”), the California Consumer Privacy Act (the “CCPA”) 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 regarding PHI, and to adopt administrative, physical, and technical safeguards to protect
PHI.

HIPAA violations may result in significant civil penalties. 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. We have experienced HIPAA breaches in the past, including breaches affecting over 500
individuals.

Even when HIPAA does not apply, according to the Federal Trade Commission (the “FTC”), failing to take
appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting
commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C § 45(a). The FTC expects a
company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of
consumer information it holds, the size and complexity of its business, and the cost of available tools to improve
security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that
merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is
similar to what is required by the HIPAA security regulations.

In addition, certain state laws govern the privacy and security of health information in certain circumstances, many
of which differ from each other in significant ways, thus complicating compliance efforts. For example, California
enacted the CCPA, which became effective on January 1, 2020. The CCPA, among other things, creates new data
privacy obligations for covered companies and provides new privacy rights to California residents, including the right
to opt out of certain disclosures of their information. The CCPA also creates a private right of action with statutory
damages for certain data breaches, thereby potentially increasing risks associated with a data breach.

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

Molina Healthcare, Inc. 2020 Form 10-K | 21

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.

Unforeseen changes in pharmaceutical regulations or market conditions may impact our revenues and
adversely affect our results of operations.

Pharmaceutical products and services are a significant component of our healthcare costs. Evolving regulations and
state and federal mandates regarding coverage may impact the ability of our health plans to continue to receive
existing price discounts on pharmaceutical products for our members. Other factors affecting our pharmaceutical
costs include, but are not limited to, the price of pharmaceuticals, geographic variation in utilization of new and
existing pharmaceuticals, and changes in discounts. The unpredictable nature of these factors may have a material
adverse effect on our business, financial condition, cash flows, or results of operations.

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 cost 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 would have an adverse impact on our financial condition and results of operations. 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 be successful in this regard.

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, 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 flu season or epidemic, newly
emergent mosquito-borne illnesses, such as the Zika virus, the West Nile virus, or the Chikungunya virus, or new
viruses such as COVID-19, 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. If one of the states in which we operate
were to experience a large-scale natural disaster, a significant terrorist 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, financial condition, cash flows, or results of operations.

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.

Molina Healthcare, Inc. 2020 Form 10-K | 22

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 our
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.

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.

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’ 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
healthcare companies to have to defend a false claim action, pay fines, or be excluded from the Medicare,
Medicaid, or other state or federal healthcare 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.

RISKS RELATED TO OUR BUSINESS

The May 2020 contract award to our Kentucky Medicaid plan, and its acquisition of Passport, is the subject
of a legal challenge.

In October 2020, pursuant to the appeal of a protest denial with regard to the May 2020 Kentucky RFP awards, a
court ordered the addition of a sixth health plan to the Kentucky Medicaid program for 2021. That ruling did not

Molina Healthcare, Inc. 2020 Form 10-K | 23

rescind the Medicaid contract award to our Kentucky health plan for 2021, nor did it impact the earlier novation of
the Passport Medicaid contract to us. On October 27, 2020, a different health plan filed an appeal with regard to the
court’s October 2020 order. In addition, another health plan filed a legal challenge with regard to our acquisition of
Passport. The outcome of this litigation and any appellate proceedings is inherently unpredictable. In the event the
contract award to our Kentucky health plan or the novation of the Passport Medicaid contract is overturned, the
business and revenues of our Kentucky health plan may be materially affected.

If the responsive bids of our health plans for new or renewed Medicaid contracts are not successful, or if
our government contracts are terminated or are not renewed on favorable terms, 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 18 states, including the states added in
our acquisition of Magellan Complete Care on December 31, 2020. Our consolidated Medicaid premium revenue
constituted 73% of our total revenue in the year ended December 31, 2020. Measured by Medicaid premium
revenue by health plan, our top four health plans were in California, Ohio, Texas, and Washington, with aggregate
Medicaid premium revenue of $8.9 billion, or approximately 63% of consolidated Medicaid premium revenue, in the
year ended December 31, 2020. If we are unable to continue to operate in any of our existing jurisdictions, or if our
current operations in those jurisdictions or any portions of those jurisdictions are significantly curtailed or terminated
entirely, our revenues could decrease materially.

Many of our government contracts are effective only for a fixed period of time and will only be extended for an
additional period of time if the contracting entity elects to do so. For example, our contract in California is expected
to be subject to re-procurement in late 2021. When our government contracts expire, they may be opened for
bidding by competing health plans, and there is no guarantee that the contracts will be renewed or extended. Even
if our contracts are renewed or extended, there can be no assurance that they will be renewed or extended on the
same terms or without a reduction in the applicable service areas.

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 contract being less profitable than we had
expected or could result in a net loss. Furthermore, our 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 we sustain a cyber-attack or suffer data privacy or 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 designed 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. As a result of the COVID-19
pandemic, we may face increased cybersecurity risks due to our reliance on internet technology and the number of
our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit
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, or by 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.

Molina Healthcare, Inc. 2020 Form 10-K | 24

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 the 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 vulnerabilities before they have been addressed. The complexity of our systems and
platforms, 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.

We may be unable to successfully integrate our acquisitions or realize the anticipated benefits of such
acquisitions.

Our growth strategy includes the pursuit of targeted inorganic growth opportunities that we believe will provide a
strategic fit, leverage operational synergies, and lead to incremental earnings accretion. For example, in the third
quarter of 2020, we closed on two business combinations, the acquisition of certain assets of YourCare Health Plan,
Inc. and the acquisition of certain assets of Passport Health Plan, Inc. On December 31, 2020, we closed on our
acquisition of the Magellan Complete Care line of business of Magellan Health, Inc. and, in the second quarter of
2021, we expect to close on our pending acquisition of substantially all of the assets of Affinity Health Plan, Inc. The
integration of acquired businesses with our existing business is a complex, costly and time-consuming process. The
success of acquisitions we make will depend, in part, on our ability to successfully combine our existing business
with such acquired businesses and realize the anticipated benefits, including synergies, cost savings, growth in
earnings, innovation, and operational efficiencies, from the combinations. If we are unable to achieve these
objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or
may take longer to realize than expected.

Our acquisitions and the related integration activities involve a number of risks, including the following:

•

•
•

The transition services that a seller may have agreed to provide following the closing, such as those
Magellan Health, Inc. has agreed to provide following the closing of the Magellan Complete Care
transaction, may not be provided in a timely or efficient manner, or certain necessary transition services
may not be provided at all;
Unforeseen expenses or delays associated with the acquisition and/or integration;
The assumptions underlying our expectations regarding the integration process or the expected benefits to
be achieved from an acquisition may prove to be incorrect;

• Maintaining employee morale and retaining key management and other employees;
•

Difficulties retaining the business and operational relationships of the acquired business, and attracting new
business and operational relationships;
Unanticipated attrition in the membership of the acquired business pending the completion of the proposed
transaction or after the closing of the transaction;
Unanticipated difficulties or costs in integrating information technology, communications and other systems,
consolidating corporate and administrative infrastructures, and eliminating duplicative operations;
Attention to integration activities may divert management’s attention from ongoing business concerns, which
could result in performance shortfalls;
Successfully addressing the challenges inherent in managing a larger company and coordinating
geographically separate organizations; and
Delays in obtaining, or inability to obtain, necessary state or federal regulatory approvals, or such approvals
may impose conditions that were not anticipated.

•

Many of these factors are outside of our control and any one of them could result in delays, increased costs,
decreases in the amount of expected revenues, and diversion of management's time and energy, which could
materially affect our financial position, results of operations, or cash flows. There can be no assurances that we will
be successful in managing our expanded operations as a result of acquisitions or that we will realize the expected
growth in earnings, operating efficiencies, cost savings, or other benefits.

Molina Healthcare, Inc. 2020 Form 10-K | 25

If we lose contracts that constitute a significant amount of our premium revenue, we will lose the
administrative cost efficiencies or cost leverage that is inherent in a larger 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 currently 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 or cost leverage, and the resulting stranded administrative costs, could have a material
and adverse impact on our business, financial condition, cash flows, or results of operations.

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 subject to differing interpretations by us and the relevant government agency
with whom we contract. If the applicable government agency disagrees with our interpretation or implementation of
a particular contract provision, we could be required to adjust the amount of our obligation under that provision. Any
such adjustment could have a material adverse effect on our business, financial condition, cash flows, or results of
operations.

In addition, many of our contracts 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, which could have
a material adverse effect on our business, financial condition, cash flows, or results of operations.

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.

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. 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, in the interest of long-term profitability, we decide to exit certain state contractual arrangements, make
changes to our provider networks, or make changes to our administrative infrastructure, we may incur
disruptions to our business that could in the short term materially reduce our premium revenues and our
net income.

Decisions that we make with regard to retaining or exiting our portfolio of state or federal contracts, and changes to
the manner in which we serve the members of 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, all of which could materially
reduce our premium revenues and net income.

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

Because of the lag in time between when medical services are actually rendered by our providers and when we
receive, process, and pay a claim for those medical services, we must continually estimate our medical claims
liability at particular points in time and establish claims reserves related to such estimates. Our estimated reserves
for such incurred but not paid, or IBNP, medical care costs are based on numerous assumptions. We estimate our
medical claims liabilities using actuarial methods based on historical data adjusted for claims receipt and payment
experience (and variations in that experience), changes in membership, provider billing practices, healthcare
service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit
changes, known incidence of disease, including COVID-19, or increased incidence of illness such as the flu,

Molina Healthcare, Inc. 2020 Form 10-K | 26

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.

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 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 86.5% for the year ended December 31, 2020, had been one percentage point higher,
or 87.5%, our net income per diluted share for the year ended December 31, 2020 would have been approximately
$8.88 rather than our actual net income per diluted share of $11.23, a difference of $2.35.

Many factors may affect our medical care costs, including:

•
•
•
•
•
•

•
•
•
•
•
•
•
•

the level of utilization of healthcare services;
the impact of the COVID-19 pandemic;
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;
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 healthcare regulations and practices;
epidemics;
new medical technologies; and
other various external factors.

Many of these factors are beyond our control. 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 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 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 healthcare services for
our members, to manage medical 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. There can be no assurance 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,

Molina Healthcare, Inc. 2020 Form 10-K | 27

providers could refuse to contract with us, demand higher payments, or take other actions which could result in
higher medical care costs, disruption to provider access for current members, a decline in our growth rate, or
difficulty in meeting regulatory or accreditation requirements.

The Medicaid program generally pays doctors and hospitals at levels well below those of Medicare and private
insurance. Large numbers of doctors, therefore, do not accept Medicaid patients. In the face of fiscal pressures,
some states may reduce rates paid to providers, which may further discourage participation in the Medicaid
program.

In some markets, certain providers, particularly hospitals 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 dollars. In such
instances, providers may claim 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 or litigation with the provider that results in an adverse decision could adversely affect
our business, financial condition, cash flows, or results of operations.

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 an associated
reduction in Medicaid membership, which could have an adverse effect on our premium revenues and results of
operations.

The insolvency of a delegated provider could obligate us to pay its referral claims, which could have a
material adverse effect on our business, financial condition, 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 or other
circumstances 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 healthcare services as established by the state governments. We use a large portion of
our revenues to pay the costs of healthcare services delivered to our members. If premiums do not increase when

Molina Healthcare, Inc. 2020 Form 10-K | 28

expenses related to healthcare 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.

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 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.

Failure to attain profitability in any newly acquired health plans or 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 could fail.

The expenses associated with starting up a health plan in a new jurisdiction, expanding a health plan in an existing
jurisdiction, or acquiring a new health plan, could have a material adverse effect on our business, financial
condition, cash flows, or results of operations.

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 processing provider claims,
monitoring utilization and other cost factors, supporting our medical management techniques, providing data to our
regulators, and implementing our data security measures. Our members and providers also depend upon our
information systems for enrollment, premium processing, primary care and specialist physician roster access,
membership verifications, claims status, provider payments, 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, ability to produce timely and accurate reports, and ability to maintain proper security measures
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, in February 2019, we
entered into a master services agreement with a third party vendor who manages certain of our information
technology infrastructure services including, among other things, our information technology operations, end-user
services, and data centers. If 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.

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 have direct access to our systems. Our
arrangements with third party vendors and service providers may make our operations vulnerable if those third
parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and
confidentiality of our information and data 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 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. Any contractual remedies and/or indemnification obligations

Molina Healthcare, Inc. 2020 Form 10-K | 29

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. 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.

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 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 business, financial condition, cash flows, or results of
operations, and on our ability to bid for, and continue to participate in, certain programs.

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our growth
strategy.

As of December 31, 2020, we had $2,352 million of indebtedness outstanding, including long-term finance lease
liabilities. As of December 31, 2020, we also had approximately $1 billion available for borrowings under our
Revolving Credit Facility.

Our substantial indebtedness could have a material adverse effect on our business, financial condition, cash flows,
or results of operations by, among other things:

•
•

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,
capital expenditures, and future acquisitions;

• making it more difficult for us to satisfy our obligations with respect to our indebtedness, including under 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 our Credit Agreement or the indenture governing our outstanding senior notes;
limiting our ability to obtain additional financing; 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.

•
•

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, 2020, the carrying amount of goodwill was $692 million, and intangible assets, net, were $249
million.

Molina Healthcare, Inc. 2020 Form 10-K | 30

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 (one of our state health plans) 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.

An event 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.

GENERAL RISK FACTORS

We are dependent on the leadership of our chief executive officer and other executive officers and key
employees.

The success of our business and the ability to execute our strategy are highly dependent on the efforts of Mr.
Zubretsky, our chief executive officer, and our other key executive officers and 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 healthcare 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 could be adversely
affected.

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

We are subject to a variety of legal actions, including provider claims, employment related disputes, healthcare
regulatory law-based litigation and enforcement actions, 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. Such legal actions could have a material
adverse effect on our business, financial condition, results of operations, or cash flows.

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 are located in Long Beach, California. In addition, some of our health plans’ claims are
processed in Long Beach, California. 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
Southern California, 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.

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

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. 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.

Molina Healthcare, Inc. 2020 Form 10-K | 31

PROPERTIES

We own and lease certain real properties to support the business operations of our reportable segments. While we
believe our current and anticipated facilities are adequate to meet our operational needs in the near term, we
continually evaluate the adequacy of our properties for our anticipated future needs.

LEGAL PROCEEDINGS

Kentucky RFP. On September 4, 2020, Anthem Kentucky Managed Care Plan, Inc. brought an action in Franklin
County Circuit Court against the Kentucky Finance and Administration Cabinet, the Kentucky Cabinet for Health and
Family Services and all of the winning bidder health plans, including Molina Healthcare of Kentucky, Inc., Civil
Action No. 20-CI-00719. In its action, Anthem requested that the court disqualify Molina Healthcare of Kentucky, find
that the Kentucky RFP scoring was erroneous and violated procedures or was arbitrary and capricious, set aside
the contract awards and conduct a new RFP evaluation process, and award injunctive relief, including stopping the
implementation of the contracts awarded under the RFP. On September 28, 2020, the court issued a temporary
restraining order preserving the status quo, and on October 23, 2020, the court issued a temporary injunction
directing that the RFP readiness review and open enrollment proceed with six health plans, including both Anthem
and Molina Healthcare.

On December 22, 2020, the court granted a motion by UnitedHealthcare of Kentucky LTD. to assert a cross-claim
against the Kentucky Cabinet for Health and Family Services, which sought in part a disqualification of Anthem or
Molina Healthcare and a declaratory judgment that the Kentucky Medicaid program proceed with only five health
plans. On December 23, 2020, Humana Health Plan, Inc. brought a separate action against the Commonwealth of
Kentucky and the winning bidder health plans, including Molina Healthcare of Kentucky, Civil Action 20-CI-00987.
On January 11, 2021, both actions were consolidated before the Franklin County Circuit Court. Humana requests a
declaratory judgment finding that the Commonwealth violated the Medicaid contract by allocating Passport
members to Molina Healthcare for 2021 so that Passport members would instead be allocated to Humana and other
winning health plans, or, in the alternative, monetary damages from the Commonwealth.

Molina Healthcare believes it has meritorious defenses to the claims of Anthem, United, and Humana, and intends
to vigorously defend its position, including its twice being a winning bidder of the Kentucky Medicaid RFP, and its
protection of the continuity of care for Passport Medicaid members. This matter remains subject to significant
additional legal proceedings, and no assurances can be given regarding the ultimate outcome. Under the court’s
temporary injunction, Molina Healthcare of Kentucky continues to operate under its contract and provide care to
Kentucky Medicaid members.

Refer to the Notes to Consolidated Financial Statements, Note 15, “Commitments and Contingencies—Legal
Proceedings,” for further information.

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, 2020, 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 (1)

Average Price
Paid per
Share

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

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

1,000 $

188.27

— $

500,000,000

— $

—

323,000 $

432,000,000

443,000 $

341,000,000

1,000 $

188.27

766,000

Molina Healthcare, Inc. 2020 Form 10-K | 32

(1) During the three months ended December 31, 2020, we withheld approximately 1,000 shares of common stock to settle
employee income tax obligations for releases of awards granted under the Molina Healthcare, Inc. 2019 Equity Incentive
Plan. For further information refer to Notes to Consolidated Financial Statements, Note 13, “Stockholders' Equity.”

(2)

In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common
stock. This program is funded with cash on hand and extends through December 31, 2021. The exact timing and amount of
any repurchase is determined by management based on market conditions and share price, in addition to other factors, and
subject to the restrictions relating to volume, price, and timing under applicable law. Under this program, pursuant to a Rule
10b5-1 trading plan, we purchased approximately 766,000 shares of our common stock for $159 million in November and
December 2020 (average cost of $208.37 per share).

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, 2015 to December 31, 2020. The comparison
assumes $100 was invested on December 31, 2015, 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.

