Molina Healthcare Reports Fourth Quarter and 2008 Year-End Results

Molina Healthcare, Inc. (NYSE: MOH):

  • Earnings of $2.25 per diluted share, up 10% over 2007;
  • EBITDA of $146.3 million, up 16% over 2007;
  • Annual premium revenues of $3.1 billion, up 26% over 2007;
  • Aggregate membership up 9% over 2007; and
  • 2009 guidance confirmed at range of $2.20 to $2.40 per diluted share.

Molina Healthcare, Inc. (NYSE: MOH) today reported its financial results for the fourth quarter and year ended December 31, 2008.

Net income for the quarter ended December 31, 2008, was $15.5 million, or $0.58 per diluted share, compared with net income of $17.9 million, or $0.63 per diluted share, for the quarter ended December 31, 2007. Net income for the year ended December 31, 2008, increased to $62.4 million, or $2.25 per diluted share, compared with net income of $58.3 million, or $2.05 per diluted share, for the year ended December 31, 2007.

In commenting on the results, J. Mario Molina, M.D., president and chief executive officer of Molina Healthcare, said, “Our results in 2008 give us confidence as we look forward to 2009. For nearly 30 years, Molina Healthcare has delivered solid financial performance while providing quality care to financially vulnerable populations in a cost-effective manner. 2008 was no different. Had our 2008 investment income matched 2007, our earnings would have increased 23% year-over-year. The challenges of 2009 provide us with the opportunity to strengthen our business as we continue to provide quality care to those who most need it.”

Earnings Per Share Guidance

The Company confirms its guidance issued on January 22, 2009, for fiscal year 2009 earnings per diluted share of between $2.20 and $2.40, with revenue of approximately $3.6 billion, an administrative expense ratio of approximately 10.5%, and net income of between $59 million and $65 million. The Company expects its effective tax rate to be approximately 41%, and its shares outstanding, for the purpose of calculating diluted EPS, to be approximately 27 million for the year ended December 31, 2009.

Financial Results – Comparison of Quarters Ended December 31, 2008 and 2007

Premium revenue for the fourth quarter of 2008 was $808.9 million, an increase of $138.3 million, or 21%, over the $670.6 million of premium revenue for the fourth quarter of 2007. Medicare premium revenue for the fourth quarter of 2008 was $22.7 million, compared with $17.2 million in the fourth quarter of 2007. Consolidated membership increased 9% between December 31, 2008 and December 31, 2007.

Significant contributors to the $138.3 million increase in quarterly premium revenue in 2008, compared with 2007 included the following:

  • A $44.2 million increase in Medicaid premium revenue at the Ohio health plan due to higher enrollment. The higher enrollment in the Ohio health plan was primarily due to the transfer of approximately 35,000 Covered Families and Children (CFC) members from another health plan in the Central region effective April 1, 2008. Effective September 1, 2008, the Ohio health plan also added approximately 4,000 Aged, Blind or Disabled (ABD) members in the Central and West Central regions, which drove the $6.0 million sequential Medicaid premium revenue increase.
  • A $29.0 million increase in Medicaid premium revenue as a result of the acquisition of the Missouri health plan on November 1, 2007.
  • A $13.7 million increase in Medicaid premium revenue at the Washington health plan, primarily due to higher enrollment.
  • An $11.0 million increase in Medicaid premium revenue at the California health plan, primarily due to higher enrollment. Sequentially, the California health plan’s Medicaid premium revenue increased $6.7 million, primarily due to rate increases in San Diego County (effective retroactive to July 1, 2008) and San Bernardino and Riverside counties effective October 1, 2008. These increases were partially offset by a decrease in premium rates in Los Angeles County effective October 1, 2008. Rate cuts intended to be implemented by the state with respect to all of the Company’s California Medicaid contracts as of July 1, 2008 had no effect on revenue in the fourth quarter as a result of a court injunction issued on August 18, 2008 that stayed those rate cuts.
  • An $11.4 million increase in Medicaid premium revenue at the Utah health plan, primarily due to increases in revenue as a result of higher medical expenses incurred under the Company’s cost-plus contract in that state.
  • A $5.5 million increase in Medicare premium revenue across all health plans serving Medicare members, due to higher enrollment. During the fourth quarter of 2008, Medicare revenue was reduced by approximately $3.5 million due to accruals for amounts estimated to be owed back to the Federal government for the 2008 Part D pharmacy reconciliation.

