Molina Healthcare Reports Third Quarter 2009 Results

Molina Healthcare, Inc. (NYSE: MOH):

  • Diluted earnings per share of $0.33, down 45% from the third quarter of 2008
  • Year-to-date diluted earnings per share of $1.36, down 15% from 2008
  • Cash flow from operating activities increases $150 million
  • Investment earnings decrease $3.1 million
  • California health plan loses $4.8 million in quarter
  • Quarterly premium revenues of $915 million, up 16%
  • Aggregate membership up 14% over the third quarter of 2008
  • Guidance withdrawn for the fourth quarter 2009

Molina Healthcare, Inc. (NYSE: MOH) today reported net income for the quarter ended September 30, 2009, of $8.6 million, or $0.33 per diluted share, compared with net income of $16.5 million, or $0.60 per diluted share, for the quarter ended September 30, 2008.

“Our results in the quarter reflect the continuing rise in influenza-like illness across the nation, particularly the dramatic surge that has occurred since September as children have returned to school,” said J. Mario Molina, M.D., president and chief executive officer of Molina Healthcare. “We also continue to be adversely affected by state budget pressures and the resulting compressed profit margins of our health plans. Although we continue to believe the long-term prospects for our company are promising, the near-term uncertainty created by this unprecedented confluence of factors is likely to continue throughout the fourth quarter.”

2009 Medical Cost and Earnings Guidance Withdrawn

The Company currently believes that it will not achieve its previously announced fiscal year 2009 earnings guidance of $2.15 per diluted share. Due to several factors that make it particularly difficult to predict the Company’s short-term medical costs and earnings, including the 2009 H1N1 flu pandemic (and the resulting Declaration of National Emergency by the President), higher utilization associated with new members, and state budgetary shortfalls, including the uncertainty surrounding the Michigan state budget, the Company is withdrawing those elements of its 2009 guidance related to its medical care costs and earnings. The Company’s 2009 guidance, which was provided in its second quarter earnings release on August 4, 2009, remains unchanged with respect to its premium revenue, investment income, core G&A, administrative expense as a percentage of total revenue, depreciation and amortization, interest expense, total membership, diluted shares outstanding, and effective tax rate.

Overview of Financial Results

Note: Estimates of utilization and unit costs may not match changes in reported costs due to the impact of shifts in case mix between the periods presented, prior period development, the existence of pass-through contracts in which third parties assume medical risk, and other factors. Additionally, estimates of utilization for the three and nine months ended September 30, 2009, exclude the month of September 2009 due to the substantial incompleteness of claims payment data for that month.

Third Quarter 2009 Compared with Third Quarter 2008

Net income in the third quarter of 2009 decreased 48% to $8.6 million compared with net income of $16.5 million in the third quarter of 2008.

California health plan results have continued to exert downward pressure on the Company’s current quarter and year-to-date results. The California health plan lost approximately $4.8 million, or $0.19 per diluted share, in the third quarter of 2009.

The California health plan is currently engaged in a number of efforts to improve its profitability. These efforts include provider re-contracting, the restructuring of provider networks, and tighter utilization management. The California health plan has terminated and/or renegotiated certain of its high-cost providers. However, because the effective date of the terminations was late in the third quarter or will occur in the fourth quarter, the benefit of the expected cost savings will not be seen until the fourth quarter of 2009, at the earliest. The California health plan may also selectively reduce membership in certain regions of the state that are operating at a loss. Effective October 1, 2009, the California health plan received a combination of premium rate increases and premium tax relief under its contracts with the state that will combine to improve margins by approximately 4.9%. This premium relief will provide an immediate benefit to the health plan’s performance in the fourth quarter. The Company remains committed to the California market due to its size, long-term potential, and barriers to entry.

Premium revenue grew 16% in the third quarter of 2009 compared with the third quarter of 2008. Membership grew 14% overall, with Florida, California, Washington, and Ohio gaining the most members. On a per-member per-month, or PMPM, basis, consolidated premium revenue increased 2%. Increased membership contributed 87% of the growth in premium revenue in the third quarter of 2009 compared with the third quarter of 2008, and increases in PMPM revenue, as a result of both rate changes and shifts in member mix, contributed the remaining 13%.

Despite the increase in premium revenue in the third quarter of 2009 compared with the third quarter of 2008, premium revenue decreased by $10.7 million in the third quarter of 2009 compared with the second quarter of 2009. Premium revenue decreased approximately $10.00 PMPM sequentially as a result of premium decreases in Michigan (approximately 1.4% effective July 1, 2009) and Washington (approximately 7% effective August 1, 2009). In both states, rates under the Medicaid fee schedule were reduced in a manner the Company believes to be commensurate with the reduction in premium rates. Member mix and utilization patterns at the Michigan and Washington health plans, however, may differ from the assumptions built into the states’ rate development methodologies. Through September 30, 2009, the Company did not have sufficient claims data to determine the ultimate impact on its earnings of the reduction in premium revenue and medical costs in Michigan and Washington. During the third quarter of 2009, the Texas health plan recorded adjustments to decrease premium revenue by $7.8 million relating to a profit-sharing provision in its agreement with the state of Texas. Effective September 1, 2009, the Florida health plan received a blended premium rate increase of approximately 3%. Effective October 1, 2009, the Company transitioned approximately 9,000 CHIP members from another health plan into its Texas health plan.