The 2020 peer group index consists of Acadia Healthcare Company, Inc. (ACHC), Anthem, Inc. (ANTM), Centene
Corporation (CNC), Cigna Corporation (CI), Community Health Systems, Inc. (CYH), HCA Healthcare, Inc. (HCA),
Humana, Inc. (HUM), Laboratory Corporation of America Holdings (LH), Magellan Health, Inc. (MGLN), Quest
Diagnostics Incorporated (DGX), Tenet Healthcare Corporation (THC) and Universal Health Services, Inc. (UHS).

Molina Healthcare, Inc. 2020 Form 10-K | 33

The 2019 peer group index, used in last year’s Annual Report on Form 10-K and also set forth above, 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 12,
2021, there were 12 registered holders of record of our common stock, including Cede & Co. 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 credit agreement 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
15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions.”

Molina Healthcare, Inc. 2020 Form 10-K | 34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (“MD&A”)
Management’s discussion and analysis of financial condition and results of operations as of and for the years ended
December 31, 2020 and 2019, are presented in the sections that follow. Our MD&A as of and for the year ended
December 31, 2018, may be found in our 2019 Annual Report on Form 10-K, which prior disclosure is incorporated
by reference herein.

OVERVIEW

Molina Healthcare, Inc., a FORTUNE 500 company, provides managed healthcare services under the Medicaid and
Medicare programs, and through the state insurance marketplaces (the “Marketplace”). Through our locally
operated health plans in 15 states, we served approximately 4.0 million members as of December 31, 2020. In
addition, in connection with our acquisition of Magellan Complete Care on December 31, 2020, we added
approximately 200,000 members, and now operate health plans in 18 states. These health plans are generally
operated by our respective wholly owned subsidiaries in those states, and licensed as health maintenance
organizations (“HMOs”).

2020 HIGHLIGHTS

Highlights of our 2020 results included the following:

Net income per diluted share of $11.23, with net income of $673 million;
Total revenue of $19.4 billion, which increased 15% compared to 2019;
Premium revenue of $18.3 billion, which increased 13% compared to 2019;
Consolidated medical care ratio (“MCR”) of 86.5%, compared to 85.8% in 2019;

•
•
•
•
• We estimate the net effect of COVID decreased net income for the full year 2020 by $2.30 per diluted

•

share, and increased the MCR by approximately 50 basis points;
Results were positively impacted by certain non-recurring and other items, mainly including the proceeds
from the Marketplace risk corridor judgment;

• Membership, including Magellan Complete Care, increased approximately 900,000 members to 4.2 million

at December 31, 2020. Roughly half of this increase was from our recent acquisitions of Magellan Complete
Care, Passport in Kentucky and YourCare in New York, with the balance from suspension of Medicaid
redeterminations noted below;

• General and administrative expense ratio (“G&A ratio”) of 7.6%, compared to 7.7% in 2019; and
•

After-tax margin of 3.5%, despite the underperformance of our Marketplace business.

COVID Impacts

As noted above, the combined net effect of COVID-related impacts reduced our 2020 earnings and included:

•

A decrease in medical costs due to COVID-related utilization curtailment throughout most of year of
approximately $420 million, which was partially offset by direct care related to COVID patients;
Premium refunds and related actions enacted by a number of our state customers in response to the
COVID-related utilization curtailment of approximately $564 million, including $401 million recognized in the
fourth quarter, mostly associated with recently-enacted risk sharing corridors;
An increase in our G&A spending on activities related to COVID; and
•
• Membership growth due to suspension of redeterminations in Medicaid.

Growth Initiatives

We made major strides in 2020 related to our growth strategy. On December 31, 2020, we closed on the acquisition
of Magellan Complete Care. In September 2020, we signed a definitive agreement to purchase the net assets of
Affinity Health Plan in New York, which we expect to close as early as the second quarter of 2021. We closed on the
Passport acquisition in Kentucky on September 1, 2020, and we closed on the YourCare acquisition in upstate New
York on July 1, 2020. Each of these acquisitions involve financially underperforming health plans, but with stable
membership and revenue bases. We believe they provide attractive opportunities for margin improvement,
operating leverage and membership growth. Our growth initiatives continue to be anchored by our capital allocation
priorities: first, organic growth; second, inorganic growth through accretive acquisitions; and third, programmatically
returning excess capital to shareholders.

In summary, we continue to perform well, our fundamentals remain strong, and we continue to grow revenue as a
result of our focus on top-line growth.

Molina Healthcare, Inc. 2020 Form 10-K | 35

FINANCIAL RESULTS SUMMARY

Premium revenue

Less: medical care costs

Medical margin

MCR (1)

Other revenues:

Premium tax revenue

Health insurer fees reimbursed

Investment income and other revenue

Marketplace risk corridor judgment

General and administrative expenses

G&A ratio (2)

Premium tax expenses

Health insurer fees

Depreciation and amortization

Other

Operating income

Interest expense

Other expenses (income), net

Income before income tax expense

Income tax expense

Net income

Net income per diluted share

Diluted weighted average shares outstanding

Other Key Statistics:
Ending Membership (3)
Effective income tax rate
After-tax margin (2)

Year Ended December 31,

2020

2019

(In millions, except per-share
amounts)

18,299

16,208

15,820

2,479

13,905

2,303

86.5%

85.8%

649

271

128

489

—

132

—

1,480

7.6%

1,296

7.7%

649

277

489

—

1,078

1,044

102

961

288

673

11.23

59.9

(15)

972

235

737

11.47

64.2

4.0

30.0%

3.5%

3.3

24.2%

4.4%

__________________
(1) MCR represents medical care costs as a percentage of premium revenue.
(2) G&A ratio represents general and administrative expenses as a percentage of total revenue. After-tax margin represents net

income as a percentage of total revenue.

(3) Does not include approximately 200,000 Magellan Complete Care members from the acquisition closed on December 31,

2020.

Molina Healthcare, Inc. 2020 Form 10-K | 36

CONSOLIDATED RESULTS

NET INCOME AND OPERATING INCOME

Net income amounted to $673 million, or $11.23 per diluted share in 2020, compared with net income of $737
million, or $11.47 per diluted share, in 2019. Our after-tax margin decreased to 3.5% for 2020, compared to 4.4% for
2019.

Operating income was $1,078 million in 2020, compared with $1,044 million in 2019. We estimate that the net effect
of COVID-19 decreased pretax income in 2020 by approximately $180 million, or $2.30 per diluted share. Operating
income increased in 2020, despite the net effect of COVID-19, due to growth in membership and premiums, and a
$128 million legal judgment for Marketplace risk corridor claims related to prior years, partially offset by a year-over-
year decline in the underlying performance of our Marketplace business.

Net income per share in 2020 was favorably impacted by the reduction in common shares outstanding as a result of
our share repurchase programs in 2020. See further discussion and information in “Liquidity and Financial
Condition,” below, and in the Notes to Consolidated Financial Statements, Note 3, “Net Income Per Share.”

PREMIUM REVENUE

Premium revenue increased $2,091 million, or 13%, in 2020, when compared with 2019.

The higher premium revenues reflect increased membership, primarily in Medicaid, and include the impact from the
YourCare and Passport acquisitions. In 2020, we added 337,000 members from our acquisition of the Kentucky
Passport business on September 1, 2020, and 47,000 members from our acquisition of the New York YourCare
business on July 1, 2020. Suspension of redeterminations in Medicaid was also a driver for membership growth in
2020.

The increase in premium revenues from these acquisitions was slightly offset by the decline in membership
associated with our exit of operations in Puerto Rico in 2020. The increase in premium revenue was net of
approximately $564 million recognized for COVID-related premium refunds and related actions that were enacted in
several states in response to lower utilization of medical services resulting from COVID-19.

MEDICAL CARE RATIO

The consolidated MCR in 2020 increased to 86.5%, compared to 85.8% in 2019, primarily due to the unfavorable
net effect of COVID-19 impacts in all our lines of business. We estimate that the net effect of COVID-19 increased
our consolidated MCR in 2020 by approximately 50 basis points.

Prior year reserve development in 2020 was not material. The year ended December 31, 2019, was positively
impacted by 80 basis points of favorable reserve development, primarily in the Medicaid program.

PREMIUM TAX REVENUE AND EXPENSES

The premium tax ratio increased to 3.4% in 2020, compared with 2.9% in 2019. The current year ratio increase was
mainly due to the state of Illinois’ implementation of a managed care organization provider assessment in the third
quarter of 2019. Additionally, the state of California implemented a new managed care organization assessment,
effective January 1, 2020, after the prior assessment mechanism expired on June 30, 2019.

HEALTH INSURER FEES (“HIF”)

In 2020, HIF expense amounted to $277 million and HIF reimbursements amounted to $271 million. Public Law No.
115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year.
Due to the reinstatement of the HIF in 2020, our effective tax rate was higher in 2020 compared with 2019.

The Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020.

INVESTMENT INCOME AND OTHER REVENUE

Investment income and other revenue decreased to $76 million in 2020, compared with $132 million in 2019. The
year-over-year decrease was consistent with our expectation and was due to the low interest rate environment.

MARKETPLACE RISK CORRIDOR JUDGMENT

In June 2020, the U.S. Court of Federal Claims granted us judgment in the amount of $128 million for 2014, 2015,
and 2016 Marketplace risk corridor claims, following a favorable U.S. Supreme Court decision in April 2020 which

Molina Healthcare, Inc. 2020 Form 10-K | 37

held §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full
Marketplace risk corridor amounts calculated by that statute. We received the judgment in October 2020 and,
consistent with the timing of the cash receipt, the gain was recognized in our fourth quarter 2020 financial results
and reported in “Marketplace risk corridor judgment” in our consolidated statements of income. The judgment did
not create additional Minimum MLR rebates.

GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES

The G&A expense ratio decreased slightly to 7.6% in 2020 compared with 7.7% in 2019, due to increased
revenues, partially offset by increased costs associated with the COVID-19 pandemic, due to added operational
protocols, technology implementations, and benefits for our employees, and also from increased costs associated
with acquisitions.

INTEREST EXPENSE

Interest expense increased to $102 million in 2020, compared with $87 million in 2019. Additional interest expense
relating to the 4.375% Notes issued in June 2020, and the 3.875% Notes issued in November 2020, was partially
offset by the decrease in interest expense resulting from the settlement of the convertible senior notes in January
2020. As further described below in “Liquidity,” a portion of the net proceeds from the 4.375% Notes offering was
used to repay $600 million principal amount outstanding under the term loan facility of our prior credit agreement.
Additionally, a portion of the net proceeds from the 3.875% Notes offering was used to repay the $330 million
principal amount outstanding under the 4.875% Notes.

OTHER EXPENSES (INCOME), NET

In 2020, we recognized losses on debt repayment of $15 million in connection with repayment of our term loan
facility and other financing transactions. In 2019, we recognized a gain on debt repayment of $15 million, in
connection with convertible senior notes repayment transactions.

INCOME TAXES

Income tax expense amounted to $288 million in 2020, or 30.0% of pretax income, compared with income tax
expense of $235 million in 2019, or 24.2% of the pretax income. The effective tax rate was higher in 2020 due to
higher nondeductible expenses in 2020, primarily related to the nondeductible HIF. As discussed above, the HIF
was not applicable in 2019 and has been repealed for years after 2020.

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.

The key metrics used to assess the performance of our Health Plans segment are premium revenue, margin and
MCR. MCR 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 also referred to as “Medical Margin.” Medical Margin amounted to $2.5
billion and $2.3 billion in 2020 and 2019, respectively for the Health Plans segment. Management’s discussion and
analysis of the changes in Medical Margin is discussed below under “Financial Performance.”

See Notes to Consolidated Financial Statements, Note 16, “Segments,” for more information.

Molina Healthcare, Inc. 2020 Form 10-K | 38

HEALTH PLANS

As of December 31, 2020, the Health Plans segment consisted of health plans operating in 15 states, and served
approximately 4.0 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare
programs for low-income families and individuals, including Marketplace members, most of whom receive
government premium subsidies. In addition, in connection with our acquisition of Magellan Complete Care on
December 31, 2020, we added approximately 200,000 members, and now operate health plans in 18 states.

TRENDS AND UNCERTAINTIES

For a discussion of the Health Plans segment’s trends, uncertainties and other developments, refer to “Item 1.
Business—Our Business,” “—COVID-19 Pandemic,” and “—Legislative and Political Environment.”

FINANCIAL PERFORMANCE

The tables below summarize premium revenue, Medical Margin, and MCR by state health plan and by government
program for the periods indicated (dollars in millions):

HEALTH PLANS

California

Florida

Illinois

Kentucky

Michigan

Ohio

Texas

Washington
Other (1)
Total

Year Ended December 31,

2020

Premium
Revenue

Medical
Margin

MCR

Premium
Revenue

2019

Medical
Margin

2,109 $

643

1,328

654

1,587

2,962

3,085

3,169

2,762

259

109

155

249

349

391

474

429

87.7% $

2,266 $

83.0

88.3

90.2

84.4

88.2

87.3

85.1

84.5

734

1,002

—

1,624

2,553

2,991

2,695

2,343

429

144

130

—

293

267

377

305

358

MCR

81.0%

80.4

87.0

—

82.0

89.6

87.4

88.7

84.7

18,299 $

2,479

86.5% $

16,208 $

2,303

85.8%

______________________
(1)

“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, South Carolina, Utah, and Wisconsin health
plans, whose results are not individually significant to our consolidated operating results.

As discussed above, the combination of all the COVID-19 pandemic-related impacts decreased pretax income in
2020 and increased our consolidated MCR in 2020 by approximately 50 basis points. Some of these items
increased earnings, such as lower than expected medical costs from the curtailment of utilization that benefited all
our state health plans, and a meaningful increase in Medicaid membership, while others served to decrease
earnings, such as the temporary, retroactive Medicaid premium refunds and related actions enacted by certain
states.

Comments relating to the performance of our health plans in California, Ohio, Texas and Washington, which
represent our largest health plans from a premium revenue standpoint, follow:

California. For the year ended December 31, 2020, Medical Margin declined when compared with 2019, as the
lower medical care costs from the curtailment of utilization were more than offset by retroactive Medicaid premium
refunds and underperformance in the Marketplace program.

Ohio. For the year ended December 31, 2020, Medical Margin was higher when compared with 2019, due to higher
premiums and improved operating performance in Medicaid. Premium revenues were higher year-over-year, mainly
due to increased membership, program changes and rate increases in Medicaid established before COVID-19. The

Molina Healthcare, Inc. 2020 Form 10-K | 39

net effects of COVID-19 had an unfavorable impact on Medical Margins in all programs in 2020, as the retroactive
premium refunds exceeded the benefit from lower medical costs due to the curtailment of utilization.

Texas. For the year ended December 31, 2020, premium revenues and Medical Margin were both slightly higher
when compared with 2019. Medical Margin increased due to higher premium revenues and a lower MCR in
Medicaid, mostly driven by curtailment of utilization related to COVID-19 premiums, partially offset by
underperformance in Marketplace. The decline in Marketplace resulted mainly from lower premiums and higher
acuity mix for the new members we served.

Washington. For the year ended December 31, 2020, Medical Margin was higher when compared with 2019, mainly
due to improved results in Medicaid. Medicaid premium revenues increased in the year ended December 31, 2020,
due to membership growth. In addition, results in the year ended December 31, 2020, benefited modestly from
lower medical costs due to the curtailment of utilization driven by COVID-19, which was partially offset by COVID-
related provider payments mandated by the state in the second quarter of 2020.

PROGRAMS

Medicaid

Medicare

Marketplace

Total

Medicaid

Year Ended December 31,

2020

2019

Premium
Revenue

Medical
Margin

MCR

Premium
Revenue

Medical
Margin

MCR

14,265 $

1,804

87.4 % $

12,466 $

1,497

88.0 %

2,512

1,522

351

324

86.0

78.7

2,243

1,499

330

476

85.3

68.2

18,299 $

2,479

86.5 % $

16,208 $

2,303

85.8 %

Medicaid premium revenue increased $1,799 million in 2020, when compared with 2019, mainly due to membership
growth and premium increases in several states, and the impact from suspension of redeterminations due to
COVID-19. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000
new Medicaid members since March 31, 2020, when we first began to report on the impacts of the pandemic. We
believe this membership increase was mainly due to the suspension of redeterminations. These premium increases
were partially offset by premium refunds and related actions enacted in several states in response to the lower
utilization of medical services stemming from COVID-19.

The Medical Margin of our Medicaid program increased $307 million, or 21%, in 2020 when compared with 2019.
The increase was driven by increased premium revenues and margin associated with the membership growth
discussed above, and from a reduction in the MCR.

The Medicaid MCR decreased to 87.4% in 2020, from 88.0% in 2019, or 60 basis points. The decrease in the
Medicaid MCR in 2020 was due to improvements across all programs. The MCR benefited from operational
improvements and premium increases in several states, but was partially offset by unfavorable effects of COVID-19,
including the impact of the premium refunds and related actions, net of lower medical costs due to the curtailment of
utilization.

In the third quarter of 2020, we recognized a $10 million premium deficiency reserve (“PDR”) associated with the
Puerto Rico Medicaid business. We exited this business on October 31, 2020. The PDR represents the estimated
remaining claims and administrative costs that exceed the estimated remaining premiums associated with the
contract.

These improvements were partially offset by unfavorable year-over-year changes in prior year reserve
development. Prior year reserve development in 2020 was not material; however, 2019 was positively impacted by
100 basis points of favorable reserve development.

Medicare

Medicare premium revenue increased $269 million in 2020, when compared with 2019, primarily due to increases in
premium revenue PMPM and member months. PMPMs improved due to increased revenue resulting from risk
scores that are more commensurate with the acuity of our population and increases in quality incentive premium
revenues. These increases were partially offset by premium refunds, mainly in MMP, enacted in response to the
lower utilization of medical services stemming from COVID-19.

Molina Healthcare, Inc. 2020 Form 10-K | 40

The Medical Margin for Medicare increased $21 million, or 6%, in 2020 when compared with 2019, primarily due to
the increase in premium revenue discussed above, partially offset by increases in medical costs PMPM.