Investment income for the fourth quarter of 2008 decreased $5.4 million to $3.6 million, from $9.0 million earned in the fourth quarter of 2007. This 60% decline was due to declining interest rates in 2008. The Company’s annualized portfolio yield decreased to 3.1% for 2008, compared with 5.2% for 2007.

Medical care costs as a percentage of premium revenue (the medical care ratio) increased to 84.7% in the fourth quarter of 2008, from 83.6% in the fourth quarter of 2007. Sequentially, the medical care ratio increased from 84.6% for the quarter ended September 30, 2008. Excluding Medicare, the Company’s medical care ratio was 84.3% in the fourth quarter of 2008, 83.7% in the fourth quarter of 2007, and 84.9% in the third quarter of 2008.

  • The medical care ratio of the California health plan was 86.7% for the quarter, up from 82.8% in the fourth quarter of 2007 and down from 89.1% in the third quarter of 2008. The year-over-year increase in the plan’s medical care ratio was caused primarily by higher fee-for-service and capitation costs.
  • The medical care ratio of the Michigan health plan was 76.4% for the quarter, down from 84.4% in the fourth quarter of 2007 and 79.7% in the third quarter of 2008. The year-over-year and sequential decreases in the plan’s medical care ratio were primarily due to premium increases, with little change in PMPM medical costs.
  • The medical care ratio of the Missouri health plan was 75.0% for the quarter, down from 85.9% in the fourth quarter of 2007 and 80.6% in the third quarter of 2008.
  • The medical care ratio of the New Mexico health plan was 82.0% for the quarter, up from 81.0% in the fourth quarter of 2007 and down from 87.4% in the third quarter of 2008. The sequential decrease was primarily due to lower PMPM fee-for-service costs.
  • The medical care ratio of the Ohio health plan, by line of business, was as follows:
Three Months Ended

Dec. 31,

2008

Sept. 30,

2008

Dec. 31,

2007

Covered Families and Children (CFC) 89.2 % 89.9 % 86.3 %
Aged, Blind or Disabled (ABD) 95.1 94.6 97.0
Aggregate 91.5 % 91.5 % 90.3 %

Sequentially, the medical care ratio for the CFC line of business decreased 70 basis points primarily due to lower capitation costs. The sequential increase in the medical care ratio for the ABD line of business was primarily due to out of period psychiatric capitation expense which added 100 basis points to the fourth quarter 2008 medical care ratio.

  • The medical care ratio of the Texas health plan was 73.6% for the quarter, up from 54.1% in the fourth quarter of 2007 and down from 79.8% in the third quarter of 2008. The sequential decrease was primarily due to lower fee-for-service medical costs. During the fourth quarter of 2008, the Texas health plan reduced revenue $2.1 million to record adjustments relating to its profit-sharing agreement with the state of Texas.
  • The medical care ratio of the Utah health plan was 92.0% for the quarter, down from 99.7% in the fourth quarter of 2007 and up from 86.0% in the third quarter of 2008. The sequential increase was primarily due to Medicare reconciliation adjustments that were recorded during the third and fourth quarters of 2008. Those adjustments decreased revenue by approximately $0.9 million in the fourth quarter of 2008 and increased revenue by approximately $2.7 million in the third quarter of 2008.
  • The medical care ratio of the Washington health plan was 83.0% for the quarter, up from 77.9% in the fourth quarter of 2007 and 76.5% in the third quarter of 2008. The sequential increase was primarily due to higher fee-for-service specialist and hospital costs.

Days in medical claims and benefits payable were 41 days at December 31, 2008, a 7% decrease from the 44 days reported at September 30, 2008 and a 21% decrease from the 52 days reported at December 31, 2007. As of December 31, 2008, medical claims inventory (measured as the total billed charges of all claims received but not paid as of the reporting date) had decreased approximately 22% since September 30, 2008 and 46% since December 31, 2007. The Company’s reserving methodology is consistently applied across all periods presented.

General and administrative expenses were $91.6 million, or 11.3% of total revenue, for the fourth quarter of 2008, compared with $80.5 million, or 11.8% of total revenue, for the fourth quarter of 2007.