Investment income for the third quarter of 2009 was $1.7 million, a $3.1 million decrease from the $4.8 million in investment income earned in the third quarter of 2008. This 64% decline was due primarily to lower interest rates.

Medical care costs, in the aggregate, increased approximately 5% on a PMPM basis in the third quarter of 2009 compared with the third quarter of 2008. Medical care costs as a percentage of premium revenue (the medical care ratio) were 86.7% for the third quarter of 2009 compared with 84.6% for the third quarter of 2008. Excluding the California health plan, the medical care ratio increased to 85.8% during the third quarter of 2009 compared with 83.9% during the third quarter of 2008. Medical costs trends were consistent with those identified by the Company in its earnings release for the second quarter of 2009. Specifically, increased expenses were generally the result of higher utilization rather than higher unit costs (except in the case of outpatient costs, where both utilization and unit costs increased) and were most pronounced in connection with physician and outpatient costs. The 2009 H1N1 flu and the costs associated with more recently enrolled members were key factors in the higher utilization.

Physician and outpatient costs exhibited the most significant unfavorable cost trend in the third quarter of 2009. Together, these costs increased nearly 9% on a PMPM basis compared with the third quarter of 2008. The primary drivers of these increased costs were emergency room utilization (up approximately 6%) and cost per visit (up approximately 9%). This increase in utilization was most pronounced in the California and Michigan health plans.

Inpatient facility costs decreased approximately 5% PMPM compared with the third quarter of 2008, despite increased utilization.

Pharmacy costs increased approximately 4% PMPM compared with the third quarter of 2008. Pharmacy utilization increased approximately 5% year-over-year, while unit costs (excluding rebates) decreased approximately 1%.

Capitated costs increased approximately 9% PMPM compared with the third quarter of 2008 as a result of rate increases received for members capitated on a percentage of premium basis at the New Mexico health plan and the transition of members into capitated arrangements at the California health plan.

Days in medical claims and benefits payable were 37 days at September 30, 2009, 39 days at June 30, 2009, and 44 days at September 30, 2008. As of September 30, 2009, billed charges in ending claims inventory have declined approximately 1%, and the number of claims in ending inventory has declined approximately 18% compared with September 30, 2008. As of September 30, 2009, billed charges in ending inventory have declined approximately 16% ($28 million), and the number of claims in inventory has declined approximately 8% compared with June 30, 2009.

Core G&A expenses (defined as G&A expenses less premium taxes) were 7.5% of revenue in the third quarter of 2009 compared with 8.0% in the third quarter of 2008 and 7.0% in the second quarter of 2009. Year-over-year, premium revenue grew faster than administrative costs, causing administrative costs, as a percentage of revenue, to decrease. Sequentially, there was a slight increase in the core G&A ratio as a result of the sequential premium revenue decrease described above. On a PMPM basis, core G&A increased slightly to $16.35 in the third quarter of 2009 compared with $16.04 in the second quarter of 2009.

Interest expense for both periods presented includes non-cash interest expense relating to the Company’s convertible senior notes, as a result of the adoption of FASB Accounting Standards Codification (ASC) Subtopic 470-20, Debt with Conversion and Other Options. The amounts recorded for this additional interest expense totaled $1.2 million ($0.03 per diluted share) for both the third quarter of 2009 and the third quarter of 2008.

Income taxes were recorded at an effective rate of 34.1% in the third quarter of 2009 compared with 39.7% in the third quarter of 2008. The Company recorded discrete tax benefits of $1 million during the quarter ended September 30, 2009, primarily related to higher than previously estimated tax credits and a reassessment of liabilities for unrecognized tax benefits based on recent examination experience and other factors. The Company’s tax rate would have been 42% for the three months ended September 30, 2009, absent these discrete tax benefits.

Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008

Net income decreased 21% to $35.3 million in the nine months ended September 30, 2009, compared with net income of $44.8 million in the same period of 2008.

The California health plan lost approximately $15.2 million, or $0.58 per diluted share, during the nine months ended September 30, 2009. As described above, the California health plan is taking several steps to improve its profitability and will benefit in the fourth quarter from a combination of rate increase and premium tax relief that will combine to improve margins by approximately 4.9%, effective October 1, 2009.

Premium revenue grew approximately 18% in the nine months ended September 30, 2009, compared with the same period in 2008. Consolidated premium revenue increased 6% on a PMPM basis. Increased membership contributed 67% of the growth in premium revenue.

Investment income for the nine months ended September 30, 2009, was $7.3 million, a $10.2 million decrease from the $17.5 million earned in the same period in 2008. This 58% decline was primarily due to lower interest rates in 2009. The Company’s annualized portfolio yield for the nine months ended September 30, 2009, decreased to 1.4% compared with 3.3% for the same period in 2008.