The Medicare MCR increased from 85.3% in 2019 to 86.0% in 2020, or 70 basis points. The increase was primarily
driven by an increase in medical care costs PMPM, which was mainly attributed to unfavorable changes in member
mix, including higher acuity populations. The medical cost PMPM also reflected modestly lower utilization of medical
services stemming from COVID-19. The impact of increased medical costs on the MCR was partially offset by the
increase in the premium revenue PMPM discussed above.

Marketplace

Marketplace premium revenue increased $23 million in 2020, when compared with 2019, mainly due to increased
membership, partially offset by a decrease in premium revenue PMPM. The decrease in premium revenue PMPM
was mainly driven by lower pricing, in an effort to be more competitive and generate membership growth, and the
impact of more health plans being subject to minimum medical loss ratio rebates when compared with the prior
year. The factors decreasing premium revenue PMPM were partially offset by the impact of higher risk adjustment
premiums, resulting from higher acuity of our membership.

The Marketplace Medical Margin decreased $152 million in 2020, despite the increase in premium revenues, due to
an increase in the MCR compared to 2019.

The Marketplace MCR increased to 78.7% in 2020, compared to 68.2% in 2019. The increase in MCR was driven
by the impact of the decrease in premium revenue PMPM discussed above, combined with an increase in medical
cost PMPM when compared with 2019. The higher medical cost PMPM was primarily due to a higher member
acuity mix and increased medical costs related to COVID-19. The rebound in utilization for Marketplace, following
the curtailment from COVID-19, has been much more pronounced than our Medicaid and Medicare programs.
Additionally, our risk scores, though increased compared to 2019, continue to lag the acuity of our membership.

OTHER

The Other segment includes certain corporate amounts not allocated to the Health Plans segment. In 2020 and
2019, such amounts were immaterial to our consolidated results of operations.

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 and net income. 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 healthcare
services. The 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 dividends to the parent company amounting to
$635 million in 2020, and $1,373 million in 2019, respectively. The parent company contributed capital of $107
million and $43 million in 2020 and 2019, respectively, to our regulated health plan subsidiaries to satisfy statutory
capital and surplus requirements.

Cash, cash equivalents and investments at the parent company amounted to $644 million and $997 million as of
December 31, 2020, and 2019, respectively. The decrease in 2020 was mainly due to cash used for Magellan
Complete Care and other acquisitions, and common stock repurchases. These outflows were partially offset by
inflows from net debt financing transactions, and dividends received from regulated health plan subsidiaries, net of
contributions, as described above. See further discussion below, in “Investing Activities,” and “Financing Activities.”

Molina Healthcare, Inc. 2020 Form 10-K | 41

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 less than 10
years, or less than 10 years average life for structured securities. 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.

We believe that the risks of the COVID-19 pandemic, as they relate to our investments, are minimal. The overall
rating of our portfolio remains strong and is rated AA. Our investment policy has directives in conjunction with state
guidelines to minimize risks and exposures in volatile markets. Additionally, our portfolio managers assist us in
navigating the current volatility in the capital markets.

Our restricted investments are invested principally in cash, cash equivalents, 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.

Cash Flow Activities

Our cash flows are summarized as follows:

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash, cash equivalents, and restricted cash

and cash equivalents

Operating Activities

Year Ended December 31,

2020

2019

Change

(In millions)

1,890 $

427 $

1,463

(400)

225

(293)

(552)

(107)

777

1,715 $

(418) $

2,133

We typically receive capitation payments monthly, in advance of payments for medical claims; however, government
payors may adjust their payment schedules, positively or negatively impacting our reported cash flows from
operating activities in any given period. For example, government payors may delay our premium payments, or they
may prepay the following month’s premium payment.

Net cash provided by operations was $1,890 million in 2020, compared with $427 million of net cash provided in
2019. The $1,463 million increase in year-over-year cash flow was due to cash flow timing benefits from the growth
in membership in 2020, and the net impact of timing differences in governmental receivables and payables.

Investing Activities

Net cash used in investing activities was $400 million in 2020, compared with $293 million of net cash used in 2019,
a decrease in year-over-year cash flow of $107 million. The decrease was mainly attributable to net cash paid in the
YourCare, Passport and Magellan Complete Care acquisitions, partially offset by decreased purchases of
investments in 2020.

Financing Activities

Net cash provided by financing activities was $225 million in 2020, compared with $552 million of net cash used in
2019, an increase in year-over-year cash flow of $777 million. In 2020, cash inflows included $1,429 million from the
issuance of the 4.375% and 3.875% Notes and $380 million borrowed under the term loan facility. Cash outflows
included the $600 million repayment of the term loan facility, common stock purchases of $606 million, which
included $7 million to settle shares purchased in late December 2019, and net cash paid for the aggregate
convertible senior notes‑related transactions amounting to $42 million. In 2019, cash outflows included net cash
paid for the aggregate convertible senior notes-related transactions of $754 million, and $47 million paid for
common stock purchases, partially offset by proceeds of $220 million borrowed under the term loan facility.

Molina Healthcare, Inc. 2020 Form 10-K | 42

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, as of December 31, 2020, our working capital was $2,911 million compared with $2,698
million as of December 31, 2019. At December 31, 2020, our cash and investments amounted to $6,165 million,
compared with $4,477 million of cash and investments at December 31, 2019.

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. For more information, see the “Liquidity” discussion
presented above.

Regulatory Capital and Dividend Restrictions

Each of our regulated, wholly owned subsidiaries must maintain a minimum amount of statutory capital determined
by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and
amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To
the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer
funds to us. Based upon current statutes and regulations, the minimum capital and surplus requirement for these
subsidiaries (not including the Magellan Complete Care subsidiaries) was estimated to be approximately
$1,310 million at December 31, 2020, compared with $1,110 million at December 31, 2019. We estimate the
Magellan Complete Care subsidiaries’ minimum capital and surplus requirement amounted to approximately
$230 million at December 31, 2020. The aggregate capital and surplus of our wholly owned subsidiaries was in
excess of these minimum capital requirements as of both dates.

Under applicable regulatory requirements, the amount of dividends that may be paid by our wholly owned
subsidiaries without prior approval by regulatory authorities as of December 31, 2020, was approximately $60
million in the aggregate. The subsidiaries may pay dividends over this amount, but only after approval is granted by
the regulatory authorities.

Based on our cash and investments balances as of December 31, 2020, management believes that its regulated
wholly owned subsidiaries remain well capitalized and exceed their regulatory minimum requirements. We have the
ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure
compliance with statutory capital and surplus requirements.

Debt Ratings

Each of our high-yield senior notes is rated “BB-” by Standard & Poor’s, and “Ba3” by Moody’s Investor Service, Inc.
A downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs.

Financial Covenants

The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and
an interest coverage ratio. Such ratios are computed as defined by the terms of the Credit Agreement.

In addition, the indentures governing each of our outstanding high-yield senior 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, 2020, we were in compliance with all financial and
non-financial covenants under the Credit Agreement and other long-term debt.

FUTURE SOURCES AND USES OF LIQUIDITY

Future Sources

Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which is
generally received a short time before related healthcare services are paid. Premium revenue is our primary source
of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, could have a negative impact
on our liquidity.

Molina Healthcare, Inc. 2020 Form 10-K | 43

Potential Impact of COVID-19 Pandemic. Excluding acquisitions and our planned exit from Puerto Rico, we have
added approximately 415,000 new Medicaid members since March 31, 2020, when we first began to report on the
impacts of the pandemic. We believe this membership increase was mainly due to the suspension of
redeterminations.

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. As a result of the COVID-19 pandemic, state regulators could
restrict the ability of our regulated health plan subsidiaries to pay dividends to the parent company, which could
reduce the liquidity of the parent company. For more information on our regulatory capital requirements and
dividend restrictions, refer to Notes to Consolidated Financial Statements, Note 15, “Commitments and
Contingencies—Regulatory Capital Requirements and Dividend Restrictions,” and Note 17, “Condensed Financial
Information of Registrant—Note C - Dividends and Capital Contributions.”

Credit Agreement Borrowing Capacity. As of December 31, 2020, we had available borrowing capacity of $1 billion
under the revolving credit facility of our Credit Agreement. In addition, the Credit Agreement provides for a
$15 million swingline sub-facility and a $100 million letter of credit sub-facility, as well as incremental term loans
available to finance certain acquisitions up to $500 million, plus an unlimited amount of such term loans as long as
we maintain a minimum consolidated net leverage ratio. See further discussion in the Notes to Consolidated
Financial Statements, Note 11, “Debt.”

Future Uses

Common Stock Purchases. In September 2020, our board of directors authorized the purchase of up to
$500 million, in the aggregate, of our common stock. This program is funded with cash on hand and extends
through December 31, 2021. The exact timing and amount of any repurchase is determined by management based
on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume,
price, and timing under applicable law. Following the purchases completed under a Rule 10b5-1 trading plan from
November 2020 through February 11, 2021, there is approximately $219 million remaining available to purchase our
common stock through December 31, 2021. See further information in the Notes to Consolidated Financial
Statements, Note 13, “Stockholders’ Equity.”

Acquisitions. We have a disciplined and steady approach to growth. Organic growth, which includes leveraging our
existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will
consider targeted acquisitions that are a strategic fit that we believe will leverage operational synergies, and lead to
incremental earnings accretion. For further information on our acquisitions, refer to the Notes to Consolidated
Financial Statements, Note 4, “Business Combinations.”

In September 2020, we entered into a definitive agreement to acquire substantially all the assets of Affinity Health
Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various adjustments at
closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the
second quarter of 2021.

In September 2020, we completed the acquisition of certain assets of Passport Health Plan, Inc. The purchase
consideration included estimated contingent consideration of approximately $46 million as of December 31, 2020.
Half this amount is payable later in 2021, with the remainder payable in early 2022, subject to review and
agreement among us and the seller. The second half payment is contingent upon the outcome of certain legal
challenges.

Molina Healthcare, Inc. 2020 Form 10-K | 44

Outcome of ACA Litigation. As described above in “Health Plans Segment—Trends and Uncertainties,” the U.S.
Supreme Court has accepted the appeal of the Fifth Circuit Court’s decision regarding the constitutionality and
severability of the individual mandate. The ACA remains in effect pending the issuance of the Supreme Court’s
opinion. A decision by the Supreme Court that the entirety of the ACA is unconstitutional could have a material
adverse effect on our business, financial condition, cash flows, or results of operations.

Potential Impact of COVID-19 Pandemic. Beginning in early 2020 the pandemic, along with the related quarantine
and social distancing measures, reduced demand for certain routine and non-critical medical services, while at the
same time increased demand for other medical services, such as COVID-19 testing and emergency services. In
2020, utilization was curtailed, but could rebound to more normal levels in 2021. Increased demand for medical
services, which we are presently unable to predict the timing or magnitude, could result in a significant increase in
medical care costs and related provider claims payments.

Also, as described above in “Item 1. Business—COVID-19 Pandemic,” we have been subject to premium refunds
and related actions as a result of the pandemic. In 2020, various states enacted temporary premium refunds and
related actions in response to the reduced demand for medical services stemming from COVID-19, which resulted
in a reduction of our medical margin. In some cases, these premium actions were retroactive to earlier periods in
2020, or as early as the beginning of the states’ fiscal years in 2019. Beginning in the second quarter of 2020, we
have recognized retroactive premium actions that we believe to be probable, and where the ultimate premium
amount is reasonably estimable. We recognized $564 million related to these retroactive premium actions, in the
aggregate, in 2020.

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.

The Molina Healthcare Charitable Foundation. In August 2020, we announced our commitment of $150 million to
fund The Molina Healthcare Charitable Foundation (the “Foundation”), an independent not-for-profit charitable
foundation. We contributed $15 million to the Foundation in the fourth quarter of 2020.

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, and some differences could be
material. Our most significant accounting estimates, which include a higher degree of judgment and/or complexity,
include the following:

• 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.

•

Contractual provisions that may adjust or limit revenue or profit. For a 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 discussion of this topic, refer to the Notes to Consolidated Financial Statements,

Note 2, “Significant Accounting Policies.”

•

Business Combinations, and Goodwill and intangible assets, net. At December 31, 2020, goodwill and
intangible assets, net, represented approximately 10% of total assets and 45% of total stockholders’ equity,
compared with 3% and 9%, respectively, at December 31, 2019. 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,” Note 4, “Business
Combinations,” and Note 9, “Goodwill and Intangible Assets, Net.”

Molina Healthcare, Inc. 2020 Form 10-K | 45

MEDICAL CARE COSTS, MEDICAL CLAIMS AND BENEFITS PAYABLE

Medical care costs are recognized in the period in which services are provided and include fee-for-service claims,
pharmacy benefits, capitation payments to providers, and various other medically-related costs. Under fee-for-
service claims arrangements with providers, we retain the financial responsibility for medical care provided and
incur costs based on actual utilization of hospital and physician services. Such medical care costs include amounts
paid by us as well as estimated medical claims and benefits payable for costs that were incurred but not paid as of
the reporting date (“IBNP”). Pharmacy benefits represent payments for members' prescription drug costs, net of
rebates from drug manufacturers. We estimate pharmacy rebates based on historical and current utilization of
prescription drugs and contractual provisions. Capitation payments represent monthly contractual fees paid to
providers, 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. Other medical care costs include all
medically-related administrative costs, amounts due to providers pursuant to risk-sharing or other incentive
arrangements, provider claims, and other healthcare expenses. Examples of medically-related administrative costs
include expenses relating to health education, quality assurance, case management, care coordination, disease
management, and 24-hour on-call nurses. Additionally, we include an estimate for the cost of settling claims
incurred through the reporting date in our medical claims and benefits payable liability.

Medical claims and benefits payable consist mainly of fee-for-service IBNP, unpaid pharmacy claims, capitation
costs, other medical costs, including amounts payable to providers pursuant to risk-sharing or other incentive
arrangements and amounts payable to providers on behalf of certain state agencies for certain state assessments
in which we assume no financial risk. IBNP includes the costs of claims incurred as of the balance sheet date which
have been reported to us, and our best estimate of the cost of claims incurred but not yet reported to us. We also
include an additional reserve to ensure that our overall IBNP liability is sufficient under moderately adverse
conditions. We reflect changes in these estimates in the consolidated results of operations in the period in which
they are determined.

The estimation of the IBNP liability requires a significant degree of judgment in applying actuarial methods,
determining the appropriate assumptions and considering numerous factors. Of those factors, we consider
estimated completion factors (measures the cumulative percentage of claims expense that will ultimately be paid for
a given month of service based on historical payment patterns) and the assumed healthcare cost trend (the year-
over-year change in per-member per-month medical care costs) to be the most critical assumptions. Other relevant
factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels, changes in
membership, product mix, seasonality, benefit changes or changes in Medicaid fee schedules, provider contract
changes, prior authorizations and the incidence of catastrophic or pandemic cases.

For claims incurred more than three months before the financial statement date, we mainly use estimated
completion factors to estimate the ultimate cost of those claims. Completion factors measure the cumulative
percentage of claims expense that will ultimately be paid for a given month of service based on historical claims
payment patterns. We analyze historical claims payment patterns by comparing claim incurred dates to claim
payment dates to estimate completion factors. The estimated completion factors are then applied to claims paid
through the financial statement date to estimate the ultimate claims cost for a given month’s incurred claim activity.
The difference between the estimated ultimate claims cost and the claims paid through the financial statement date
represents our estimate of claims remaining to be paid as of the financial statement date and is included in our
IBNP liability.

For claims incurred within three months before the financial statement date, actual claims paid are a less reliable
measure of our ultimate cost since a large portion of medical claims are not submitted to us until several months
after services have been submitted. Accordingly, we estimate our IBNP liability for claims incurred during these
months based on a blend of estimated completion factors and assumed medical care cost trend. The assumed
medical care cost trend represents the year-over-year change in per-member per-month medical care costs, which
can be affected by many factors including, but not limited to, our ability and practices to manage medical and
pharmaceutical costs, changes in level and mix of services utilized, mix of benefits offered, including the impact of
co-pays and deductibles, changes in medical practices, changes in member demographics, catastrophes and
epidemics, and other relevant factors.

Actuarial standards of practice generally require a level of confidence such that our overall best estimate of the
IBNP liability has a greater probability of being adequate versus being insufficient, where the liability is sufficient to
account for moderately adverse conditions. Adverse conditions are situations that may cause actual claims to be
higher than the otherwise estimated value of such claims at the time of the estimate, such as changes in the

Molina Healthcare, Inc. 2020 Form 10-K | 46

magnitude or severity of claims, uncertainties related to our entry into new geographical markets or provision of
services to new populations, changes in state-controlled fee schedules, and modifications or upgrades to our claims
processing systems and practices. Therefore, in many situations, the claim amounts ultimately settled will be less
than the estimate that satisfies the actuarial standards of practice.

When subsequent actual claims payments are less than we estimated, we recognize a benefit for favorable prior
period development that is reported as part of “Components of medical care costs related to: “Prior years” in the
table presented in Note 10, “Medical Claims and Benefits Payable.” Our reserving practice is to consistently
recognize the actuarial best estimate including a provision for moderately adverse conditions for each current
period. This provision is reported as part of “Components of medical care costs related to: Current year” in the table
presented in Note 10. Assuming stability in the size of our membership, the use of this consistent methodology,
during any given period, usually results in the replenishment of reserves at a level that generally offsets the benefit
of favorable prior period development in that period. In the case of material growth or decline of membership,
replenishment can exceed or fall short of the favorable development, assuming all other factors remain unchanged.

Because of the significant degree of judgment involved in estimation of our IBNP liability, there is considerable
variability and uncertainty inherent in such estimates. The following table reflects the hypothetical change in our
estimate of claims liability as of December 31, 2020 that would result if we change our completion factors for the
fourth through the twelfth months preceding December 31, 2020, by the percentages indicated. A reduction in the
completion factor results in an increase in medical claims liabilities. The following tables do not include amounts
relating to our recent acquisitions of Magellan Complete Care and Passport. Dollar amounts are in millions.

Increase (Decrease) in Estimated Completion Factors
(6)%

(4)%

(2)%

Increase
(Decrease)
in Medical
Claims
and
Benefits
Payable

491

327

164

(164)

(327)

(491)

The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2020 that
would result if we alter our assumed medical care cost trend factors by the percentages indicated. An increase in
the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in millions.