Core G&A expenses (defined as G&A expenses less premium taxes) were 8.1% of revenue in the fourth quarter of 2008, compared with 8.8% in the fourth quarter of 2007 and 8.0% in the third quarter of 2008. The decrease in core G&A compared with the fourth quarter of 2007 was primarily due to lower administrative payroll as a percentage of revenue, as indicated in the table below.

Three Months Ended December 31,
(in thousands)20082007
Amount% of Total

Revenue

Amount% of Total

Revenue

Medicare-related administrative costs $ 4,929 0.6 % $ 3,760 0.5 %
Non Medicare-related administrative costs:

Administrative payroll, including employee incentive compensation

49,162 6.1 45,193 6.7
Florida health plan start up expenses 1,000 0.1
All other administrative expense 10,442 1.3 10,796 1.6
Core G&A expenses $ 65,533 8.1 % $ 59,749 8.8 %

Income taxes were recorded at an effective rate of 38.6% in the fourth quarter of 2008, compared with 36.9% in the fourth quarter of 2007. The net increase in the Company’s effective tax rate was primarily the result of a change in Michigan state taxes effective January 1, 2008 that increased state income taxes, partially offset by net discrete tax benefits recorded in the fourth quarter of 2008 related primarily to California enterprise zone credits. Absent the net discrete tax benefits recorded during the fourth quarter of 2008, our effective tax rate for the fourth quarter of 2008 would have been approximately 41%.

Financial Results – Comparison of Years Ended December 31, 2008 and 2007

Premium revenue for the year ended December 31, 2008 was $3,091.2 million, an increase of $628.8 million, or 26%, over the $2,462.4 million of premium revenue for the year ended December 31, 2007. Medicare premium revenue for 2008 was $95.1 million, compared with $49.3 million for 2007.

Significant contributors to the $628.8 million increase in annual premium revenue included the following:

  • A $194.6 million increase in Medicaid premium revenue at the Missouri health plan, primarily a result of the Company’s acquisition of this plan on November 1, 2007.
  • A $166.6 million increase in Medicaid premium revenue at the Ohio health plan due to higher enrollment, particularly in the Covered Families and Children (CFC) population.
  • A $78.7 million increase in Medicaid premium revenue at the New Mexico health plan, primarily due to higher enrollment.
  • A $51.4 million increase in Medicaid premium revenue at the Washington health plan, primarily due to higher rates.
  • A $45.8 million increase in Medicare premium revenue across all health plans that serve Medicare enrollees, primarily due to increased enrollment.
  • A $34.3 million increase in Medicaid premium revenue at the California health plan, primarily due to increased enrollment.

Investment income for 2008 decreased $9.0 million to $21.1 million, from $30.1 million earned in 2007. This 30% decline was due to declining interest rates in 2008.

Medical care costs as a percentage of premium revenue (the medical care ratio) increased to 84.8% in 2008 from 84.5% in 2007. Excluding Medicare, the Company’s medical care ratio was 84.8% in 2008, compared with 84.7% in 2007.

  • The medical care ratio of the California health plan was 87.2% for 2008, up from 81.9% in 2007. The increase in the plan’s medical care ratio was caused primarily by increased fee-for-service and pharmacy costs that proportionally exceeded the increased revenue from premium rate increases.
  • The medical care ratio of the Michigan health plan was 79.6% for 2008, down from 84.0% in 2007. This decrease was caused primarily by premium rate increases that proportionally exceeded the plan’s increased medical costs.
  • The medical care ratio of the Missouri health plan was 81.8% for 2008, down from 85.9% in 2007. Premium increases were proportionally greater than PMPM medical costs due to revised provider contracts and a fee schedule increase effective July 1, 2008.
  • The medical care ratio of the New Mexico health plan was 82.1% in 2008, down from 82.6% in 2007. Between July 1, 2008 and December 31, 2008, the New Mexico health plan received a blended rate decrease of approximately 3% under the plan’s Medicaid Salud! contract and two separate contracts serving membership under the state’s coverage initiative for the uninsured. The impact of this blended rate decrease was exceeded by the reversal of a $12.9 million accrual established as of December 31, 2007, pursuant to a minimum medical care ratio contract provision. In 2007, the New Mexico health plan had recorded a charge of $6.0 million related to this contract provision. Absent the impact of the minimum medical care ratio contract provision, the New Mexico health plan’s MCR would have been 85.2% in 2008, compared with 80.8% in 2007, due to higher fee-for-service and capitation costs and lower PMPM premium revenue.
  • The medical care ratio of the Ohio health plan, by line of business, was as follows:
Dec. 31,