Medical care costs, in the aggregate, increased approximately 8% on a PMPM basis in the nine months ended September 30, 2009, compared with the same period in 2008. The medical care ratio was 86.5% for the nine months ended September 30, 2009, compared with 84.9% for the same period in 2008. Excluding the California health plan, the medical care ratio increased to 85.6% during the nine months ended September 30, 2009, compared with 84.5% during the nine months ended September 30, 2008. Specifically, increased expenses were generally the result of higher utilization rather than higher unit costs (except in the case of outpatient costs, where both utilization and unit costs increased) and were most pronounced in connection with physician and outpatient costs. The 2009 H1N1 flu and the costs associated with more recently enrolled members were key factors in the higher utilization.

Analysis of claims paid through September 30, 2009, indicates that, on a consolidated basis, the claims reserve established at December 31, 2008, was adequate.

Physician and outpatient costs exhibited the most significant unfavorable cost trend in the nine months ended September 30, 2009. Together, these costs increased approximately 12% on a PMPM basis compared with the same period in 2008. Consistent with the Company’s experience throughout 2009, emergency room utilization (up approximately 6%) and cost per visit (up approximately 12%) were the primary drivers of increased cost in the nine months ended September 30, 2009.

The Company continues to observe hospitals billing for more intensive levels of care than in the same period in 2008. The billing codes for emergency room level of care – with Level 1 reflecting the least intensive care and Level 5 reflecting the most intensive care – changed significantly in the nine months ended September 30, 2009, compared with the same period in 2008. As indicated in the following table, Level 1 and Level 2 visits decreased by 16% and 11%, respectively, while Level 3, Level 4, and Level 5 visits increased by 10%, 11%, and 13%, respectively. The Company continues to compile and analyze the data relevant to this apparent up-coding of emergency room claims and will be meeting with regulators and individual hospitals to ensure that emergency room medical care is billed appropriately.

Emergency Room Visits per 1,000
Level
12345
Nine Months Ended September 30, 2009, v. Same Period in 2008 -16% -11% 10% 11% 13%

Inpatient costs increased less than 1% PMPM year-over-year despite increased utilization.

Pharmacy costs increased approximately 4% PMPM year-over-year. Pharmacy utilization increased approximately 5% year-over-year while unit costs (excluding rebates) increased by approximately 1%.

Capitated costs increased approximately 11% PMPM year-over-year, primarily as a result of rate increases received for members capitated on a percentage of premium basis at the New Mexico health plan and the transition of members into capitated arrangements in California.

Core G&A expenses were 7.4% of revenue in the nine months ended September 30, 2009, compared with 8.0% in the same period in 2008. Year-over-year, premium revenue grew faster than administrative costs, causing administrative costs, as a percentage of revenue, to decrease. On a PMPM basis, core G&A decreased to $16.38 in the nine months ended September 30, 2009, from $16.90 for the same period in 2008.

Interest expense for both nine-month periods includes non-cash interest expense relating to the Company’s convertible senior notes, as a result of the adoption of ASC Subtopic 470-20. The amounts recorded for this additional interest expense totaled $3.6 million for the nine months ended September 30, 2009, ($0.08 per diluted share) and $3.5 million for the same period in 2008 ($0.08 per diluted share).

Income taxes were recorded at an effective rate of 31.0% for the nine months ended September 30, 2009, compared with 40.5% for the same period in 2008. The Company recorded discrete tax benefits of $5.5 million as a result of settling tax examinations, a reassessment of the tax liability for unrecognized tax benefits, higher than previously estimated tax credits, and the voluntary filing of certain accounting method changes during the nine months ended September 30, 2009. The Company’s tax rate would have been 42% for the nine months ended September 30, 2009, absent these discrete tax benefits.

Cash Flow

Cash provided by operating activities for the nine months ended September 30, 2009, was $130 million compared with cash used in operating activities of $20 million for 2008, an increase of $150 million.

Significant contributors to this increase included the following:

  • Increased deferred revenue of $82.3 million, primarily due to the timing of the Ohio health plan’s receipt of premium payments from the state of Ohio;
  • Increased medical claims and benefits payable of $23.5 million, primarily due to the commencement of operations of the Company’s Florida health plan in 2009; and
  • Increased collections of accounts receivable totaling $42.7 million, primarily relating to California health plan. In the prior year, there was a significant increase in the California health plan receivable due to the delayed passage of the California state budget for 2008-2009.

At September 30, 2009, the Company had cash and investments (not including restricted investments) of $679.5 million, including non-current auction rate securities with a fair value of $59.9 million. At September 30, 2009, the parent company had unrestricted cash and investments of $54.4 million, including auction rate securities with a fair value of $16.7 million. At December 31, 2008, the parent company had unrestricted cash and investments of $68.9 million.