(Decrease) Increase in Trended Per Member Per Month Cost Estimates
(6)%

(4)%

(2)%

(Decrease)
Increase
in Medical
Claims
and
Benefits
Payable

(179)

(120)

(60)

120

179

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.

RECENTLY ISSUED ACCOUNTING STANDARDS

Refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” for a discussion
of recent accounting pronouncements that affect us.

Molina Healthcare, Inc. 2020 Form 10-K | 47

CONTRACTUAL OBLIGATIONS

In the table below, we present our contractual obligations as of December 31, 2020. 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. We are not a
party to off-balance sheet financing arrangements.

Total (1)

2021

2022-2023

2024-2025

2026 and after

Medical claims and benefits payable
Principal amount of debt (2)
Amounts due government agencies

Interest on long-term debt

Purchase commitments

Finance leases

Operating leases
Contingent consideration liability (3)

2,696

2,150

1,253

581

426

383

(In millions)

2,696 $

— $

—

1,253

186

700

—

154

146

—

120

—

1,450

—

209

266

—

Total

7,619 $

4,312 $

1,104 $

269 $

1,934

_______________________________
(1) As of December 31, 2020, we had 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 12, “Income Taxes.”

(2) Represents the principal amounts due on the 4.375% Notes due 2028, 5.375% Notes due 2022 and 3.875% Notes due

2030. For further information, refer to Notes to Consolidated Financial Statements, Note 11, “Debt.”

(3) Represents the estimate of contingent consideration due to the seller in connection with a business combination completed
in 2020. For further information, refer to Notes to Consolidated Financial Statements, Note 4, “Business Combinations.”

INFLATION

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

COMPLIANCE COSTS

Our health plans are regulated by both state and federal government agencies. Regulation of managed care
products and healthcare 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.

Molina Healthcare, Inc. 2020 Form 10-K | 48

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our earnings and financial position are exposed to financial market risk relating to 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, 2020, the fair value of our fixed income investments would decrease by approximately $39
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 5, “Fair Value Measurements,” and Note 6, “Investments.”

Borrowings under the Credit Agreement bear interest based, at our election, on a base rate or other defined rate,
plus, in each case, the applicable margin. For further information, see Notes to Consolidated Financial Statements,
Note 11, “Debt.”

Molina Healthcare, Inc. 2020 Form 10-K | 49

MOLINA HEALTHCARE, INC.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statements of Income...................................................................................................
Consolidated Statements of Comprehensive Income........................................................................
Consolidated Balance Sheets............................................................................................................
Consolidated Statements of Stockholders’ Equity..............................................................................
Consolidated Statements of Cash Flows............................................................................................
Notes to Consolidated Financial Statements......................................................................................

Page
51
51
52
53
54
56

Molina Healthcare, Inc. 2020 Form 10-K | 50

CONSOLIDATED STATEMENTS OF INCOME

Revenue:

Premium revenue

Premium tax revenue

Health insurer fees reimbursed

Marketplace risk corridor judgment

Service revenue

Investment income and other revenue

Total revenue

Operating expenses:

Medical care costs

General and administrative expenses

Premium tax expenses

Health insurer fees

Depreciation and amortization

Other

Cost of service revenue

Total operating expenses

Operating income

Other expenses, net:

Interest expense

Other expenses (income), net

Total other expenses, net

Income before income tax expense

Income tax expense

Net income

Net income per share:

Basic

Diluted

Weighted average shares outstanding:

Basic

Diluted

Year Ended December 31,

2020

2019

2018

(In millions, except per-share data)

18,299 $

16,208 $

17,612

649

271

128

—

19,423

15,820

1,480

649

277

—

489

—

132

16,829

13,905

1,296

489

—

417

329

—

407

125

18,890

15,137

1,333

417

348

364

18,345

1,078

15,785

1,044

17,759

1,131

102

117

961

288

(15)

972

235

673 $

737 $

115

132

999

292

707

11.40 $

11.23 $

11.85 $

11.47 $

11.57

10.61

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Net income

Other comprehensive income (loss):

Unrealized investment income (loss)

Less: effect of income taxes

Other comprehensive income (loss), net of tax

Year Ended December 31,

2020

2019

2018

(In millions)

673 $

737 $

707

(3)

(1)

(2)

Comprehensive income

706 $

749 $

705

See accompanying notes.

Molina Healthcare, Inc. 2020 Form 10-K | 51

CONSOLIDATED BALANCE SHEETS

ASSETS

Current assets:

Cash and cash equivalents

Investments

Receivables

Prepaid expenses and other current assets

Total current assets

Property, equipment, and capitalized software, net

Goodwill and intangible assets, net

Restricted investments

Deferred income taxes

Other assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Medical claims and benefits payable

Amounts due government agencies

Accounts payable, accrued liabilities and other

Deferred revenue

Total current liabilities

Long-term debt

Finance lease liabilities

Other long-term liabilities

Total liabilities

Stockholders’ equity:

Common stock, $0.001 par value per share; 150 million shares authorized; outstanding:

59 million shares at December 31, 2020, and 62 million at December 31, 2019

Preferred stock, $0.001 par value per share; 20 million shares authorized, no shares

issued and outstanding

Additional paid-in capital

Accumulated other comprehensive income

Retained earnings

Total stockholders’ equity

December 31,

2020

2019

(Dollars in millions,
except per-share amounts)

4,154 $

1,875

1,672

175

7,876

391

941

136

119

9,532 $

2,452

1,946

1,406

163

5,967

385

172

105

6,787

2,696 $

1,854

1,253

641

375

4,965

2,127

225

119

7,436

—

199

1,860

2,096

664

502

249

3,269

1,237

231

4,827

—

175

1,781

1,960

6,787

Total liabilities and stockholders’ equity

9,532 $

See accompanying notes.

Molina Healthcare, Inc. 2020 Form 10-K | 52

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Balance at December 31, 2017

60 $ — $ 1,044 $

(5) $

298 $ 1,337

Common Stock

Outstanding

Amount

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total

(In millions)

Net income

Adoption of new accounting standards

Partial termination of warrants

Exchange of convertible senior notes

Conversion of convertible senior notes

Other comprehensive loss, net

Share-based compensation

Balance at December 31, 2018

Net income

Common stock purchases

Adoption of new accounting standards

Partial termination of warrants

Other comprehensive income, net

Share-based compensation

Balance at December 31, 2019

Net income

Common stock purchases

Termination of warrants

Other comprehensive income, net

Share-based compensation

Balance at December 31, 2020

—

(4)

—

(550)

108

—

643

—

(1)

—

(514)

—

175

—

(11)

(30)

—

(1)

—

(2)

—

707

—

707

(550)

108

(2)

(8)

1,012

1,647

—

737

(53)

—

737

(54)

(514)

1,781

1,960

673

(594)

(605)

—

(30)

59 $ — $

199 $

37 $ 1,860 $ 2,096

See accompanying notes.

Molina Healthcare, Inc. 2020 Form 10-K | 53

CONSOLIDATED STATEMENTS OF CASH FLOWS

Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)

operating activities:
Depreciation and amortization
Deferred income taxes
Share-based compensation
Loss (gain) on debt repayment
Loss on sales of subsidiaries, net of gain
Non-cash restructuring charges
Other, net
Changes in operating assets and liabilities, net of the effect of acquisitions:
Receivables
Prepaid expenses and other current assets
Medical claims and benefits payable
Amounts due government agencies
Accounts payable, accrued liabilities and other
Deferred revenue
Income taxes

Net cash provided by (used in) operating activities

Investing activities:

Purchases of investments
Proceeds from sales and maturities of investments
Net cash paid in business combinations
Purchases of property, equipment and capitalized software
Net cash received from sale of subsidiaries
Other, net

Net cash (used in) provided by investing activities

Financing activities:

Proceeds from senior notes offerings, net of issuance costs
Common stock purchases
Repayment of term loan facility
Proceeds from borrowings under term loan facility
Repayment of senior notes
Cash paid for partial termination of warrants
Cash paid for partial settlement of conversion option
Cash received for partial settlement of call option
Repayment of principal amount of convertible senior notes
Repayment of credit facility
Other, net

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents, and restricted cash

and cash equivalents

Cash and cash equivalents, and restricted cash and cash equivalents at

beginning of period

Year Ended December 31,

2020

2019

(In millions)

2018

673 $

737 $

707

88
(19)
57
15
—
—
12

(100)
(16)
544
446
78
126
(14)

1,890

(670)

1,097

(755)
(74)
—
2
(400)

1,429

(606)
(600)
380
(338)
(30)
(27)
27
(12)
—
2
225

1,715

2,508

89
10
39
(15)
—
—
—

(76)
28
(107)
(303)
2
38
(15)
427

(2,536)
2,302
—
(57)
—
(2)
(293)

—
(47)
—
220
—
(514)
(578)
578
(240)
—
29
(552)

127
(6)
27
22
15
17
26

(530)
6
(226)
(574)
45
(21)
51
(314)

(1,444)
2,445
—
(30)
190
(18)
1,143

—
—
—
—
—
(549)
(623)
623
(362)
(300)
18
(1,193)

(418)

(364)

2,926

3,290

Cash and cash equivalents, and restricted cash and cash equivalents at end

of period

4,223 $

2,508 $

2,926

See accompanying notes.

Molina Healthcare, Inc. 2020 Form 10-K | 54

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:

Details of business combinations:

Fair value of assets acquired

Fair value of contingent consideration liabilities

Fair value of liabilities assumed

Net cash paid in business combinations

Convertible senior notes exchange transaction:

Common stock issued in exchange for convertible senior notes

Component of convertible senior 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

Common stock purchases not settled at end of period

Details of change in fair value of derivatives, net:

(Loss) gain on call option

Gain (loss) on conversion option

Change in fair value of derivatives, net

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

Year Ended December 31,

2020

2019

(In millions)

2018

321 $

112 $

239 $

78 $

240

(1,340) $

— $

545

—

(755) $

— $

—

— $

—

— $

(8) $

(7) $

6 $

7 $

(2) $

— $

132 $

(132)

— $

—

— $

—

131

(23)

108

(6)

—

577

(577)

—

(327)

(15)

242

(15)

See accompanying notes.

Molina Healthcare, Inc. 2020 Form 10-K | 55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

Organization and Operations

Molina Healthcare, Inc. provides managed healthcare services under the Medicaid and Medicare programs, through
the state insurance marketplaces (the “Marketplace”), and under other government-sponsored healthcare programs
for low-income families and individuals, most of whom receive government subsidies for premiums. As of December
31, 2020, we had two reportable segments: the Health Plans segment, and the Other segment. Our reportable
segments are consistent with how we currently manage the business and view the markets we serve.

Recent Developments – Health Plans Segment

Acquisition of Magellan Complete Care. On December 31, 2020, we closed on our acquisition of 100% of the
outstanding equity interests of the Magellan Complete Care line of business of Magellan Health, Inc., for total
purchase consideration of approximately $1,037 million. Because this acquisition closed on December 31, 2020,
Magellan Complete Care’s operating results were insignificant to our consolidated results of operations for the year
ended December 31, 2020. See Note 4, “Business Combinations,” for further information.

In July 2020, we completed the acquisition of certain assets of YourCare Health Plan, Inc. See Note 4, “Business
Combinations,” for further information.

Kentucky. In May 2020, our Kentucky health plan was selected as an awardee pursuant to the statewide Medicaid
managed care RFP issued by the Kentucky Cabinet for Health and Family Services, Department of Medicaid
Services. The new Medicaid contract began on January 1, 2021. In connection with this RFP award, we completed
the acquisition of certain assets of Passport Health Plan, Inc. (“Passport”) in September 2020. See Note 4,
“Business Combinations,” for further information.

Puerto Rico. We exited Puerto Rico’s Medicaid program when our contract expired on October 31, 2020. We have
been working with the regulatory authorities and the provider community to ensure that our former members in
Puerto Rico have reliable continuity of care.

Molina Healthcare, Inc. 2020 Form 10-K | 56

Consolidation and Presentation

The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. 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 U.S. 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 segment contractual provisions that may limit revenue recognition based upon the costs
incurred or the profits realized under a specific contract;
Health Plans segment quality incentives that allow us to recognize incremental revenue if certain quality
standards are met;
Settlements under risk or savings sharing programs;
Purchase price allocations relating to business combinations, including the determination of contingent
consideration;
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.

2. Significant Accounting Policies

Cash and Cash Equivalents

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

Cash and cash equivalents

Restricted cash and cash equivalents

2020

December 31,
2019

(In millions)

2018

4,154 $

2,452 $

2,826

100

Total cash and cash equivalents, and restricted cash and cash equivalents

presented in the consolidated statements of cash flows

4,223 $

2,508 $

2,926

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
(“AFS”) 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 (“HTM”) 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 arising from credit-related factors with respect to AFS
and HTM securities are included in the determination of net income. 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 less than 10 years, or less than 10
years average life for structured securities. 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.

Molina Healthcare, Inc. 2020 Form 10-K | 57

In general, our AFS 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 credit-related impairment. For
comprehensive discussions of the fair value and classification of our investments, see Note 5, “Fair Value
Measurements,” and Note 6, “Investments.”

Accrued interest receivable relating to our AFS and HTM securities is presented within “Prepaid expenses and other
current assets” in the accompanying consolidated balance sheets, and amounted to $10 million and $12 million at
December 31, 2020, and 2019, respectively. We do not measure an allowance for credit losses on accrued interest
receivable. Instead, we write off accrued interest receivable that has not been collected within 90 days of the
interest payment due date. We recognize such write offs as a reversal of interest income. No accrued interest was
written off during the year ended December 31, 2020.

Receivables

Receivables consist primarily of premium amounts due from government agencies, which may be subject to
potential retroactive adjustments. Because substantially 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.

Government receivables

Pharmacy rebate receivables

Health insurer fee reimbursement receivables

Other

Magellan Complete Care

Total

Business Combinations

December 31,

2020

2019

(In millions)

969 $

1,056

178

104

255

166

150

195

—

1,672 $

1,406

We account for business combinations using the acquisition method of accounting, which requires us to recognize
the assets acquired and the liabilities assumed at their acquisition date fair values. As discussed below, the excess
of the purchase consideration transferred over the fair value of the net tangible and intangible assets acquired is
recorded as goodwill. 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 results
of operations. Refer to Note 4, Business Combinations, and Note 9, “Goodwill and Intangible Assets, Net,” for
further details.

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 16 years.

Determining the fair value of identifiable assets acquired, particularly intangible assets, and liabilities assumed,
requires management to make estimates, which are based on all available information and in some cases
assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will
have different useful lives. The most significant intangible asset we typically record in a business combination is
contract rights associated with membership assumed. In determining the estimated fair value of the intangible
assets, we typically apply the income approach, which discounts the projected future net cash flows using an
appropriate discount rate that reflects the risk associated with such projected future cash flows. The most critical
assumptions used in determining the fair value of contract rights include forecasted operating margins and the
weighted average cost of capital.

Molina Healthcare, Inc. 2020 Form 10-K | 58

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 9, “Goodwill and Intangible Assets, Net,” for further details.

Goodwill

Goodwill represents the excess of the purchase consideration 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. Impairment indicators 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 (one of our state health plans) 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.

When testing goodwill for impairment, we may first assess qualitative factors, such as industry and market factors,
the dynamic economic and political environments in which we operate, 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. 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 under a quantitative assessment, the base year in the reporting units’ discounted
cash flows is derived from the annual financial planning cycle, which 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, healthcare 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.

Leases

Right-of-use (“ROU”) assets represent our right to use the underlying assets over the lease term, and lease
liabilities represent our obligation for lease payments arising from the related leases. ROU assets and lease
liabilities are recognized at the lease commencement date based on the present value of lease payments over the
lease term. Lease terms may include options to extend or terminate the lease when we believe it is reasonably
certain that we will exercise such options. If applicable, we account for lease and non-lease components within a
lease as a single lease component.

Because most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate
to determine the present value of lease payments. Lease expenses for operating lease payments are recognized on
a straight-line basis over the lease term, and the related ROU assets and liabilities are reduced to the present value
of the remaining lease payments at the end of each period. Finance lease payments reduce finance lease liabilities,

Molina Healthcare, Inc. 2020 Form 10-K | 59

the related ROU assets are amortized on a straight-line basis over the lease term, and interest expense is
recognized using the effective interest method.

The significant majority of our operating leases consist of long-term operating leases for office space. Short-term
leases (those with terms of 12 months or less) are not recorded as ROU assets or liabilities in the consolidated
balance sheets. For certain leases that represent a portfolio of similar assets, such as a fleet of vehicles, we apply a
portfolio approach to account for the related ROU assets and liabilities, rather than account for such assets and the
related liabilities individually. A nominal number of our lease agreements include rental payments that adjust
periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material
restrictive covenants.

For further information, including the amount and location of the ROU assets and lease liabilities recognized in the
accompanying consolidated balance sheets, see Note 8, “Leases.”

Medical Claims and Benefits Payable

The estimation of the IBNP liability requires a significant degree of judgment in applying actuarial methods,
determining the appropriate assumptions and considering numerous factors. Of those factors, we consider
estimated completion factors and the assumed healthcare cost trend to be the most critical assumptions. Other
relevant factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels,
changes in membership, product mix, seasonality, benefit changes or changes in Medicaid fee schedules, provider
contract changes, prior authorizations and the incidence of catastrophic or pandemic cases.

Because of the significant degree of judgment involved in estimation of our IBNP liability, there is considerable
variability and uncertainty inherent in such estimates. Each reporting period, the recognized IBNP liability represents
our best estimate of the total amount of unpaid claims incurred as of the balance sheet date using a consistent
methodology in estimating our IBNP liability. We believe our current estimates are reasonable and adequate;
however, the development of our estimate is a continuous process that we monitor and update as more complete
claims payment information and healthcare cost trend data becomes available. Actual medical care costs may be
less than we previously estimated (favorable development) or more than we previously estimated (unfavorable
development), and any differences could be material. Any adjustments to reflect favorable development would be
recognized as a decrease to medical care costs, and any adjustments to reflect unfavorable development would be
recognized as an increase to medical care costs, in the period in which the adjustments are determined.