2008

Dec. 31,

2007

Covered Families and Children (CFC) 89.7 % 88.6 %
Aged, Blind or Disabled (ABD) 93.7 94.7

Aggregate

91.1 % 90.4 %
  • The medical care ratio of the Texas health plan was 76.5% in 2008, down from 77.1% in 2007. Increased premiums more than offset higher medical costs.
  • The medical care ratio of the Utah health plan was 89.1% in 2008, down from 94.0% in 2007. In 2007, the Utah health plan had recorded a $4.2 million reduction of revenue as a result of a reconciliation of amounts due the state of Utah under a savings sharing arrangement. Absent the savings sharing adjustment, the medical care ratio in 2007 would have been 90.7%.
  • The medical care ratio of the Washington health plan was 81.0% in 2008, up from 79.6% in 2007, primarily due to higher fee-for-service specialist and hospital costs.

General and administrative expenses were $344.8 million, or 11.1% of total revenue, for 2008, compared with $285.3 million, or 11.5% of total revenue, for 2007.

Core G&A expenses were 8.0% of revenue in 2008, compared with 8.2% in 2007. The decrease in core G&A compared with 2007 was primarily due to lower administrative payroll as a percentage of revenue, as indicated in the table below.

Year Ended December 31,
(in thousands)20082007
Amount% of Total

Revenue

Amount% of Total

Revenue

Medicare-related administrative costs $ 18,451 0.6 % $ 9,778 0.4 %
Non Medicare-related administrative costs:

Administrative payroll, including employee incentive compensation

190,932 6.1 163,420 6.6
Florida health plan start up expenses 2,495 0.1
All other administrative expense 37,768 1.2 31,077 1.2
Core G&A expenses $ 249,646 8.0 % $ 204,275 8.2 %

Income taxes were recorded at an effective rate of 39.9% for the year ended December 31, 2008, compared with 37.8% in the prior year. The increase in the Company’s effective tax rate was primarily the result of an increase in Michigan state taxes effective January 1, 2008, partially offset by net discrete tax benefits recorded during the year relating primarily to California enterprise zone credits. Absent the discrete tax benefits, the Company’s effective tax rate for the year ended December 31, 2008 would have been approximately 41%.

Cash Flow

Cash provided by operating activities for the year ended December 31, 2008 was $40.4 million, compared with cash provided by operating activities of $158.6 million for 2007, a decrease of $118.2 million.

Significant contributors to this decrease included the following:

  • Increased receivables of approximately $32 million, primarily in Ohio and Missouri;
  • Decreased medical claims and benefits payable of approximately $26 million;
  • Decreased deferred revenue of approximately $33 million, primarily due to the timing of the Ohio health plan’s receipts of premium payments from the state of Ohio;
  • Decreased accounts payable and accrued liabilities of approximately $19 million, primarily due to the 2008 release of the New Mexico health plan accrual (recorded prior to 2008) to meet a contractually required minimum medical care ratio; and
  • Increased income tax accounts of approximately $24 million due to the 2008 increase in income taxes receivable, combined with the 2007 decrease in income taxes payable, as a result of the timing of receipts and payments.

At December 31, 2008, the Company had cash and investments (not including restricted investments) of approximately $635.2 million, including auction rate securities with a fair value of $58.2 million that were reclassified as non-current assets in the first quarter of 2008. At December 31, 2008, the parent company had cash and investments of approximately $68.9 million, including auction rate securities with a fair value of $16.4 million.