EBITDA (1)

(in thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2009200820092008
Operating income $ 16,274 $ 30,429 $ 61,115 $ 85,138
Add back:
Depreciation and amortization expense 9,832 8,515 28,468 24,997
EBITDA $ 26,106 $ 38,944 $ 89,583 $ 110,135

(1)

The Company calculates EBITDA by adding back depreciation and amortization expense to operating income. EBITDA is not prepared in conformity with GAAP since it excludes the provisions for income taxes, interest expense, and depreciation and amortization expense. This non-GAAP financial measure should not be considered as an alternative to net income, operating income, operating margin, or cash provided by operating activities. Management uses EBITDA as a metric in evaluating the Company’s financial performance, in evaluating financing and business development decisions, and in forecasting and analyzing future periods. For these reasons, management believes that EBITDA is a useful supplemental measure to investors in evaluating the Company’s performance and the performance of other companies in our industry.

Securities Purchase Program

Year-to-date, the Company has purchased approximately 1.4 million shares of its common stock for $27.7 million (average cost of $20.49 per share). These purchases increased diluted earnings per share for the nine months ended September 30, 2009, by $0.04. A total of approximately $12.3 million currently remains available under the Company’s securities purchase program.

Conference Call

The Company’s management will host a conference call and webcast to discuss its third quarter results at 5:00 p.m. Eastern Time on Wednesday, October 28, 2009. The telephone number for this interactive conference call is 212-231-2927, and a telephonic replay will be available from 7:00 p.m. Eastern time through 6:00 p.m. on Thursday, October 29, 2009, by dialing (800) 633-8284 and entering confirmation number 21437533. A live webcast of the call can be accessed on the Company’s website at www.molinahealthcare.com, or at www.earnings.com. An online replay will be available beginning about one hour following the conclusion of the call and webcast.

Molina Healthcare, Inc. is a multi-state managed care organization that arranges for the delivery of healthcare services to persons eligible for Medicaid, Medicare, and other government-sponsored programs for low-income families and individuals. Molina Healthcare’s ten licensed health plan subsidiaries in California, Florida, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington currently serve approximately 1.4 million members. More information about Molina Healthcare can be obtained at www.molinahealthcare.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This press release contains “forward-looking statements” identified by words such as “will,” “believes,” “expects” or “expectations,” “projects,” “estimates,” and similar words and expressions. In addition, any statements that explicitly or implicitly refer to any elements of 2009 guidance, expectations, projections, or their underlying assumptions, or other characterizations of future events or circumstances, are forward-looking statements. All of our forward-looking statements are based on our current expectations and assumptions which are subject to numerous known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially. Such factors include, without limitation, risks related to: both the 2009 H1N1 flu and the seasonal flu, including utilization rates that are materially elevated above historic seasonal patterns; budgetary pressures on the federal and state governments and their resulting inability to fully fund Medicaid, Medicare, or CHIP, including without limitation the passage of a final budget in Michigan; the potential need to establish a premium deficiency reserve for the California health plan’s Los Angeles County contract for the fourth quarter of 2009; the successful management of our medical costs in all of our health plans; up-coding by providers or billing in a manner at material variance with historic patterns; high rates of utilization associated with the enrollment of new Medicaid members; the leveraging of our administrative costs to address the needs associated with increased enrollment; growth in our Medicaid and Medicare enrollment consistent with our expectations; uncertainties regarding the impact of federal healthcare reform efforts; rate revisions and the maintenance of existing rate levels that are consistent with our assumptions and expectations; our ability to pass on to providers any rate cuts under our government contracts, including the reduction in provider payment levels under the Michigan and Washington Medicaid fee schedules that are commensurate with the reduced rates paid to our Michigan and Washington health plans; our ability to accurately estimate incurred but not reported medical costs across all health plans; the successful renewal and continuation of the government contracts of all of our health plans; our limited experience operating in Florida; the transition from a non-risk to a risk-based capitation contract by our Utah health plan; the availability of financing to fund and capitalize our acquisitions and start-up activities and to meet our liquidity needs; the illiquidity of our auction rate securities; the successful and cost-effective integration of our acquisitions; earnings seasonality; high profile qui tam matters and negative publicity regarding Medicaid managed care and Medicare Advantage; changes in funding under our contracts as a result of regulatory and programmatic adjustments and reforms; approval by state regulators of dividends and distributions by our subsidiaries; unexpected changes in member utilization patterns, healthcare practices, or healthcare technologies; high dollar claims related to catastrophic illness; changes in federal or state laws or regulations or in their interpretation; the favorable resolution of litigation or arbitration matters; and other risks and uncertainties as detailed in our reports and filings with the Securities and Exchange Commission and available on its website at www.sec.gov.All forward-looking statements in this release represent our judgment as of the date of this release. We disclaim any obligation to update any forward-looking statement to conform the statement to actual results or changes in our expectations.