Refer to Note 10, “Medical Claims and Benefits Payable,” for 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.

Molina Healthcare, Inc. 2020 Form 10-K | 60

Premium Revenue Recognition and Amounts Due Government Agencies

Premium revenue is generated from our Health Plans segment contracts, for our participation in the Medicaid,
Medicare and Marketplace programs. Premium revenue is generally received based on per member per month
(“PMPM”) rates established in advance of the periods covered. These premium revenues are recognized in the
month that members are entitled to receive healthcare services, and premiums collected in advance are deferred.
State Medicaid programs and the federal Medicare program periodically adjust premium rates.

Certain components of premium revenue are subject to accounting estimates and are described below, under
“Contractual Provisions That May Adjust or Limit Revenue or Profit,” and “Quality Incentives.”

Contractual Provisions That May Adjust or Limit Revenue or Profit

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. Liabilities accrued for
premiums to be returned under such provisions are reported in the aggregate as “Amounts due government
agencies” in the accompanying consolidated balance sheets. Categorized by program, such amounts due
government agencies included the following:

Medicaid program:

Minimum MLR and profit sharing

Other

Medicare program:

Risk adjustment and Part D risk sharing

Minimum MLR and profit sharing

Other

Marketplace program:

Risk adjustment

Minimum MLR

Other

Magellan Complete Care

December 31,

2020

2019

(In millions)

513 $

326

143

Total amounts due government agencies

1,253 $

368

—

664

Medicaid Program

Minimum MLR 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. Under certain medical cost corridor provisions, the health
plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum
threshold.

Profit Sharing. Our contracts with certain states contain profit sharing 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.

Retroactive Premium Adjustments. State Medicaid programs periodically adjust premium rates on a retroactive
basis. In these cases, we adjust our premium revenue in the period in which we determine that the adjustment is
probable and reasonably estimable, and is based on our best estimate of the ultimate premium we expect to realize
for the period being adjusted.

In 2020, various states enacted temporary premium refunds and related actions in response to the reduced demand
for medical services stemming from COVID-19, which resulted in a reduction of our medical margin. In some cases,
these premium actions were retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal
years in 2019. Beginning in the second quarter of 2020, we have recognized retroactive premium actions that we
believe to be probable, and where the ultimate premium amount is reasonably estimable. We recognized
$564 million related to these retroactive premium actions, in the aggregate, in 2020, including $37 million related to

Molina Healthcare, Inc. 2020 Form 10-K | 61

MMP plans. Approximately $401 million was recognized in the fourth quarter of 2020, mostly associated with
recently enacted risk-sharing corridors.

Medicare Program

Risk Adjustment. 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 Centers for Medicare & Medicaid Services (“CMS”)
practices.

Minimum MLR. The Affordable Care Act (“ACA”) 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 income.

Marketplace Program

Risk Corridor Judgment. In April 2020, the United States Supreme Court held that §1342 of the Affordable Care Act
obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated
by that statute, and that impacted insurers may sue the federal government in the U.S. Court of Federal Claims to
recover damages for breach of that obligation. In June 2020, the Claims Court granted us judgment in the amount of
$128 million for 2014, 2015, and 2016 Marketplace risk corridor claims, which we received in October 2020.
Consistent with the timing of the cash receipt, the gain was recognized in our fourth quarter 2020 financial results
and reported in “Marketplace risk corridor judgment” in our consolidated statements of income. The judgment did
not create additional Minimum MLR rebates.

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 (risk adjustment payable), and
will receive a risk adjustment payment from the pool if their composite risk scores are above the average risk score
(risk adjustment receivable). We estimate our ultimate premium based on insurance policy year-to-date experience,
and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in
our consolidated statements of income. As of December 31, 2020, Marketplace risk adjustment payables amounted
to $326 million and related receivables amounted to $20 million, for a net payable of $306 million. As of December
31, 2019, Marketplace risk adjustment payables amounted to $368 million and related receivables amounted to $63
million, for a net payable of $305 million, which relates primarily to 2019 and prior periods.

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 income.

Quality Incentives

At many of our health plans, revenue ranging from approximately 1% to 4% of certain health plan premiums is
earned only if certain performance measures are met. Such performance measures are generally found in our
Medicaid and MMP contracts. As described in Note 1, “Organization and Basis of Presentation–Use of Estimates,”
recognition of quality incentive premium revenue is subject to the use of estimates.

Reinsurance

We bear underwriting and reserving risks associated with our health plan subsidiaries. We limit our risk of significant
catastrophic losses by maintaining high deductible reinsurance coverage with a highly-rated, unaffiliated insurance
company (the “third-party reinsurer”). Because we remain liable to our policyholders in the event the third-party
reinsurer is unable to pay its portion of the losses, we continually monitor the third-party reinsurer’s financial
condition, including its ability to maintain high credit ratings. Intercompany transactions with our captive are
eliminated in consolidation.

Molina Healthcare, Inc. 2020 Form 10-K | 62

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 $9 million, $17 million, and $16
million for the years ended December 31, 2020, 2019, and 2018, respectively. Reinsurance recoveries amounted to
$23 million, $18 million, and $33 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Reinsurance recoverable of $17 million, $21 million, and $31 million, as of December 31, 2020, 2019, and 2018,
respectively, is included in “Receivables” in the accompanying consolidated balance sheets.

Premium Deficiency Reserves on Loss Contracts

We assess the profitability of our contracts to determine if it is probable that a loss will be incurred in the future by
reviewing current results and forecasts. For purposes of this assessment, contracts are grouped in a manner
consistent with our method of acquiring, servicing and measuring the profitability of such contracts. A premium
deficiency is recognized if anticipated future medical care and administrative costs exceed anticipated future
premium revenue, investment income and reinsurance recoveries. In the third quarter of 2020, we recognized a
premium deficiency reserve (“PDR”) of $10 million for our Medicaid contract in Puerto Rico, $4 million of which was
amortized in the fourth quarter of 2020 to offset losses the PDR was established to cover. As described in Note 1,
“Organization and Basis of Presentation,” we exited Puerto Rico’s Medicaid program when our contract expired on
October 31, 2020. No premium deficiency reserves were recorded as of December 31, 2019.

Income Taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax
rates expected to be in effect during the year in which the basis differences reverse. Valuation allowances are
established when management determines it is more likely than not that some portion, or all, of the deferred tax
assets will not be realized. For further discussion and disclosure, see Note 12, “Income Taxes.”

Taxes Based on Premiums

Health Insurer Fee (“HIF”). Under the Affordable Care Act, the federal government imposed an annual fee, or excise
tax, on health insurers for each calendar year (the “HIF”).

The HIF was allocated to health insurers based on each health insurer's share of net premiums for all U.S. health
insurers in the year preceding the assessment, and was not deductible for income tax purposes. Our HIF liability for
2020 was $277 million, which was settled in September 2020. Public Law No. 115-120 provided for a HIF
moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. Due to the reinstatement of the
HIF in 2020, our effective tax rate was higher in 2020 compared with 2019. The Further Consolidated Appropriations
Act, 2020 repealed the HIF effective for years after 2020.

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
income.

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 final
maturities of less than 10 years, or less than 10 years average life for structured securities. Restricted investments
are invested principally in cash, cash equivalents and U.S. Treasury securities. Concentration of credit risk with
respect to accounts receivable is limited because our payors consist principally of the federal government, and
governments of each state in which our health plan subsidiaries operate.

Risks and Uncertainties

Our profitability depends in large part on our ability to accurately predict and effectively manage medical care costs.
We continually review our medical costs in light of our underlying claims experience and revised actuarial data.
However, several factors could adversely affect medical care costs. These factors, which include changes in
healthcare 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.

Molina Healthcare, Inc. 2020 Form 10-K | 63

We operate health plans primarily as a direct contractor with the states, and in Los Angeles County, California, as a
subcontractor to another health plan holding a direct contract with the state. We are therefore dependent upon a
relatively 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. In addition, 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.

The following table summarizes premium revenue by state health plan for the periods presented:

Year Ended December 31,

2020

2019

2018

Amount

% of Total

Amount

% of Total

Amount

% of Total

(Dollars in millions)

2,109

643

1,328

654

1,587

2,962

3,085

3,169

2,762

11.5% $

3.5

7.3

3.6

8.7

16.2

16.9

17.3

15.0

2,266

734

1,002

—

1,624

2,553

2,991

2,695

2,343

14.0% $

4.5

6.2

—

10.0

15.8

18.5

16.6

14.4

2,150

1,790

793

—

1,601

2,388

3,244

2,361

3,285

12.2%

10.2

4.5

—

9.1

13.6

18.4

13.4

18.6

18,299

100.0% $

16,208

100.0% $

17,612

100.0%

California

Florida

Illinois

Kentucky

Michigan

Ohio

Texas

Washington
Other (1)
Total

_______________________

(1)

“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, South Carolina, Utah and Wisconsin health
plans, which were immaterial to our consolidated results of operations.

Recent Accounting Pronouncements Adopted

Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, which was subsequently modified by several ASUs issued in 2018 and 2019. We adopted
Topic 326 effective January 1, 2020, using the modified retrospective approach. Under this method we recognized
the cumulative effect of adopting the standard as an adjustment to the opening balance of retained earnings on
January 1, 2020, which was immaterial.

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and
exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other
transactions affected by a change in the reference rate from the London Interbank Offered Rate (“LIBOR”) or
another reference rate expected to be discontinued, if certain conditions are met. ASU 2020-04 is effective
immediately and expires after December 31, 2022. We are evaluating the effect of reference rate reform and this
guidance on our contracts and other transactions.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the
American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not
have, nor does management expect such pronouncements to have, a significant impact on our present or future
consolidated financial statements.

Molina Healthcare, Inc. 2020 Form 10-K | 64

3. Net Income Per Share

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

Numerator:

Net income

Denominator:

Shares outstanding at the beginning of the period

Weighted-average number of shares issued:

Stock purchases

Stock-based compensation
Exchange of convertible senior notes (1)
Conversion of convertible senior notes (1)
Denominator for basic net income per share

Effect of dilutive securities:

Stock-based compensation
Warrants (2)
Convertible senior notes (1)

Denominator for diluted net income per share

Net income per share - Basic (3)
Net income per share - Diluted (3)

_______________________________

Year Ended December 31,

2020

2019

2018

(In millions, except net income per share)

673 $

737 $

707

61.9

(3.0)

0.1

—

59.0

0.9

—

59.9

62.1

—

0.1

—

62.2

0.6

1.4

—

64.2

59.3

—

0.2

1.4

0.2

61.1

0.3

4.8

0.4

66.6

11.40 $

11.23 $

11.85 $

11.47 $

11.57

10.61

(1)
“Convertible senior notes” in this table refer to the 1.625% convertible senior notes due 2044 that were settled in 2018.
(2) For more information regarding the warrants, including partial termination transactions, refer to Note 13, “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 per share because to
do so would have been anti-dilutive.
(3) Source data for calculations in thousands.

4. Business Combinations

In the last half of 2020, we closed on three business combinations in the Health Plans segment, consistent with our
strategy to grow in our existing markets and expand into new markets. For these transactions, we applied the
acquisition method of accounting, where the total purchase price was allocated, or preliminarily allocated, to the
tangible and intangible assets acquired and liabilities assumed, based on their fair values as of the acquisition
dates. We expect to complete the final determination of the purchase price allocations as soon as practicable, but
no later than one year following the acquisitions’ closing dates in accordance with Accounting Standards
Codification Topic 805, Business Combinations. Measurement period adjustments will be recorded in the period in
which they are determined, as if they had been completed at the acquisition date.

Acquisition costs amounted to $16 million in the aggregate for the year ended December 31, 2020, and were
recorded as “General and administrative expenses” in the accompanying consolidated statements of income.

Molina Healthcare, Inc. 2020 Form 10-K | 65

Magellan Complete Care is a managed care organization serving members in six states, including Medicaid
members in Arizona and statewide in Virginia, and integrated acute care members in Florida. Through its Senior
Whole Health branded plans, Magellan Complete Care provides fully integrated plans for Medicaid and Medicare
dual beneficiaries in Massachusetts, as well as managed long-term care in New York. As of December 31, 2020,
Magellan Complete Care served approximately 200,000 members in its managed care plans. Magellan Complete
Care also provides consultative services to participants who self-direct their care through Wisconsin’s long-term
services and supports (“LTSS”) program. For the year ended December 31, 2020, Magellan Complete Care’s total
2020 revenue was approximately $2.9 billion.

Because this acquisition closed on December 31, 2020, Magellan Complete Care’s operating results were
insignificant to our consolidated results of operations for the year ended December 31, 2020. If we had acquired
Magellan Complete Care on January 1, 2019, our total revenue and earnings for the year ended December 31,
2019, would have been approximately $19.6 billion and $772 million, respectively, and our total revenue and
earnings for the year ended December 31, 2020, would have been approximately $22.4 billion and $833 million,
respectively. These amounts were computed after adjusting the results of Magellan Complete Care to reflect the
additional amortization that would have been charged assuming the fair value adjustments to intangible assets and
liabilities had been applied beginning on January 1, 2019, together with the consequential tax effects. The pro forma
results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition. Accordingly, the
unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on
January 1, 2020, or January 1, 2019, and is not a projection of future results.

The valuation of the assets acquired, and liabilities assumed has not yet been finalized because the acquisition
closed on December 31, 2020. As a result, provisional estimates have been recorded and are subject to change,
primarily for accounts that include the use of estimates, such as medical claims and benefits payable, receivables,
amounts due government agencies, certain acquired intangible assets, and certain tax assets and liabilities.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents
the estimated future economic benefits arising from other assets acquired that could not be individually identified
and separately recognized. Such assets include synergies we expect to achieve, such as the use of our existing
infrastructure to support the added membership, and future economic benefits arising from the assembled
workforce. Approximately 27% of the goodwill is deductible for income tax purposes. The following table
summarizes the provisional fair values assigned to assets acquired and liabilities assumed.

Assets acquired:

Cash and cash equivalents

Investments

Receivables

Prepaid expenses and other current assets

Property and equipment

Intangible assets

Goodwill

Restricted investments

Other assets

Liabilities assumed:

Medical claims and benefits payable

Amounts due government agencies

Accounts payable, accrued and other long-term liabilities

Deferred income taxes

Net purchase price paid

December 31,
2020

(In millions)

310

312

166

191

488

(294)

(143)

(84)

(20)

1,008

Kentucky. On September 1, 2020, we closed on the acquisition of certain assets of Passport Health Plan, Inc., a
Medicaid health plan. Effective on that same date, the Kentucky Medicaid agency approved the novation of
Passport’s Medicaid contract to Molina Healthcare of Kentucky, Inc., thereby ensuring continuity of care for
Passport’s Medicaid members. As of December 31, 2020, our Kentucky health plan had 337,000 Medicaid

Molina Healthcare, Inc. 2020 Form 10-K | 66

members. The total purchase price was $66 million, which included our initial cash payment of $20 million in
September 2020, plus $46 million in contingent consideration payable to the seller. See further information
regarding contingent consideration in Note 5, “Fair Value Measurements.” We recorded goodwill of $30 million, all of
which is deductible for income tax purposes. The goodwill recorded relates to future economic benefits arising from
the assembled workforce, and the future growth associated with the member contract rights that are incremental to
the contract rights identified.

New York. On July 1, 2020, we closed on the acquisition of certain assets of YourCare Health Plan, Inc., a Medicaid
health plan operating in certain regions of New York, for a cash purchase price of $42 million. As a result of this
transaction, we added approximately 47,000 Medicaid members in New York. We recorded goodwill of $31 million,
substantially all of which is deductible for income tax purposes. The goodwill recorded relates to future economic
benefits arising from expected synergies to be achieved, including the use of our existing infrastructure to support
the added membership.

Intangible Assets Acquired

The table below presents intangible assets acquired, by major class, for the three acquisitions.

Contract rights - member list

Provider network

Trade name

Fair Value

Life

Weighted-
Average Life

(In millions)

(Years)

193

5 - 10

10 - 16

235

5.3

10.0

15.4

6.5

5. Fair Value Measurements

We consider the carrying amounts of current assets and current liabilities to approximate their fair values because
of the relatively short period of time between the origination of these instruments and their expected realization or
payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in
measuring fair value according to a three-tier fair value hierarchy as follows:

Level 1 — Observable Inputs. Level 1 financial instruments are actively traded and therefore the fair value for these
securities is based on quoted market prices for identical securities in active markets.

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.

Level 3 — Unobservable Inputs. Level 3 financial instruments are valued using unobservable inputs that represent
management’s best estimate of what market participants would use in pricing the financial instrument at the
measurement date. As of December 31, 2020, our Level 3 financial instruments consisted of contingent
consideration liabilities. As of December 31, 2019, our Level 3 financial instruments consisted of derivative financial
instruments.

The net changes in fair value of Level 3 financial instruments are reported in “Other” operating expenses in our
consolidated statements of income. In the year ended December 31, 2020, we recognized a loss of $6 million,
primarily for the increase in the fair value of the contingent consideration liability described below, because the
opening 2021 enrollment for our Kentucky health plan was higher than our estimate as of September 30, 2020. In
the year ended December 31, 2019, the net changes in fair value of Level 3 financial instruments were insignificant
to our results of operations.