EBITDA (1)

(in thousands)

Three Months Ended

December 31,

Year Ended

December 31,

2008200720082007
Operating income $ 27,467 $ 30,633 $ 112,605 $ 98,327
Add back:
Depreciation and amortization expense 8,691 7,693 33,688 27,967
EBITDA $ 36,158 $ 38,326 $ 146,293 $ 126,294

(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 depreciation and amortization expense, as well as interest expense, and the provision for income taxes.  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 supplemental 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 Repurchase Programs

In January 2009, the Company announced that its Board of Directors has authorized the repurchase of up to $25 million in aggregate of either the Company’s common stock or its 3.75% convertible senior notes due 2014. The repurchase program will be funded with working capital, and repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program extends through June 30, 2009, but the Company reserves the right to suspend or discontinue the program at any time. To date for 2009, the Company has not effected any repurchases of its securities.

During the fourth quarter of 2008, the Company repurchased approximately 722,000 shares of its common stock for $17.3 million (average cost of approximately $23.92 per share). Shares used for computing diluted earnings per share for the fourth quarters of 2008 and 2007 were 26.8 million and 28.5 million, respectively.

During 2008, the Company repurchased approximately 1.9 million shares at an aggregate purchase price of $50 million pursuant to the two share repurchase programs announced during 2008.

Conference Call

The Company’s management will host a conference call and webcast to discuss its fourth quarter and year-end results at 5:00 p.m. Eastern Time on Wednesday, February 11, 2009. The telephone number for this interactive conference call is 212-231-2928, and the 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 approximately 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 1.26 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,” “should,” “believes,” “expects” or ”expectations,” “anticipates,” “plans,” “projects,” “estimates,” “intends,” and similar words and expressions. In addition, any statements that explicitly or implicitly refer to 2009 earnings 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: budgetary pressures on the federal and state governments and their resulting inability to fully fund Medicaid, Medicare, or SCHIP or to maintain current membership eligibility thresholds and criteria; the successful management of our medical costs and the achievement of our projected medical care ratios in all our health plans, including the reduction of the medical care ratio of our Ohio health plan; the success of our efforts to leverage our administrative costs to address the needs associated with increased enrollment; risks related to our limited experience operating in Florida and attendant claims estimation difficulties; growth in our Medicaid and Medicare enrollment consistent with our expectations; uncertainties regarding the impact of federal health care reform efforts and the new presidential administration; rate increases and the maintenance of existing rate levels that are consistent with our expectations; our inability to pass on to our contracted providers any rate cuts under our governmental contracts; the budget and liquidity crisis in California and the state's inability to make payment under its contracts with our California health plan; the successful resolution of pending rate litigation in California; the renewal of the provider premium tax beyond October 1, 2009; 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, including the re-selection of our Michigan and Missouri health plans in response to Medicaid RFPs in 2009; in light of the current turmoil and illiquidity in credit markets, 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; interest rates on invested balances that are lower than expected; 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

December 31,

Year Ended

December 31,

2008200720082007
Revenue:
Premium revenue $ 808,895 $ 670,605 $ 3,091,240 $ 2,462,369
Investment income 3,609 9,024 21,126 30,085
Total operating revenue 812,504 679,629 3,112,366 2,492,454
Expenses:
Medical care costs 684,781 560,839 2,621,312 2,080,083
General and administrative expenses 91,565 80,464 344,761 285,295
Depreciation and amortization 8,691 7,693 33,688 27,967
Impairment charge on purchased software 782
Total expenses 785,037 648,996 2,999,761 2,394,127
Operating income 27,467 30,633 112,605 98,327
Interest expense (2,155 ) (2,251 ) (8,714 ) (4,631 )
Income before income taxes 25,312 28,382 103,891 93,696
Provision for income taxes 9,771 10,471 41,493 35,366
Net income $ 15,541 $ 17,911 $ 62,398 $ 58,330
Net Income Per Share:
Basic $ 0.58 $ 0.63 $ 2.25 $ 2.06
Diluted $ 0.58 $ 0.63 $ 2.25 $ 2.05

Weighted average number of common shares and potentially dilutive common shares outstanding

26,813,000 28,536,000 27,772,000 28,419,000
Operating Statistics:

Ratio of direct medical care costs to premium revenue

82.2 % 81.0 %

82.3

% 81.8 %

Ratio of administrative costs included in medical care costs to premium revenue

2.5 2.6

2.5

2.7
Medical care ratio (1) 84.7 % 83.6 % 84.8 % 84.5 %

General and administrative expense ratio (2) excluding premium taxes (core G&A ratio)

8.1 % 8.8 % 8.0 % 8.2 %

Premium taxes included in general and administrative expenses

3.2 3.0 3.1 3.3
Total general and administrative expense ratio 11.3 % 11.8 % 11.1 % 11.5 %
Depreciation and amortization expense ratio (2) 1.1 % 1.1 % 1.1 % 1.1 %
Effective tax rate 38.6 % 36.9 % 39.9 % 37.8 %

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

(2) Computed as a percentage of total revenue.