MOLINA HEALTHCARE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share and per-share data)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2009200820092008
Revenue:
Premium revenue $ 914,805 $ 791,554 $ 2,697,796 $ 2,282,345
Investment income 1,707 4,775 7,336 17,517
Total operating revenue 916,512 796,329 2,705,132 2,299,862
Expenses:
Medical care costs 792,771 669,355 2,333,865 1,936,531
General and administrative expenses 97,635 88,030 283,216 253,196
Depreciation and amortization 9,832 8,515 28,468 24,997
Total expenses 900,238 765,900 2,645,549 2,214,724
Gain on retirement of convertible senior notes 1,532
Operating income 16,274 30,429 61,115 85,138
Interest expense (1) (3,279 ) (3,120 ) (9,917 ) (9,913 )
Income before income taxes (1) 12,995 27,309 51,198 75,225
Income tax expense (1), (2) 4,431 10,829 15,858 30,447
Net income (1) $ 8,564 $ 16,480 $ 35,340 $ 44,778
Net income per share: (1)
Basic $ 0.34 $ 0.60 $ 1.36 $ 1.60
Diluted $ 0.33 $ 0.60 $ 1.36 $ 1.59
Weighted average number of common shares and potentially dilutive common shares outstanding 25,630 27,582 26,058 28,087
Operating Statistics:
Ratio of medical care costs paid directly to providers to premium revenue 84.6 % 82.1 % 84.5 % 82.4 %
Ratio of medical care costs not paid directly to providers to premium revenue 2.1 2.5 2.0 2.5
Medical care ratio (3) 86.7 % 84.6 % 86.5 % 84.9 %

General and administrative expense ratio excluding premium taxes (core G&A ratio) (4)

7.5 % 8.0 % 7.4 % 8.0 %
Premium taxes included in G&A expense (4) 3.2 3.1 3.1 3.0

Total general and administrative expense ratio (4)

10.7 % 11.1 % 10.5 % 11.0 %
Depreciation and amortization expense ratio (4) 1.1 % 1.1 % 1.1 % 1.1 %
Effective tax rate (1),(2) 34.1 % 39.7 % 31.0 % 40.5 %

(1)

The Company’s 2008 results have been recast to reflect the adoption of ASC Subtopic 470-20. This resulted in additional interest expense of $1.2 million ($0.03 per diluted share) for the three months ended September 30, 2008, and $3.5 million ($0.08 per diluted share) for the nine months ended September 30, 2008.

(2)

The Company recorded tax benefits totaling $5.5 million in the second and third quarters of 2009 as a result of settling tax examinations and the voluntary filing of certain accounting method changes.

(3)

Medical care ratio represents medical care costs as a percentage of premium revenue.

(4)

Computed as a percentage of total operating revenue.

MOLINA HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per-share data)

Sept. 30,

2009

Dec. 31,

2008 (1)

(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 449,469 $ 387,162
Investments 170,194 189,870
Receivables 144,129 128,562
Income taxes refundable 4,019
Deferred income taxes (1) 7,261 9,071
Prepaid expenses and other current assets 14,312 14,766
Total current assets 785,365 733,450
Property and equipment, net 76,244 65,058
Goodwill and intangible assets, net 214,102 192,599
Investments 59,855 58,169
Restricted investments 42,400 38,202
Receivable for ceded life and annuity contracts 25,926 27,367
Other assets (1) 20,113 33,223
Total assets $ 1,224,005 $ 1,148,068
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable $ 303,114 $ 292,442
Accounts payable and accrued liabilities 72,093 66,247
Deferred revenue 90,919 29,538
Income taxes payable 1,937
Total current liabilities 468,063 388,227
Long-term debt (1) 157,681 164,873
Deferred income taxes (1) 13,423 12,911
Liability for ceded life and annuity contracts 25,926 27,367
Other long-term liabilities 14,140 22,928
Total liabilities 679,233 616,306
Stockholders’ equity:

Common stock, $0.001 par value; 80,000 shares authorized, outstanding 25,549 shares at September 30, 2009, and 26,725 shares at December 31, 2008

26 27

Preferred stock, $0.001 par value; 20,000 shares authorized, no shares outstanding

Additional paid-in capital (1) 127,317 170,681
Accumulated other comprehensive loss (1,665 ) (2,310 )
Retained earnings (1) 419,094 383,754
Treasury stock, at cost; 1,201 shares at December 31, 2008 (20,390 )
Total stockholders’ equity 544,772 531,762
Total liabilities and stockholders’ equity $ 1,224,005 $ 1,148,068

(1)

The Company’s financial position as of December 31, 2008, has been recast to reflect adoption of ASC Subtopic 470-20. The cumulative adjustments to reduce retained earnings totaled $3.4 million as of January 1, 2009.