Molina Healthcare, Inc. 2020 Form 10-K | 67

Our financial instruments measured at fair value on a recurring basis at December 31, 2020, were as follows:

Corporate debt securities

Mortgage-backed securities

Asset-backed securities

Municipal securities

U.S. Treasury notes

Total assets

Contingent consideration liabilities

Total liabilities

Total

Level 1

Level 2

Level 3

1,256 $

— $

1,256 $

(In millions)

392

132

—

392

132

1,875 $

— $

1,875 $

46 $

— $

Our financial instruments measured at fair value on a recurring basis at December 31, 2019, were as follows:

Corporate debt securities

Mortgage-backed securities

Asset-backed securities

Municipal securities

U.S. Treasury notes

Government-sponsored enterprise securities (“GSEs”)

Certificate of deposit

Other

Subtotal

Call option derivative asset

Total assets

Conversion option derivative liability

Total liabilities

Contingent Consideration Liabilities

Total

Level 1

Level 2

Level 3

1,178 $

— $

1,178 $

(In millions)

420

127

1,946

—

420

127

1,946

—

1,975 $

— $

1,946 $

29 $

— $

—

As of December 31, 2020, our Level 3 financial instruments recorded at fair value on a recurring basis included
contingent consideration liabilities of $46 million, in connection with the Kentucky acquisition described in Note 4,
“Business Combinations.” As of December 31, 2020, the contingent consideration fair value was estimated primarily
based on an amount we expect to pay the seller for members enrolled in our Kentucky health plan as of January 1,
2021, over a minimum threshold. Half this amount is payable later in 2021, with the remainder payable in early
2022, subject to review and agreement among us and the seller. The second half payment is contingent upon the
outcome of certain legal challenges. The current portion is reported in “Accounts payable, accrued liabilities and
other,” and the non-current portion is reported in “Other long-term liabilities,” in the accompanying consolidated
balance sheets. Contingent consideration liabilities are remeasured to fair value each quarter until the contingencies
are resolved with fair value adjustments, if any, recorded to operations.

Molina Healthcare, Inc. 2020 Form 10-K | 68

Derivatives

The following table summarizes the fair values and the presentation of our derivative financial instruments in the
accompanying consolidated balance sheets:

Balance Sheet Location

December 31,

2020

2019

(In millions)

Derivative asset:

Call Option

Current assets: Prepaid expenses and other current assets

— $

Derivative liability:

Conversion Option

Current liabilities: Accounts payable, accrued liabilities and other

— $

Our derivative financial instruments did not qualify for hedge treatment. Gains and losses for our derivative financial
instruments are presented individually in the accompanying consolidated statements of cash flows, “Supplemental
cash flow information.”

In the year ended December 31, 2020, we received $27 million for the settlement of the call option derivative asset,
and we paid $39 million to settle the outstanding $12 million principal amount of the 1.125% Convertible Notes, and
settle the related conversion option. For more information, refer to Notes 11, “Debt,” and 13 “Stockholders' Equity.”

Fair Value Measurements – Disclosure Only

The carrying amounts and estimated fair values of our notes payable 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.

4.375% Notes

5.375% Notes

3.875% Notes
4.875% Notes (1)
Term Loan Facility (1)
1.125% Convertible Notes (1)

Total

December 31, 2020

December 31, 2019

Carrying
Amount

Fair Value

Carrying
Amount

Fair Value

789 $

843 $

— $

(In millions)

697

641

—

742

691

—

696

—

327

220

—

745

—

340

220

2,127 $

2,276 $

1,255 $

1,347

_______________________________

(1) For more information on debt repayments, refer to Note 11, “Debt.”

Molina Healthcare, Inc. 2020 Form 10-K | 69

6. Investments

Available-for-Sale

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:

Corporate debt securities

Mortgage-backed securities

Asset-backed securities

Municipal securities

U.S. Treasury notes

Total

Corporate debt securities

Mortgage-backed securities
Asset-backed securities

Municipal securities

U.S. Treasury notes

GSEs

Certificate of deposit

Other

Total

Amortized
Cost

December 31, 2020

Gross
Unrealized

Gains

Losses

(In millions)

Estimated
Fair Value

1,220 $

36 $

— $

1,256

383

130

—

392

132

1,826 $

50 $

1 $

1,875

Amortized
Cost

1,174 $
420

126

December 31, 2019

Gross
Unrealized

Gains

Losses

(In millions)

5 $
1
1

—

Estimated
Fair Value

1 $
1

—

1,178
420

127

1,941 $

7 $

2 $

1,946

The contractual maturities of our current investments as of December 31, 2020 are summarized below:

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years

Total

Amortized
Cost

Estimated
Fair Value

(In millions)

474 $

892

132

328

475

926

137

337

1,826 $

1,875

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 amounted to
$6 million and $13 million in the years ended December 31, 2020 and 2019, respectively. Gross realized investment
losses were insignificant in the years ended December 31, 2020 and 2019. Gross realized investment gains and
losses for the year ended December 31, 2018 were insignificant.

We have determined that unrealized losses at December 31, 2020 and 2019 primarily resulted from fluctuating
interest rates, rather than a deterioration of the creditworthiness of the issuers. Therefore, we determined that an
allowance for credit losses was not necessary. 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. 2020 Form 10-K | 70

The following table summarizes those available-for-sale investments that have been in a continuous loss position
for less than 12 months. No investments have been in a continuous loss position for 12 months or more as of
December 31, 2020, and 2019.

In a Continuous Loss Position for
Less than 12 Months as of December 31, 2020

In a Continuous Loss Position for
Less than 12 Months as of December 31, 2019

Estimated
Fair Value

Unrealized
Losses

Total Number
of Positions

Estimated
Fair Value

Unrealized
Losses

Total Number
of Positions

(Dollars in millions)

Mortgage-backed securities

Corporate debt securities

Total

77 $

—

77 $

—

21 $

143 $

—

222

21 $

365 $

167

239

Held-to-Maturity

Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and
deposits required by government authorities primarily in cash, cash equivalents, 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. Our held-to-
maturity restricted investments are carried at amortized cost, which approximates fair value, of which $134 million
will mature in one year or less, and $2 million will mature in after one through five years. The following table
presents the balances of restricted investments:

Florida

New Mexico

New York

Ohio

Other

Magellan Complete Care

Total Health Plans segment

December 31,

2020

2019

(In millions)

12 $

136 $

—

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. Software developed for internal use is capitalized.
Furniture and equipment are generally depreciated using the straight-line method over estimated useful lives
ranging from three to seven years. Software is generally amortized over its estimated useful life of three years.
Leasehold improvements are amortized over the term of the lease, or over their useful lives from five to 10 years,
whichever is shorter. Buildings are depreciated over their estimated useful lives of 31.5 to 40 years.

Molina Healthcare, Inc. 2020 Form 10-K | 71

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

Capitalized software

Furniture and equipment

Building and improvements

Land

Magellan Complete Care

Total cost

Less: accumulated amortization - capitalized software

Less: accumulated depreciation and amortization - furniture, equipment, building, and

improvements

Total accumulated depreciation and amortization

ROU assets - finance leases

Property, equipment, and capitalized software, net

December 31,

2020

2019

(In millions)

475 $

221

752

(385)

(192)

(577)

216

391 $

421

213

—

687

(351)

(179)

(530)

228

385

The following table presents all depreciation and amortization recognized in our consolidated statements of income:

Recorded in depreciation and amortization:

Amortization of capitalized software

Amortization of finance leases

Depreciation and amortization of furniture, equipment, building, and

improvements

Amortization of intangible assets

Subtotal

Recorded in cost of service revenue:

Amortization of capitalized software and deferred contract costs

Year Ended December 31,

2020

2019

2018

(In millions)

38 $

33 $

—

Total depreciation and amortization recognized

88 $

89 $

—

127

8. Leases

We are a party to operating and finance leases primarily for our corporate and health plan offices. Our operating
leases have remaining lease terms up to 8 years, some of which include options to extend the leases for up to 10
years. As of December 31, 2020, the weighted average remaining operating lease term is 4 years.

Our finance leases have remaining lease terms of 1 year to 18 years, some of which include options to extend the
leases for up to 25 years. As of December 31, 2020, the weighted average remaining finance lease term is 15
years.

As of December 31, 2020, the weighted-average discount rate used to compute the present value of lease
payments was 5.2% for operating lease liabilities, and 6.5% for finance lease liabilities. The components of lease
expense for the years ended December 31, 2020, and 2019, are presented in the following table. Rental expense
related to operating leases amounted to $62 million for the year ended December 31, 2018.

Molina Healthcare, Inc. 2020 Form 10-K | 72

Operating lease expense

Finance lease expense:

Amortization of ROU assets

Interest on lease liabilities

Total finance lease expense

Supplemental consolidated cash flow information related to leases follows:

Cash used in operating activities:

Operating leases

Finance leases

Cash used in financing activities:

Finance leases

ROU assets recognized in exchange for lease obligations:

Operating leases

Finance leases

Year Ended December 31,

2020

2019

(In millions)

28 $

19 $

34 $

Year Ended December 31,

2020

2019

(In millions)

30 $

7 $

Supplemental information related to leases, including location of amounts reported in the accompanying
consolidated balance sheets, follows:

Operating leases:

ROU assets

Other assets

Other assets - Magellan Complete Care

Total other assets

Lease liabilities

Accounts payable and accrued liabilities (current)

Other long-term liabilities (non-current)

Magellan Complete Care

Total operating lease liabilities

Finance leases:

ROU assets

Property, equipment, and capitalized software, net

Lease liabilities

Accounts payable and accrued liabilities (current)

Finance lease liabilities (non-current)

Total finance lease liabilities

December 31,

2020

2019

(In millions)

58 $

71 $

21 $

76 $

216 $

12 $

225

237 $

245

—

228

231

239

Molina Healthcare, Inc. 2020 Form 10-K | 73

Maturities of lease liabilities as of December 31, 2020, were as follows:

2021

2022

2023

2024

2025

Thereafter

Subtotal - undiscounted lease payments

Less imputed interest

Total

9. Goodwill and Intangible Assets, Net

Goodwill

Operating

Leases

Finance

Leases

(In millions)

29 $

(8)

76 $

266

383

(146)

237

The following table presents the changes in the carrying amounts of goodwill, for the periods presented. All goodwill
is recorded in the Health Plans segment.

Balance, December 31, 2018

Acquisitions

Dispositions

Impairment and other

Balance, December 31, 2019

Acquisitions

Dispositions

Impairment and other

Balance, December 31, 2020

(In millions)

143

—

143

549

—

692

For the Health Plans segment, gross goodwill amounted to $994 million and $445 million, as of December 31, 2020
and 2019, respectively. Accumulated impairment losses amounted to $302 million at each of December 31, 2020
and 2019, respectively. The changes in the carrying amounts of both goodwill and intangible assets, net, in 2020,
was due to the acquisitions described in Note 4, “Business Combinations.”

Intangible Assets, Net

The following table provides the details of identified intangible assets, by major class, for the periods presented. All
intangible assets, net, are recorded in the Health Plans segment.

December 31, 2020

December 31, 2019

Cost

Accumulated
Amortization

Carrying
Amount

Cost

Accumulated
Amortization

Carrying
Amount

(In millions)

Contract rights and licenses

370 $

168 $

202 $

179 $

156 $

Provider networks

Trade name

Total

—

432 $

183 $

249 $

199 $

170 $

—

As of December 31, 2020, we estimate that our intangible asset amortization will be approximately $46 million in
2021, $44 million in 2022, 2023 and 2024, and $43 million in 2025.

Molina Healthcare, Inc. 2020 Form 10-K | 74

10. Medical Claims and Benefits Payable

The following table provides the details of our medical claims and benefits payable as of the dates indicated.

December 31,

2020

2019

2018

(In millions)

Fee-for-service claims incurred but not paid (“IBNP”)

1,647 $

1,406 $

1,562

Pharmacy payable

Capitation payable

Other

Magellan Complete Care

Total

157

528

294

126

267

—

115

232

—

2,696 $

1,854 $

1,961

“Other” medical claims and benefits payable include amounts payable to certain providers for which we act as an
intermediary on behalf of various government agencies without assuming financial risk. Such receipts and payments
do not impact our consolidated statements of income. Non-risk provider payables amounted to $235 million, $132
million and $107 million, as of December 31, 2020, 2019, and 2018, 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 years” represent
the amount by which our original estimate of medical claims and benefits payable at the beginning of the year were
more than the actual liabilities, based on information (principally the payment of claims) developed since those
liabilities were first reported.

Medical claims and benefits payable, beginning balance

1,854 $

1,961 $

2,192

Year Ended December 31,

2020

2019

2018

(In millions)

Components of medical care costs related to:

Current year
Prior years (1)

Total medical care costs

Payments for medical care costs related to:

Current year

Prior years

Total paid

Acquisition - Magellan Complete Care

Change in non-risk and other provider payables

15,939

14,176

(119)

(271)

15,820

13,905

13,871

1,507

15,378

294

106

12,554

1,482

14,036

—

15,478

(341)

15,137

13,671

1,710

15,381

—

Medical claims and benefits payable, ending balance

2,696 $

1,854 $

1,961

________________
(1) December 31, 2018, includes the 2018 benefit of the 2017 Marketplace CSR reimbursement of $81 million.

Our estimates of medical claims and benefits payable recorded at December 31, 2020, 2019 and 2018 developed
favorably by approximately $119 million, $271 million and $341 million in 2020, 2019 and 2018, respectively.

The favorable prior year development recognized in 2020 was primarily due to lower than expected utilization of
medical services by our Medicaid members, and improved operating performance. Consequently, the ultimate costs
recognized in 2020 were lower than our original estimates in 2019, which was not discernible until additional
information was provided, and as claims payments were processed.

The favorable prior year development recognized in 2019 was primarily due to lower than expected utilization of
medical services by our Medicaid members, and improved operating performance. Consequently, the ultimate costs
recognized in 2019 were lower than our original estimates in 2018, which was not discernible until additional
information was provided, and as claims payments were processed.

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

Molina Healthcare, Inc. 2020 Form 10-K | 75

prior period development was primarily due to lower than expected utilization of medical services by our Medicaid
and Marketplace members and improved operating performance. Consequently, the ultimate costs recognized in
2018 were lower than our original estimates in 2017, which was not discernible until additional information was
provided, and as claims payments were processed.

The following tables provide information about incurred and paid claims development as of December 31, 2020, 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

2018

2019

2020

Total IBNP

Cumulative
number of
reported claims

(Unaudited)

15,478 $

2018

2019

2020

(In millions)

15,245 $

14,176

15,233 $

14,083

15,939

45,255 $

1,593

1,631

110

100

Cumulative Paid Claims and Allocated Claims Adjustment Expenses

Benefit Year

2018

2019

2020

(Unaudited)

(In millions)

13,752 $

2018

2019

2020

15,220 $

12,554

15,222

14,056

13,871

43,149

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

45,255

Less: cumulative paid claims and allocated claims adjustment

2020

(In millions)

expenses

All outstanding liabilities before 2018

Magellan Complete Care

Non-risk and other provider payables

Medical claims and benefits payable

11. Debt

(43,149)

294

280

2,696

Contractual maturities of debt, as of December 31, 2020, are illustrated in the following table. All amounts represent
the principal amounts of the debt instruments outstanding.

Total

2021

2022

2023

2024

2025

Thereafter

(In millions)

4.375% Notes due 2028

800 $

— $

5.375% Notes due 2022

3.875% Notes due 2030

700

650

—

700

—

800

—

650

Total

2,150 $

— $

700 $

— $

1,450

Molina Healthcare, Inc. 2020 Form 10-K | 76

All debt is held at the parent which is reported in the Other segment. 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

Term loan facility

Total (1)

Non-current portion of long-term debt:

4.375% Notes due 2028

5.375% Notes due 2022

3.875% Notes due 2030

4.875% Notes due 2025

Term loan facility

Less: debt issuance costs

Total

______________________

December 31,

2020

2019

(In millions)

— $

—

— $

800 $

700

650

—

(23)

—

700

—

330

214

(7)

2,127 $

1,237

(1) Reported in “Accounts payable, accrued liabilities and other.”

Credit Agreement

In June 2020, we entered into a credit agreement (the “Credit Agreement”) that replaced our prior credit agreement.
The terms of the Credit Agreement are substantially similar to the terms of the prior agreement. Among various
provisions, significant changes incorporated to the Credit Agreement included:

•
•
•

•

•
•

An increase of the revolving credit facility (the “Credit Facility”) from $500 million to $1.0 billion;
A $15 million swingline sub-facility and a $100 million letter of credit sub-facility;
An increase of incremental term loans available to finance certain acquisitions from $150 million to
$500 million, plus an unlimited amount as long as our consolidated net leverage ratio is not greater than
3:1;
The ability to engage in acquisitions where the consummation of such acquisitions is not conditioned on the
availability of, or on obtaining, third-party financing;
Termination of the term loan facility under the prior credit agreement; and
LIBOR succession provisions.

The Credit Agreement has a term of five years, and all amounts outstanding will be due and payable on June 8,
2025. Borrowings under the Credit Agreement 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 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.

The Credit Agreement contains customary non-financial and financial covenants. As of December 31, 2020, we
were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term
debt. As of December 31, 2020, no amounts were outstanding under the Credit Facility.

High-Yield Senior Notes

Our high-yield senior notes are described below. Each of these 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. In addition, each of the notes contain customary non-financial covenants and change
of control provisions.

The indentures governing the high-yield senior 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.

4.375% Notes due 2028. On June 2, 2020, we completed the private offering of $800 million aggregate principal
amount of senior notes (the “4.375% Notes”) due June 15, 2028, unless earlier redeemed. The 4.375% Notes
contain optional early redemption provisions, with redemption prices in excess of par. Interest, at a rate of 4.375%

Molina Healthcare, Inc. 2020 Form 10-K | 77

per annum, is payable semiannually in arrears on June 15 and December 15 of each year. A portion of the net
proceeds from the 4.375% Notes offering was used to repay $600 million principal amount outstanding under the
term loan facility of our prior credit agreement, and the balance is intended to be used for general corporate
purposes. Deferred issuance costs amounted to $11 million.

5.375% Notes due 2022. We have $700 million aggregate principal amount of senior notes (the “5.375% Notes”)
outstanding as of December 31, 2020, which are due November 15, 2022, unless earlier redeemed. Interest at a
rate of 5.375% per annum, is payable semiannually in arrears on May 15 and November 15.