MOLINA HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per-share data)

Dec. 31,

2008

Dec. 31,

2007

(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 387,162 $ 459,064
Investments 189,870 242,855
Receivables 128,562 111,537
Income taxes refundable 4,019
Deferred income taxes 4,603 8,616
Prepaid expenses and other current assets 14,766 12,521
Total current assets 728,982 834,593
Property and equipment, net 65,058 49,555
Goodwill and intangible assets, net 192,599 207,223
Investments 58,169
Deferred income taxes 4,488
Restricted investments 38,202 29,019
Receivable for ceded life and annuity contracts 27,367 29,240
Other assets 34,321 21,675
Total assets $ 1,149,186 $ 1,171,305
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable $ 292,442 $ 311,606
Accounts payable and accrued liabilities 66,247 69,266
Deferred revenue 29,538 40,104
Income taxes payable 5,946
Total current liabilities 388,227 426,922
Long-term debt 200,000 200,000
Deferred income taxes 10,136
Liability for ceded life and annuity contracts 27,367 29,240
Other long-term liabilities 22,928 14,529
Total liabilities 638,522 680,827
Stockholders’ equity:

Common stock, $0.001 par value; 80,000 shares authorized, outstanding 26,725 shares at December 31, 2008, and 28,444 shares at December 31, 2007

27 28

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

Additional paid-in capital 146,179 185,808
Accumulated other comprehensive (loss) income (2,310 ) 272
Retained earnings 387,158 324,760
Treasury stock, at cost; 1,201 shares at December 31, 2008 and 2007 (20,390 ) (20,390 )
Total stockholders’ equity 510,664 490,478
Total liabilities and stockholders’ equity $ 1,149,186 $ 1,171,305

MOLINA HEALTHCARE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended

December 31,

Year Ended

December 31,

2008200720082007
Operating activities:
Net income $ 15,541 $ 17,911 $ 62,398 $ 58,330
Adjustments to reconcile net income to

net cash provided by operating activities:

Depreciation and amortization 8,691 7,693 33,688 27,967

Other-than-temporary impairment and unrealized loss on investment

7,565 7,565
Gain on settlement rights agreement (6,907 ) (6,907 )
Deferred income taxes 4,447 (4,918 ) (1,688 ) (9,057 )
Stock-based compensation 2,042 1,950 7,811 7,188
Amortization of deferred financing costs 407 396 1,626 1,042
Loss on disposal of property and equipment 142 142

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

(88

)

(335 )
Changes in operating assets and liabilities:
Receivables 41,198 28,317 (17,025 ) 15,007
Prepaid expenses and other current assets (364 ) (750 ) (2,245 ) (2,911 )
Medical claims and benefits payable (6,345 ) (11,991 ) (19,164 ) 6,683
Accounts payable and accrued liabilities (4,238 ) 4,417 (4,904 ) 18,700
Deferred revenue 10,385 (1,939 ) (10,566 ) 21,984
Income taxes (11,774 ) 4,704 (9,965 ) 13,693
Net cash provided by operating activities 60,702 45,790 40,431 158,626
Investing activities:
Purchases of property and equipment (6,376 ) (5,785 ) (34,690 ) (22,299 )
Purchases of investments (81,852 ) (178,863 ) (263,229 ) (264,115 )
Sales and maturities of investments 57,628 44,426 246,524 103,718
Cash paid in business purchase transactions (70,172 ) (1,000 ) (70,172 )
Increase in restricted cash (1,692 ) (757 ) (9,183 ) (8,365 )
Increase in other assets (8,395 ) (1,409 ) (8,973 ) (4,330 )
Increase in other long-term liabilities 1,820 2,721 6,031 9,290
Net cash used in investing activities (38,867 ) (209,839 ) (64,520 ) (256,273 )
Financing activities:
Treasury stock purchases (17,703 ) (49,940 )
Proceeds from issuance of convertible senior notes 200,000 200,000