MOLINA HEALTHCARE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2009

2008 (1)

2009

2008 (1)

Operating activities:
Net income (1) $ 8,564 $ 16,480 $ 35,340 $ 44,778
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,832 8,515 28,468 24,997
Unrealized loss (gain) on trading securities 101 (3,509 )
(Gain) loss on rights agreement (92 ) 3,204
Deferred income taxes (923 ) (920 ) 2,322 (7,410 )
Stock-based compensation 2,272 2,182 5,730 5,769
Non-cash interest on convertible senior notes (1) 1,197 1,187 3,563 3,497

Gain on purchase and retirement of convertible senior notes

(1,532 )
Amortization of deferred financing costs (1) 344 359 1,040 1,076

Tax deficiency from employee stock compensation recorded as additional paid-in capital

(157 ) (91 ) (704 ) (247 )
Changes in operating assets and liabilities:
Receivables 7,311 (56,163 ) (15,567 ) (58,223 )
Prepaid expenses and other current assets (278 ) 82 454 (1,881 )
Medical claims and benefits payable (5,593 ) (6,754 ) 10,672 (12,819 )
Accounts payable and accrued liabilities 9,586 9,954 (6,140 ) (666 )
Deferred revenue 6,743 (31,017 ) 61,381 (20,951 )
Income taxes (3,464 ) (3,382 ) 5,561 1,809
Net cash provided by (used in) operating activities 35,443 (59,568 ) 130,283 (20,271 )
Investing activities:
Purchases of property and equipment (8,466 ) (11,216 ) (28,390 ) (28,314 )
Purchases of investments (55,153 ) (17,930 ) (127,335 ) (181,377 )
Sales and maturities of investments 67,478 51,091 149,770 188,896
Cash paid in business purchase transactions (10,900 ) (10,900 ) (1,000 )
Decrease (increase) in restricted investments 2,336 (6,635 ) (4,198 ) (7,491 )
Decrease (increase) in other assets 884 1,599 (1,877 ) (578 )
(Decrease) increase in other long-term liabilities (16 ) 1,601 (8,788 ) 4,211
Net cash (used in) provided by investing activities (3,837 ) 18,510 (31,718 ) (25,653 )
Financing activities:
Treasury stock purchases (2,271 ) (27,712 ) (32,237 )
Excess tax benefits from employee stock compensation 26 43 26 43

Purchase and retirement of convertible senior notes

(9,653 )

Proceeds from exercise of stock options and employee stock plan purchases

298 1,081 1,490
Net cash provided by (used in) financing activities 26 (1,930 ) (36,258 ) (30,704 )
Net increase (decrease) in cash and cash equivalents 31,632 (42,988 ) 62,307 (76,628 )
Cash and cash equivalents at beginning of period 417,837 425,424 387,162 459,064
Cash and cash equivalents at end of period $ 449,469 $ 382,436 $ 449,469 $ 382,436

(1)

The Company’s 2008 unaudited condensed consolidated statements of cash flows have been recast to reflect the adoption of ASC Subtopic 470-20.

MOLINA HEALTHCARE, INC.

UNAUDITED MEMBERSHIP DATA

Total Ending Membership By Health Plan:

Sept. 30,

2009

June 30,

2009

Dec. 31,

2008

Sept. 30,

2008

California 355,000 349,000 322,000 313,000
Florida (1) 43,000 29,000
Michigan 210,000 207,000 206,000 207,000
Missouri 78,000 78,000 77,000 77,000
Nevada (2)
New Mexico 90,000 85,000 84,000 84,000
Ohio 208,000 203,000 176,000 179,000
Texas 31,000 30,000 31,000 29,000
Utah 69,000 64,000 61,000 55,000
Washington 327,000 323,000 299,000 295,000
Total 1,411,000 1,368,000 1,256,000 1,239,000

Total Ending Membership By State for the Medicare Advantage Plans:

California 1,900 1,600 1,500 1,600
Michigan 2,700 2,100 1,700 1,700
Nevada 300 400 700 600
New Mexico 400 400 300 200
Texas 500 400 400 400
Utah 3,500 3,100 2,400 2,200
Washington 1,100 1,000 1,000 1,000
Total 10,400 9,000 8,000 7,700
Total Ending Membership By State for the Aged, Blind or Disabled Population:
California 13,700 13,100 12,700 12,500
Florida (1) 8,700 6,000
Michigan 30,200 29,900 30,300 30,400
New Mexico 5,700 5,700 6,300 6,500
Ohio 19,600 19,700 19,000 19,700
Texas 17,500 17,000 16,200 16,200
Utah 7,700 7,600 7,300 7,000
Washington 3,200 3,000 3,000 3,000
Total 106,300 102,000 94,800 95,300
Three Months EndedNine Months Ended

Total Member Months (3) by Health Plan:

Sept. 30,

2009

June 30,

2009

Sept. 30,

2008

Sept. 30,

2009

Sept. 30,

2008

California 1,065,000 1,031,000 936,000 3,076,000 2,765,000
Florida (1) 109,000 75,000 245,000
Michigan 629,000 623,000 627,000 1,872,000 1,904,000
Missouri 232,000 232,000 228,000 695,000 678,000
Nevada 1,000 1,000 2,000 3,000 6,000
New Mexico 264,000 251,000 249,000 763,000 716,000
Ohio 618,000 596,000 530,000 1,774,000 1,465,000
Texas 93,000 92,000 87,000 283,000 257,000
Utah 203,000 200,000 161,000 587,000 482,000
Washington 979,000 952,000 884,000 2,850,000 2,622,000
Total 4,193,000 4,053,000 3,704,000 12,148,000 10,895,000

(1)

The Florida health plan began serving members in late December 2008.