3.875% Notes due 2030. On November 17, 2020, we completed the private offering of $650 million aggregate
principal amount of senior notes (the “3.875% Notes”) due November 15, 2030, unless earlier redeemed. The
3.875% Notes contain optional early redemption provisions, with redemption prices in excess of par. Interest, at a
rate of 3.875% per annum, is payable semiannually in arrears on May 15 and November 15 of each year,
commencing on May 15, 2021. A portion of the net proceeds from the 3.875% Notes offering was used to repay
$330 million principal amount outstanding under the 4.875% Notes, and the balance is intended to be used for
general corporate purposes. Deferred issuance costs amounted to $10 million.

4.875% Notes due 2025. In December 2020, we completed the early redemption of the entire $330 million
aggregate principal amount of senior notes (the “4.875% Notes”) that would have been due June 15, 2025. In
accordance with the indenture governing such notes, the 4.875% Notes were settled at 100% of par, plus an early
redemption premium which amounted to $8 million, plus accrued and unpaid interest. In conjunction with the
redemption, we wrote off $3 million in unamortized deferred issuance costs directly related to the 4.875% Notes.

1.125% Cash Convertible Senior Notes due 2020

In January 2020, we paid $39 million to settle the $12 million remaining principal amount outstanding of the 1.125%
cash convertible senior notes due January 15, 2020 (the “1.125% Convertible Notes”), and settled the related
conversion option.

Other Expenses (Income), Net

In the year ended December 31, 2020, we recognized an aggregate loss on debt repayment of $15 million including
costs incurred in repayment of the term loan facility, the 4.875% Notes repayment costs described above, and other
financing transactions. In the year ended December 31, 2019, we recognized a gain on debt repayment of $15
million in connection with the 1.125% Convertible Notes repayment transactions. These amounts are reported in
“Other expenses (income), net” in the accompanying consolidated statements of income.

12. Income Taxes

Income tax expense for continuing operations consisted of the following:

Current:

Federal

State

Foreign

Total current

Deferred:

Federal

State

Foreign

Total deferred

Income tax expense

Year Ended December 31,

2020

2019

2018

(In millions)

281 $

204 $

—

307

(13)

(7)

(19)

288 $

225

(1)

272

298

(3)

—

(6)

235 $

292

Molina Healthcare, Inc. 2020 Form 10-K | 78

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

Statutory federal tax (benefit) rate

State income provision (benefit), net of federal

Nondeductible health insurer fee (“HIF”)

Nondeductible compensation

Worthless stock deduction

Other

Effective tax expense rate

Year Ended December 31,

2020

2019

2018

21.0 %

1.6

6.1

1.1

—

0.2

1.4

—

1.2

—

0.6

30.0 %

24.2 %

1.2

7.3

0.7

(1.0)

—

29.2 %

The effective tax rate was not impacted by the HIF in 2019 given the HIF moratorium. Our effective tax rate is based
on expected income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in
which we operate. 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, 2020 and 2019 were as follows:

Accrued expenses and 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

Fixed assets and intangibles

Prepaid expenses

Unrealized gains and losses

Other

Total deferred income tax liabilities

Net deferred income tax asset

December 31,

2020

2019

(In millions)

52 $

—

(17)

(7)

(10)

(12)

—

(29)

69 $

—

(24)

—

(6)

(1)

(2)

(9)

At December 31, 2020, we had state net operating loss carryforwards of $189 million, which begin expiring in 2035.

At December 31, 2020, we had foreign net operating loss carryforwards of $5 million, which expire in 2031.

At December 31, 2020, we had California research and development and enterprise zone tax credit carryovers of $3
million, which will begin to expire in 2024, and foreign tax credit carryovers of $5 million, which expire in 2030.

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, 2020, $17 million of deferred tax assets did not satisfy
the recognition criteria. Therefore, we decreased our valuation allowance by $7 million, from $24 million at
December 31, 2019, to $17 million as of December 31, 2020.

Molina Healthcare, Inc. 2020 Form 10-K | 79

We recognize tax benefits only if the tax position is more likely than not to be sustained. We are subject to income
taxes in the United States, Puerto Rico, and numerous state jurisdictions. Significant judgment is required in
evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business,
there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish
reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will
be due. These reserves are established when we believe that certain positions might be challenged despite our
belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and
circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve
provisions and changes to reserves that are considered appropriate.

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

Lapse in statute of limitations

Gross unrecognized tax benefits at end of period

Year Ended December 31,

2020

2019

2018

(In millions)

(20) $

—

(20) $

(13)

(9)

(20)

The total amount of unrecognized tax benefits at December 31, 2020, 2019 and 2018 that, if recognized, would
affect the effective tax rates is $18 million in each of those respective years. We expect that during the next 12
months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $10 million
due to resolution of exams and refund claims.

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, 2020, 2019 and 2018
were insignificant.

We are under examination by the IRS for calendar years 2015 through 2017 and may be subject to examination for
calendar years 2018 and 2019. 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 2015.

13. Stockholders' Equity

Stock Purchase Programs

In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our
common stock. This program is funded with cash on hand and extends through December 31, 2021. The exact
timing and amount of any repurchase is determined by management based on market conditions and share price, in
addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law.
Under this program, pursuant to a Rule 10b5-1 trading plan, we purchased approximately 766,000 shares of our
common stock for $159 million in November and December 2020 (average cost of $208.37 per share), including
approximately 29,000 shares purchased for $6 million in late December 2020, and settled in early January 2021.

In December 2019, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our
common stock. This program was funded with existing cash on hand and was completed in March 2020. Under this
program, pursuant to a Rule 10b5-1 trading plan, we purchased approximately 3.4 million shares of our common
stock for $446 million in the first quarter of 2020 (average cost of $132.45 per share). In the first quarter of 2020, we
also paid $7 million to settle shares purchased in late December 2019.

Subsequent Event

From January 1, 2021 through February 11, 2021, we purchased approximately 577,000 shares for $122 million
(average cost of $211.65 per share).

Warrants

In connection with the 1.125% Convertible Notes settlement transaction described in Note 11, “Debt,” in the first
quarter of 2020 we entered into privately negotiated agreements to terminate the associated 310,000 warrants
outstanding for $30 million, which resulted in a reduction of additional paid-in-capital for the same amount.

Molina Healthcare, Inc. 2020 Form 10-K | 80

Share-Based Compensation

In connection with our employee stock plans, approximately 244,000 shares and 242,000 shares of common stock
were issued, net of shares used to settle employees’ income tax obligations, during the years ended December 31,
2020, and 2019, respectively. Total share-based compensation expense is reported in “General and administrative
expenses” in the accompanying consolidated statements of income, and summarized below.

2020

Year Ended December 31,

2019

(In millions)

2018

Pretax
Charges

Net-of-Tax
Amount

Pretax
Charges

Net-of-Tax
Amount

Pretax
Charges

Net-of-Tax
Amount

47 $

44 $

29 $

28 $

17 $

57 $

53 $

39 $

37 $

27 $

RSAs, PSAs and PSUs (defined below)
Employee stock purchase plan and stock

options

Total

Equity Incentive Plan

At December 31, 2020, we had employee equity incentives outstanding under our 2019 Equity Incentive Plan (the
“2019 EIP”). The 2019 EIP provides for awards, in the form of restricted and performance stock awards (“RSAs” and
“PSAs”), performance units (“PSUs”), stock options, and other stock– or cash–based awards, to eligible persons
who perform services for us. The 2019 EIP provides for the issuance of up to 2.9 million shares of our common
stock.

Stock-based awards. 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 stock-based awards in the year ended December 31, 2020, is summarized below.

Unvested balance, December 31, 2019

Granted

Vested

Forfeited

Unvested balance, December 31, 2020

Weighted
Average
Grant Date
Fair Value

102.41

127.89

98.05

113.10

118.07

RSAs

447,680 $

344,739

(172,675)

(34,660)

585,084 $

Weighted
Average
Grant Date
Fair Value

101.45

123.61

68.16

98.34

PSUs

324,078 $

188,522

(7,368)

(33,323)

471,909 $

111.04

As of December 31, 2020, total unrecognized compensation expense related to unvested RSAs and PSUs was $42
million, and $23 million, respectively, which we expect to recognize over a remaining weighted-average period of 2.2
years, and 1.2 years, respectively. This unrecognized compensation cost assumes an estimated forfeiture rate of
12.2% for non-executive employees as of December 31, 2020, based on actual forfeitures over the last 4 years.

Molina Healthcare, Inc. 2020 Form 10-K | 81

The total grant date fair value of awards granted and vested is presented in the following table.

Granted:

RSAs

PSUs

Total granted

Vested:

RSAs

PSAs

PSUs

Total vested

Year Ended December 31,

2020

2019

2018

(In millions)

44 $

67 $

33 $

20
53 $

22 $

19 $

—

23 $

21 $

—

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, 2020, is summarized below.

Number of
Shares

Weighted
Average
Exercise
Price

Aggregate
Intrinsic
Value

Weighted
Average
Remaining
Contractual
term

(Per share)

(In millions)

(Years)

Stock options outstanding as of December 31, 2019 and December 31,

2020

Stock options exercisable and expected to vest as of December 31,

2020

Exercisable as of December 31, 2020

405,000 $

64.79 $

405,000 $

64.79 $

405,000 $

64.79 $

6.4

No stock options were granted or exercised in 2020, 2019, or 2018, and as of December 31, 2020, there was no
unrecognized compensation expense related to unvested stock options.

The following is a summary of information about stock options outstanding and exercisable at December 31, 2020.

Range of Exercise Prices

$33.02

$67.33

Total

Employee Stock Purchase Plans (“ESPP”)

Options Outstanding and Exercisable

Weighted-
Average
Remaining
Contractual
Life

Weighted-
Average
Exercise
Price

(Years)

(Per share)

2.2

6.8

33.02

67.33

Number of
Shares

30,000

375,000

405,000

Under our 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 a standard option pricing model. For the years
ended December 31, 2020, 2019, and 2018, the inputs to this model were as follows: risk-free interest rates of
approximately 0.2% to 2.3%; expected volatility of approximately 31% to 51%, dividend yields of 0%, and an
average expected life of 0.5 years.

Molina Healthcare, Inc. 2020 Form 10-K | 82

14. Employee Benefit Plans

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 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 $28 million, $28 million, and $36 million in the years ended
December 31, 2020, 2019, and 2018, respectively.

We also have a non-qualified deferred compensation plan for certain key employees. Under this plan, eligible
participants may defer up to 75% of their base salary and 90% of their bonus to provide tax-deferred growth.

15. Commitments and Contingencies

Regulatory Capital Requirements and Dividend Restrictions

Our health plans, which are generally 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 healthcare coverage. The requirements take the form of risk-
based capital (“RBC”) rules which may vary from state to state. 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.

All of the states in which our health plans operate, except California, Florida, Massachusetts and New York, have
adopted the RBC rules. The RBC rules, if adopted by California, Florida, Massachusetts or New York, could
increase the minimum capital required for those states. Our Massachusetts health plan, acquired on December 31,
2020, maintains a $35 million performance bond, effective through December 31, 2021, to partially satisfy minimum
net worth requirements in that state.

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 (not including the Magellan Complete Care subsidiaries and
after intercompany eliminations), which may not be transferable to us in the form of loans, advances, or cash
dividends was approximately $1,960 million at December 31, 2020, and $1,810 million at December 31, 2019. We
estimate the Magellan Complete Care subsidiaries’ net assets that may not be transferable amounted to
approximately $420 million at December 31, 2020. 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 $644 million and $997 million as of
December 31, 2020 and 2019, respectively.

As of December 31, 2020, our health plans (not including the Magellan Complete Care subsidiaries) had aggregate
statutory capital and surplus of approximately $2,020 million compared with the required minimum aggregate
statutory capital and surplus of approximately $1,310 million. As of December 31, 2020, the aggregate and
minimum capital and surplus of the Magellan Complete Care subsidiaries amounted to approximately $420 million
and $230 million, respectively. The aggregate capital and surplus of our wholly owned subsidiaries was in excess of
these minimum capital requirements as of December 31, 2020. 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.

COVID-19 Pandemic

Molina Healthcare, Inc. 2020 Form 10-K | 83

Legal Proceedings

The healthcare 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 including, but not limited to, various employment
claims, vendor disputes and provider claims. Some of these legal actions seek monetary damages, including claims
for punitive damages, which may not be covered by insurance. We review legal matters and update our estimates of
reasonably possible losses and related disclosures, as necessary. We have accrued liabilities for legal matters for
which we deem the loss to be both probable and reasonably estimable. These liability estimates could change as a
result of further developments of the matters. The outcome of legal actions is inherently uncertain. An adverse
determination in one or more of these pending matters could have an adverse effect on our consolidated financial
position, results of operations, or cash flows.

Professional Liability Insurance

We carry medical professional liability insurance for healthcare services rendered in the primary care institutions
that we manage. In addition, we carry managed care errors and omissions insurance for all managed care services
that we provide.

16. Segments

As of December 31, 2020, we had two reportable segments: the Health Plans segment, and the Other segment.
Our reportable segments are consistent with how we currently manage the business and view the markets we
serve. The Health Plans reportable segment includes our regulated health plan operating segments, along with the
recently acquired Magellan Complete Care health plans operating segment. Because this acquisition closed on
December 31, 2020, Magellan Complete Care’s operating results were insignificant to our consolidated results of
operations for the year ended December 31, 2020. Management will continue to evaluate the composition of its
operating and reportable segments for future filings. The Other segment, which is insignificant to our consolidated
results of operations, includes certain corporate amounts not associated with or allocated to the Health Plans
segment. In 2018, the Other segment also included the results of certain unregulated subsidiaries we sold in late
2018.

Molina Healthcare, Inc. 2020 Form 10-K | 84

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.

The key metrics used to assess the performance of our Health Plans segment are premium revenue, medical
margin and MCR. MCR 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 also referred to as “Medical Margin.”

2020

Total revenue

Margin

Total assets

2019

Total revenue

Margin

Total assets

2018

Total revenue

Margin

Total assets

Health Plans

Other

Consolidated

(In millions)

19,415 $

8 $

19,423

2,479

8,359

—

1,173

2,479

9,532

16,815 $

14 $

16,829

2,303

5,265

—

1,522

2,303

6,787

18,471 $

419 $

18,890

2,475

6,165

989

2,518

7,154

The following table reconciles margin by segment to consolidated income before income tax expense:

Margin:

Health Plans

Other

Total margin

Add: other operating revenues (1)
Less: other operating expenses (2)

Operating income

Less: other expenses, net

Year Ended December 31,

2020

2019

2018

(In millions)

2,479 $

2,303 $

—

2,479

1,124

—

2,303

621

2,475

2,518

871

(2,525)

(1,880)

(2,258)

1,078

117

1,044

1,131

132

Income before income tax expense
______________________
(1) Other operating revenues include premium tax revenue, health insurer fees reimbursed, Marketplace risk corridor judgment,

972 $

961 $

999

investment income and other revenue.

(2) Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fees,

depreciation and amortization, and other costs.

Molina Healthcare, Inc. 2020 Form 10-K | 85

17. Condensed Financial Information of Registrant

The condensed balance sheets as of December 31, 2020 and 2019, and the related condensed statements of
income, comprehensive income and cash flows for each of the three years in the period ended December 31, 2020
for our parent company Molina Healthcare, Inc. (the “Registrant”), are presented below.

Condensed Balance Sheets

December 31,

2020

2019

(In millions, except per-share
data)

Current assets:

Cash and cash equivalents

Investments

Receivables

Due from affiliates

Prepaid expenses and other current assets

Total current assets

Property, equipment, and capitalized software, net

Goodwill and intangible assets, net

Investments in subsidiaries

Deferred income taxes

Advances to related parties and other assets

ASSETS

575 $

114

825

339

369

3,228

836

161

1,123

327

2,225

Total assets

Current liabilities:

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable, accrued liabilities and other

Total current liabilities

Long-term debt

Finance lease liabilities

Other long-term liabilities

Total liabilities

Stockholders’ equity:

Common stock, $0.001 par value; 150 million shares authorized; outstanding: 59 million

shares at December 31, 2020, and 62 million at December 31, 2019

Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and

outstanding

Additional paid-in capital

Accumulated other comprehensive income

Retained earnings

Total stockholders’ equity

4,849 $

3,774

338 $

338

2,127

225

2,753

—

199

1,860

2,096

307

1,237

231

1,814

—

175

1,781

1,960

3,774

Total liabilities and stockholders’ equity

4,849 $

See accompanying notes.

Molina Healthcare, Inc. 2020 Form 10-K | 86

Condensed Statements of Income

Year Ended December 31,

2020

2019

2018

(In millions)

1,208 $

1,038 $

1,221

1,089

1,056

937

1,138

1,155

1,007

Revenue:

Administrative services fees

Investment income and other revenue

Total revenue

Expenses:

General and administrative expenses

Depreciation and amortization

Other operating expenses, net

Total operating expenses

Operating income

Interest expense

Other expenses (income), net

Total other expenses, net

1,180

1,004

1,082

102

117

(76)

(5)

(71)

744

673 $

(15)

(20)

(29)

766

737 $

114

131

(58)

(14)

(44)

751

707

Loss before income tax (benefit) expense and equity in net earnings of

subsidiaries

Income tax (benefit) expense

Net loss before equity in net earnings of subsidiaries

Equity in net earnings of subsidiaries

Net income

Condensed Statements of Comprehensive Income

Net income

Other comprehensive income (loss):

Unrealized investment income (loss)

Less: effect of income taxes

Other comprehensive income (loss), net of tax

Year Ended December 31,

2020

2019

2018

(In millions)

673 $

737 $

707

(3)

(1)

(2)

Comprehensive income

706 $

749 $

705

See accompanying notes.

Molina Healthcare, Inc. 2020 Form 10-K | 87

Condensed Statements of Cash Flows

Year Ended December 31,

2020

2019

2018

(In millions)

Operating activities:

Net cash provided by operating activities

59 $

64 $

118

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 paid in business combinations

Net cash received from sale of subsidiaries

Change in amounts due to/from affiliates

Other, net

(107)

635

(188)

282

(74)

(1,028)

—

(68)

(43)

1,373

(152)

(56)

—

Net cash (used in) provided by investing activities

(545)

1,254

Financing activities:

Proceeds from senior notes offering, net of issuance costs

1,429

Common stock purchases

Repayment of term loan facility

Proceeds from borrowings under term loan facility

Repayment of senior notes

Cash paid for partial termination of warrants

Cash paid for partial settlement of conversion option

Cash received for partial settlement of call option

Repayment of principal amount of convertible notes

Repayment of credit facility

Other, net

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

(606)

(600)

380

(338)

(30)

(27)

(12)

—

225

(261)

836

—

(47)

—

220

—

(514)

(578)

578

(240)

—

(552)

766

Cash and cash equivalents at end of period

575 $

836 $

See accompanying notes.