(2)

Less than 1,000 members.

(3)

A total member month is defined as the aggregate of each month’s ending membership for the period presented.

MOLINA HEALTHCARE, INC.

UNAUDITED SELECTED FINANCIAL DATA BY HEALTH PLAN

(Dollars in thousands except per member per month amounts)

Three Months Ended September 30, 2009
Premium RevenueMedical Care Costs

Medical

Care Ratio

Premium Tax

Expense

TotalPMPMTotalPMPM
California $ 122,048 $ 114.61 $ 112,663 $ 105.80 92.3 % $ 3,700
Florida (1) 27,292 250.27 25,931 237.80 95.0 10
Michigan 136,262 216.74 110,577 175.89 81.2 7,478
Missouri 60,867 261.76 50,075 215.35 82.3
Nevada 1,245 1,166.51 1,477 1,384.09 118.7
New Mexico 105,721 400.04 86,678 327.99 82.0 2,953
Ohio 204,565 331.22 175,187 283.65 85.6 11,167
Texas (2) 26,299 282.13 26,904 288.61 102.3 574
Utah 46,849 231.14 43,346 213.86 92.5
Washington 182,096 185.99 151,099 154.33 83.0 3,131
Other (3) 1,561 8,834 59
Consolidated $ 914,805 $ 218.17 $ 792,771 $ 189.07 86.7 % $ 29,072
Three Months Ended September 30, 2008
Premium RevenueMedical Care Costs

Medical

Care Ratio

Premium Tax

Expense

TotalPMPMTotalPMPM
California $ 102,383 $ 109.37 $ 91,224 $ 97.45 89.1 % $ 2,995
Florida (1)
Michigan 127,535 203.39 101,596 162.03 79.7 6,412
Missouri 59,223 259.17 47,730 208.88 80.6
Nevada 2,196 1,053.04 2,499 1198.68 113.8
New Mexico 84,386 338.65 73,723 295.86 87.4 2,838
Ohio 162,553 306.74 148,660 280.52 91.5 8,851
Texas 30,986 357.01 24,730 284.93 79.8 510
Utah 41,860 260.24 36,012 223.88 86.0
Washington 178,639 202.19 136,609 154.62 76.5 2,959
Other (3) 1,793 6,572 (5 )
Consolidated $ 791,554 $ 213.70 $ 669,355 $ 180.71 84.6 % $ 24,560

(1)

The Florida health plan began serving members in late December 2008.

(2)

The year-over-year increase in the Texas health plan’s medical care ratio was due to a $7.8 million reduction in revenue relating to our profit sharing agreement with the state of Texas. Absent this revenue adjustment, the Texas health plan’s medical care ratio for the third quarter of 2009 would have been 79%.

(3)

“Other” medical care costs represent primarily medically related administrative costs at the parent company.

MOLINA HEALTHCARE, INC.

UNAUDITED SELECTED FINANCIAL DATA BY HEALTH PLAN

(Dollars in thousands except per member per month amounts)

Nine Months Ended September 30, 2009
Premium RevenueMedical Care Costs

Medical

Care Ratio

Premium Tax

Expense

TotalPMPMTotalPMPM
California $ 354,001 $ 115.09 $ 328,386 $ 106.76 92.8 % $ 10,411
Florida (1) 66,322 270.67 61,054 249.17 92.1 10
Michigan 405,576 216.72 332,974 177.93 82.1 22,662
Missouri 177,715 255.62 145,631 209.47 82.0
Nevada 3,969 1,203.07 2,680 812.45 67.5
New Mexico (2) 301,947 395.79 258,954 339.43 85.8 8,035
Ohio 586,672 330.73 501,606 282.77 85.5 32,090
Texas 93,655 330.78 79,161 279.59 84.5 1,830
Utah 155,385 264.67 140,791 239.81 90.6
Washington 546,520 191.76 457,625 160.57 83.7 9,142
Other (3) 6,034 25,003 55
Consolidated $ 2,697,796 $ 222.08 $ 2,333,865 $ 192.12 86.5 % $ 84,235
Nine Months Ended September 30, 2008
Premium RevenueMedical Care Costs

Medical

Care Ratio

Premium Tax

Expense

TotalPMPMTotalPMPM
California $ 308,139 $ 111.44 $ 269,328 $ 97.40 87.4 % $ 9,195
Florida (1)
Michigan 377,669 198.36 304,769 160.08 80.7 19,976
Missouri 165,509 244.00 139,462 205.60 84.3
Nevada 6,382 1,184.30 6,632 1,230.61 103.9
New Mexico (2) 262,314 366.55 215,242 300.77 82.1 8,523
Ohio 434,272 296.40 395,013 269.60 91.0 21,127
Texas 80,159 311.84 62,229 242.08 77.6 1,446
Utah 114,591 237.69 100,935 209.37 88.1
Washington 531,457 202.71 426,962 162.85 80.3 8,797
Other (3) 1,853 15,959 19
Consolidated $ 2,282,345 $ 209.49 $ 1,936,531 $ 177.75 84.9 % $ 69,083

(1)

The Florida health plan began serving members in late December 2008.

(2)

The medical care ratio of the New Mexico health plan was 85.8% for the nine months ended September 30, 2009, up from 82.1% in the same period in 2008. During the same period in 2008, the New Mexico health plan had recognized $12.9 million of premium revenue due to the reversal of amounts previously recorded as payable to the state of New Mexico. Absent this revenue adjustment, the New Mexico health plan’s medical care ratio would have been 86.3% for the same period in 2008.

(3)

“Other” medical care costs represent primarily medically related administrative costs at the parent company.

MOLINA HEALTHCARE, INC.

UNAUDITED SELECTED FINANCIAL DATA

(Dollars in thousands except per member per month amounts)

The following tables provide the details of the Company’s medical care costs for the periods indicated:

Three Months Ended

September 30, 2009

Three Months Ended

September 30, 2008

AmountPMPM

% of Total

Medical

Care Costs

AmountPMPM

% of Total

Medical

Care Costs

Fee-for-service $ 515,164 $ 122.86 65.0 % $ 439,699 $ 118.71 65.7 %
Capitation 140,551 33.52 17.7 113,920 30.76 17.0
Pharmacy 104,274 24.87 13.2 88,414 23.86 13.2
Other 32,782 7.82 4.1 27,322 7.38 4.1
Total $ 792,771 $ 189.07 100.0 % $ 669,355 $ 180.71 100.0 %
Nine Months Ended

September 30, 2009

Nine Months Ended

September 30, 2008

AmountPMPM

% of Total

Medical

Care Costs

AmountPMPM

% of Total

Medical

Care Costs

Fee-for-service $ 1,521,371 $ 125.24 65.2 % $ 1,262,327 $ 115.87 65.2 %
Capitation 413,351 34.03 17.7 335,418 30.79 17.3
Pharmacy 306,168 25.20 13.1 263,372 24.17 13.6
Other 92,975 7.65 4.0 75,414 6.92 3.9
Total $ 2,333,865 $ 192.12 100.0 % $ 1,936,531 $ 177.75 100.0 %
The following table provides the details of the Company’s medical claims and benefits payable as of the dates indicated:

Sept. 30,

2009

June 30,

2009

Sept. 30,

2008

Fee-for-service claims incurred but not paid (IBNP) $ 237,495 $ 244,987 $ 238,967
Capitation payable 39,361 34,657 33,443
Pharmacy payable 21,100 22,367 18,136
Other 5,158 6,696 8,241
Total medical claims and benefits payable $ 303,114 $ 308,707 $ 298,787

MOLINA HEALTHCARE, INC.

CHANGE IN MEDICAL CLAIMS AND BENEFITS PAYABLE

(Dollars in thousands, except per-member amounts)
(Unaudited)
The Company’s claims liability includes an allowance for adverse claims development based on historical experience and other factors including, but not limited to, variation in claims payment patterns, changes in utilization and cost trends, known outbreaks of disease, and large claims. The Company’s reserving methodology is consistently applied across all periods presented. The negative amounts displayed for “Components of medical care costs related to: Prior periods” represent the amount by which the Company’s original estimate of claims and benefits payable at the beginning of the period exceeded the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported. The benefit of this prior period development may be offset by the addition of a reserve for adverse claims development when estimating the liability at the end of the period (captured in “Components of medical care costs related to: Current period”). The following table shows the components of the change in medical claims and benefits payable as of the periods indicated:
Nine Months Ended
Sept. 30,

2009

Sept. 30,

2008

Balances at beginning of period $ 292,442 $ 311,606
Components of medical care costs related to:
Current period 2,381,903 1,996,385
Prior periods (48,038 ) (59,854 )
Total medical care costs 2,333,865 1,936,531
Payments for medical care costs related to:
Current period 2,089,417 1,721,191
Prior periods 233,776 228,159
Total paid 2,323,193 1,949,350
Balances at end of period $ 303,114 $ 298,787
Benefit from prior period as a percentage of:
Balance at beginning of period 16.4 % 19.2 %
Premium revenue 1.8 % 2.6 %
Total medical care costs 2.1 % 3.1 %
Days in claims payable 37 44
Number of members at end of period 1,411,000 1,239,000
Number of claims in inventory at end of period 107,700 131,100
Billed charges of claims in inventory at end of period $ 145,500 $ 147,100
Claims in inventory per member at end of period 0.08 0.11
Billed charges of claims in inventory per member at end of period $ 103.12 $ 118.72
Number of claims received during the period 9,427,400 8,234,500
Billed charges of claims received during the period $ 7,180,800 $ 5,754,700

Contacts:

Molina Healthcare, Inc.
Juan José Orellana, 562-435-3666, ext. 111143
Investor Relations

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