(145)

298

(136)

388

(22)

—

242

—

631

—

(549)

(623)

623

(362)

(300)

(1,192)

(443)

513

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. 2020 Form 10-K | 88

resources, marketing, purchasing, risk management, actuarial, finance, accounting, compliance, 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 2020, 2019, and 2018 for these services amounted to
$1,208 million, $1,038 million, and $1,137 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. 2020 Form 10-K | 89

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, 2020, 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets; (2) 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 (3) 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,
2020, based on criteria described in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”).

On September 1, 2020, we completed our acquisition of certain assets of Passport Health Plan, Inc. (“Passport”).
On December 31, 2020, we completed our acquisition of the Magellan Complete Care line of business of Magellan
Health, Inc. We are in the process of evaluating the existing controls and procedures of Passport and Magellan
Complete Care, and integrating Passport and Magellan Complete Care into our internal control over financial
reporting. In accordance with SEC Staff guidance permitting a company to exclude an acquired business from
management’s assessment of the effectiveness of internal control over financial reporting for the year in which the
acquisition is completed, we have excluded the business that we acquired in the Passport and Magellan Complete
Care acquisitions from our assessment of the effectiveness of internal control over financial reporting as of
December 31, 2020. The business that we acquired in the Passport and Magellan Complete Care acquisitions, in
the aggregate, constituted 11% and 19% of our total and net assets, respectively, as of December 31, 2020, and 3%
and 1% of our revenues and net income, respectively, for the year ended December 31, 2020. The scope of

Molina Healthcare, Inc. 2020 Form 10-K | 90

management’s assessment of the effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2020, includes all of our consolidated operations except for those disclosure
controls and procedures of Passport and Magellan Complete Care that are subsumed by internal control over
financial reporting.

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, 2020, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

Molina Healthcare, Inc. 2020 Form 10-K | 91

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, 2020, 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, 2020, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the internal controls of the Passport operations and Magellan Complete Care, which are included in the
2020 consolidated financial statements of Molina Healthcare, Inc. and constituted 11% and 19% of total and net
assets, respectively, as of December 31, 2020 and 3% and 1% of revenues and net income, respectively, for the
year then ended. Our audit of internal control over financial reporting of Molina Healthcare, Inc. also did not include
an evaluation of the internal control over financial reporting of the Passport operations and Magellan Complete
Care.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the
related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of
the three years in the period ended December 31, 2020, and the related notes and our report dated February 16,
2021, 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

Molina Healthcare, Inc. 2020 Form 10-K | 92

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 16, 2021

Molina Healthcare, Inc. 2020 Form 10-K | 93

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, 2020 and 2019, the related consolidated statements of income, comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, 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 at December 31,
2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2020, 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, 2020, 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 16, 2021, 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 included 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which
they relate.

Description of
the matter

Valuation of incurred but not paid fee-for-service claims

As of December 31, 2020, the Company’s liability for fee-for-service claims incurred but not
paid (“IBNP”), excluding IBNP acquired from the Magellan Complete Care (“MCC”) acquisition,
comprised $1,647 million of the $2,696 million of Medical Claims and Benefits Payable. As
discussed in Note 10 to the consolidated financial statements, the Company’s IBNP liability is
determined using actuarial methods that include a number of factors and assumptions,
including completion factors, which 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, and assumed health care cost trend factors, which represent an
estimate of claims expense based on recent claims expense levels and healthcare cost levels.
There is significant uncertainty inherent in determining management’s best estimate of
completion and trend factors, which are used to calculate actuarial estimates of incurred but not
paid claims.

Molina Healthcare, Inc. 2020 Form 10-K | 94

Auditing management’s best estimate of the IBNP liability was complex and required the
involvement of our actuarial specialists due to the highly judgmental nature of completion and
trend factor assumptions used in the valuation process. These assumptions have a significant
effect on the valuation of the IBNP liability.

How we
addressed the
matter in our
audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of
the Company’s controls over the process for estimating the IBNP liability. This included testing
management review controls over completion and trend factor assumptions, and
management’s review and approval of actuarial methods used to calculate IBNP liability,
including the data inputs and outputs of those models.

To test IBNP liability, our audit procedures included, among others, testing the completeness
and accuracy of data used in the calculation by testing reconciliations of underlying claims and
membership data recorded in source systems to the actuarial reserving calculations, and
comparing a sample of claims to source documentation. With the assistance of EY actuarial
specialists, we evaluated the Company’s selection and weighting of actuarial methods by
comparing the weightings used in the current estimate to those used in prior periods and those
used in the industry for the specific types of insurance. To evaluate significant assumptions
used by management in the actuarial methods, we compared assumptions to current and
historical claims trends, to those used historically and to current industry benchmarks. We also
compared management’s recorded IBNP liability to a range of reasonable IBNP estimates
calculated independently by our EY actuarial specialists. Additionally, we performed a review of
the prior period estimates using subsequent claims development, and we reviewed and
evaluated management’s disclosures surrounding fee-for-service claims IBNP.

Valuation of intangibles

Description of
the matter

During 2020, the Company completed its acquisition of MCC for net consideration of
$1,037 million, as disclosed in Note 4 to the consolidated financial statements. The transaction
was accounted for as a business combination using the acquisition method.

Auditing the Company’s accounting for its acquisition of MCC was complex due to the
significant estimation uncertainty in the Company’s determination of the fair value of acquired
contract rights which comprised $171 million of the acquired identified intangible assets of $191
million. The Company used a discounted cash flow model to measure contract rights. The
significant estimation uncertainty was primarily due to the sensitivity of the fair value to
underlying assumptions, specifically changes in forecasted operating margins, and the
weighted average cost of capital, which are affected by expectations about future market or
economic conditions.

How we
addressed the
matter in our
audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of
the Company’s controls over its accounting for acquisitions. This included testing management
review controls over the estimation process supporting the recognition and measurement of
contract rights. We also tested management’s review of assumptions used in the valuation
models.

To test the estimated fair value of contract rights, our audit procedures included, among others,
evaluating the Company's selection of the valuation methodology and significant assumptions
used by the Company's valuation specialist, and evaluating the completeness and accuracy of
the underlying data supporting the significant assumptions and estimates. We involved our
valuation specialists to assist with our evaluation of the methodology used by the Company and
significant assumptions included in the fair value estimates. We compared the significant
assumptions used by management to current industry and economic trends, changes to the
company’s business, markets, membership retention and growth rates, and other factors.
Additionally, we reviewed and evaluated management’s disclosures surrounding determination
of the intangible assets.

/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2000.

Los Angeles, California
February 16, 2021

Molina Healthcare, Inc. 2020 Form 10-K | 95

OTHER INFORMATION

None.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information required by Item 10 of Part III will be included in our Proxy Statement relating to our 2021 Annual
Meeting of Stockholders, and is incorporated herein by reference. This information is included in the following
sections of the Proxy Statement:

•
•
•
•
•
•
•

PROPOSAL 1 - Election of Directors
Information About Director Nominees
Information About Directors Continuing in Office
Additional Information About Directors
Corporate Governance and Board of Directors Matters
Information About the Executive Officers of the Company
Section 16(a) Beneficial Ownership Reporting Compliance

Information relating to our Code of Business Conduct and Ethics and compliance with Section 16(a) of the 1934 Act
is set forth in our Proxy Statement relating to our 2021 Annual Meeting of Stockholders and is incorporated herein
by reference. To the extent permissible under NYSE rules, we intend to disclose amendments to our Code of
Business Conduct and Ethics, as well as waivers of the provisions thereof, on our investor relations website under
the heading “Investor Information—Corporate Governance” at molinahealthcare.com.

EXECUTIVE COMPENSATION

Information required by Item 11 of Part III will be included in our Proxy Statement relating to our 2021 Annual
Meeting of Stockholders in the section entitled “Executive Compensation,” and is incorporated herein by reference.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Information required by Item 12 of Part III will be included in our Proxy Statement relating to our 2021 Annual
Meeting of Stockholders in the section entitled “Security Ownership of Certain Beneficial Owners and Management,”
and is incorporated herein by reference.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE

Information required by Item 13 of Part III will be included in our Proxy Statement relating to our 2021 Annual
Meeting of Stockholders in the sections entitled “Related Party Transactions,” and “Corporate Governance and
Board of Directors Matters—Director Independence,” and is incorporated herein by reference.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by Item 14 of Part III will be included in our Proxy Statement relating to our 2021 Annual
Meeting of Stockholders in the section entitled “Fees Paid to Independent Registered Public Accounting Firm,” and
is incorporated herein by reference.

Molina Healthcare, Inc. 2020 Form 10-K | 96

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(1) The consolidated financial statements are included in this report in the section entitled “Financial

Statements and Supplementary Data.”

(2) Financial Statement Schedules:

Schedules for which provision is made in the applicable accounting regulations of the SEC are not
required under the related instructions, are inapplicable, or the required information is included in the
consolidated financial statements, and therefore have been omitted.

EXHIBITS

Reference is made to the accompanying “Index to Exhibits.”

Molina Healthcare, Inc. 2020 Form 10-K | 97

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 16th day of February, 2021.

MOLINA HEALTHCARE, INC.

By:

/s/ Joseph M. Zubretsky

Joseph M. Zubretsky
Chief Executive Officer
(Principal Executive Officer)

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 as indicated, as of February 16, 2021.

Signature

/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/ Barbara L. Brasier

Barbara L. Brasier

/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

Title

Chief Executive Officer, President and Director
(Principal Executive Officer)

Chief Financial Officer and Treasurer
(Principal Financial Officer)

Chief Accounting Officer

(Principal Accounting Officer)

Director

Chairman of the Board

Director

Molina Healthcare, Inc. 2020 Form 10-K | 98

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

Description

Method of Filing

2.1

2.2

3.1

3.2

3.3

3.4

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

10.1

Stock and Asset Purchase Agreement, dated as of April 30,
2020, by and between Molina Healthcare, Inc. and Magellan
Health, Inc.**

Asset Purchase Agreement, dated as of September 28, 2020,
by and between Molina Healthcare, Inc. and Affinity Health
Plan, Inc.**

Certificate of Incorporation

Certificate of Amendment to Certificate of Incorporation

Filed as Exhibit 2.1 to registrant’s Form 8-K filed
May 6, 2020

Filed as Exhibit 2.1 to registrant’s Form 10-Q filed
October 29, 2020

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

Filed as Appendix A to registrant’s Definitive
Proxy Statement on Form DEF 14A filed March
25, 2019

Sixth Amended and Restated Bylaws of Molina Healthcare,
Inc.

Filed as Exhibit 3.3 to registrant’s Form 10-K filed
February 19, 2019

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

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 as of June 2, 2020, by and between Molina
Healthcare, Inc. and U.S. Bank National Association, as
Trustee.

Form of 4.375% Notes (included in Exhibit 4.5).

Indenture, dated as of November 17, 2020, by and between
Molina Healthcare, Inc. and U.S. Bank National Association,
as Trustee.

Form of 3.875% Notes (included in Exhibit 4.7).

Filed as Exhibit 4.1 to registrant’s Form 8-K filed
November 10, 2015

Filed as Exhibit 4.1 to registrant’s Form 8-K filed
February 18, 2016

Filed as Exhibit 4.1 to registrant’s Form 8-K filed
June 2, 2020

Filed as Exhibit 4.2 to registrant’s Form 8-K filed
June 2, 2020 (Included in Exhibit 4.1 to
registrant’s Form 8-K filed June 2, 2020)

Filed as Exhibit 4.1 to registrant’s Form 8-K filed
November 17, 2020

Filed as Exhibit 4.2 to registrant’s Form 8-K filed
November 17, 2020 (Included in Exhibit 4.1 to
registrant’s Form 8-K filed November 17, 2020)

Description of Registrant’s Securities

Filed herewith

Credit Agreement, dated as of June 8, 2020, by and among
Molina Healthcare, Inc., as the Borrower, Truist Bank, as
Administrative Agent, Issuing Bank and Swingline Lender, and
the Lenders party thereto.

Filed as Exhibit 10.1 to registrant’s Form 8-K filed
June 8, 2020

Molina Healthcare, Inc. 2020 Form 10-K | 99

*10.10

*10.11

*10.12

*10.13

*10.14

Number

*10.2

Molina Healthcare, Inc. 2011 Employee Stock Purchase Plan

Description

Method of Filing

*10.3

Molina Healthcare, Inc. 2011 Equity Incentive Plan

Filed as Exhibit 10.6 to registrant’s Form 10-K
filed February 26, 2015

Filed as Exhibit 10.8 to registrant’s Form 10-K
filed February 26, 2014

*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

2019 Employee Stock Purchase Plan

*10.9

Molina Healthcare, Inc. 2019 Equity Incentive Plan

2019 Equity Incentive Plan - Form of Restricted Stock Award
Agreement (Employee/Officer with No Employment
Agreement)

2019 Equity Incentive Plan - Form of Performance Stock Unit
Award Agreement (Employee/Officer with No Employment
Agreement)

Filed as Appendix C to registrant’s Definitive
Proxy Statement on Form DEF 14A filed March
25, 2019

Filed as Appendix B to registrant’s Definitive
Proxy Statement on Form DEF 14A filed March
25, 2019

Filed as Exhibit 10.1 to registrant’s Form 10-Q
filed July 31, 2019

Filed as Exhibit 10.2 to registrant’s Form 10-Q
filed July 31, 2019

2019 Equity Incentive Plan - Form of Restricted Stock Award
Agreement (Officer with Employment Agreement)

Filed as Exhibit 10.3 to registrant’s Form 10-Q
filed July 31, 2019

2019 Equity Incentive Plan - Form of Performance Stock Unit
Award Agreement (Officer with Employment Agreement)

Filed as Exhibit 10.4 to registrant’s Form 10-Q
filed July 31, 2019

Molina Healthcare, Inc. Second Amended and Restated
Change in Control Severance Plan

Filed herewith

*10.15

Form of Indemnification Agreement

Filed as Exhibit 10.14 to registrant’s Form 10-K
filed March 14, 2007

*10.16

*10.17

*10.18

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

Amendment No. One to the Molina Healthcare, Inc. Amended
and Restated Deferred Compensation Plan (2018)

Filed as Exhibit 10.25 to registrant’s Form 10-K
filed February 14, 2020

Amendment No. Two to the Molina Healthcare, Inc. Amended
and Restated Deferred Compensation Plan (2018)

Filed herewith

*10.19

Employment Agreement with Jeff Barlow dated June 14, 2013

Filed as Exhibit 10.3 to registrant’s Form 8-K filed
June 14, 2013

*10.20

*10.21

*10.22

+10.23

10.24

21.1

23.1

31.1

31.2

32.1

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

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

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

Master Services Agreement for Information Technology
Services, dated February 4, 2019, by and between Molina
Healthcare, Inc. and Infosys Limited

First Amendment, dated August 1, 2019, to the Master
Services Agreement for Information Technology Services,
dated February 4, 2019, by and between Molina Healthcare,
Inc. and Infosys Limited

Filed as Exhibit 10.36 to registrant’s Form 10-K
filed February 19, 2019

Filed as Exhibit 10.1 to registrant’s Form 10-Q
filed October 30, 2019

List of subsidiaries

Filed herewith

Consent of Independent Registered Public Accounting Firm

Filed herewith

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

Filed herewith

Molina Healthcare, Inc. 2020 Form 10-K | 100

Description

Method of Filing

Number

32.2

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

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

104

Cover Page Interactive Data file (formatted as Inline XBRL
and embedded within Exhibit 101)

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 portions of this agreement have been omitted in accordance with Item 601(b)(10) of Regulation S-K. A copy
of any omitted portion 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. 2020 Form 10-K | 101

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Corporate Information
Board of Directors
Dale B. Wolf
Chairman of the Board

Barbara Brasier
Director
Retired Senior Executive

Daniel Cooperman
Director, Audit Committee Chairman
Zoox, Inc.

Steven J. Orlando
Founder,
Orlando Company

Garrey E. Carruthers
Former Governor of
New Mexico

Ronna E. Romney
Director, Park-Ohio
Holding Corporation

Richard M. Schapiro
Chief Executive Officer,
SchapiroCo., LLC

Executive Officers
Joseph M. Zubretsky
President and
Chief Executive Officer

Richard C. Zoretic
Director, Babel Health and
Aveanna Healthcare

Joseph M. Zubretsky
President and Chief Executive Officer,
Molina Healthcare, Inc.

Mark L. Keim
Chief Financial Officer

Jeff D. Barlow
Chief Legal Officer and
Corporate Secretary

James E. Woys
Executive Vice President,
Health Plan Services

Marc S. Russo
Executive Vice President,
Health Plans

Maurice S. Hebert
Chief Accounting Officer

Corporate Data

Annual
Meeting

Corporate
Headquarters

Common
Stock

Transfer
Agent

The annual meeting of stockholders will be held on Thursday, May 6, 2021, at 10:00 a.m. Eastern Time live via the internet at
www.virtualshareholdermeeting.com/MOH2021

Molina Healthcare, Inc.
200 Oceangate, Suite 100, Long Beach, CA 90802
(562) 435-3666
molinahealthcare.com

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

American Stock Transfer & Trust Company
6201 15th Avenue, Brooklyn, NY 11219
(800) 937-5449; amstock.com

Independent
Registered Public
Accounting Firm

Ernst & Young LLP
725 South Figueroa Street, 5th Floor, Los Angeles, CA 90017
(213) 977-3200; 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, 2020.

Forward-Looking
Statements

This annual report and the accompanying shareholder letter 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, the Company undertakes 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
molinahealthcare.com