Repayment of amounts borrowed under credit facility

(20,000 ) (45,000 )
Payment of convertible senior notes fees (6,498 ) (6,498 )
Payment of credit facility fees (551 )

Excess tax benefits from employee stock compensation

299 43 853

Proceeds from exercise of stock options and employee stock plan purchases

594 1,718 2,084 4,257
Net cash (used in) provided by financing activities (17,109 ) 175,519 (47,813 ) 153,061
Net increase (decrease) in cash and cash equivalents 4,726 11,470 (71,902 ) 55,414
Cash and cash equivalents at beginning of period 382,436 447,594 459,064 403,650
Cash and cash equivalents at end of period $ 387,162 $ 459,064 $ 387,162 $ 459,064

MOLINA HEALTHCARE, INC.

UNAUDITED MEMBERSHIP DATA

Total Ending Membership by Health Plan:

Dec. 31,

2008

Sept. 30,

2008

Dec. 31,

2007

California 322,000 313,000 296,000
Michigan 206,000 207,000 209,000
Missouri 77,000 77,000 68,000
Nevada (1) N/A
New Mexico 84,000 84,000 73,000
Ohio 176,000 179,000 136,000
Texas 31,000 29,000 29,000
Utah 61,000 55,000 55,000
Washington 299,000 295,000 283,000
Total 1,256,000 1,239,000 1,149,000

Total Ending Membership by State for the Medicare Advantage Plans:

Dec. 31,

2008

Sept. 30,

2008

Dec. 31,

2007

California 1,500 1,600 1,100
Michigan 1,700 1,700 1,100
Nevada 700 600 500
New Mexico 300 200
Texas 400 400
Utah 2,400 2,200 1,900
Washington 1,000 1,000 500
Total 8,000 7,700 5,100

Total Ending Membership by State for the Aged, Blind or Disabled Population:

Dec. 31,

2008

Sept. 30,

2008

Dec. 31,

2007

California 12,700 12,500 11,800
Michigan 30,300 30,400 31,400
New Mexico 6,300 6,500 6,800
Ohio 19,000 19,700 14,900
Texas 16,200 16,200 16,000
Utah 7,300 7,000 6,800
Washington 3,000 3,000 2,800
Total 94,800 95,300 90,500
Quarter EndedYear Ended

Total Member Months (2)

by Health Plan:

Dec. 31,

2008

Sept. 30,

2008

Dec. 31,

2007

Dec. 31,

2008

Dec. 31,

2007

California 956,000 936,000 881,000 3,721,000 3,500,000
Michigan 622,000 627,000 630,000 2,526,000 2,597,000
Missouri 232,000 228,000 136,000 910,000 136,000
Nevada 1,000 2,000 1,000 7,000 1,000
New Mexico 254,000 249,000 214,000 970,000 803,000
Ohio 533,000 530,000 412,000 1,998,000 1,567,000
Texas 91,000 87,000 88,000 348,000 335,000
Utah 177,000 161,000 155,000 659,000 593,000
Washington 892,000 884,000 849,000 3,514,000 3,419,000
Total 3,758,000 3,704,000 3,366,000 14,653,000 12,951,000

(1)  Less than 1,000 members.

(2)  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 PMPM amounts)

Three Months Ended December 31, 2008
Premium RevenueMedical Care Costs

Medical Care

Ratio

Premium Tax

Expense

TotalPMPMTotalPMPM
California $ 108,888 $ 113.88 $ 94,448 $ 98.78 86.7 % $ 3,308
Michigan 132,113 212.58 100,914 162.38 76.4 6,734
Missouri 59,771 258.25 44,836 193.72 75.0
Nevada 1,655 882.72 2,467 1,315.82 149.1
New Mexico 86,262 339.44 70,762 278.45 82.0 3,190
Ohio 168,554 316.51 154,169 289.50 91.5 9,378
Texas 30,019 328.94 22,095 242.12 73.6 549
Utah 41,400 234.19 38,076 215.38 92.0
Washington 178,486 200.00 148,123 165.97 83.0 2,871
Other (1) 1,747 8,891 2
Consolidated $ 808,895 $ 215.24 $ 684,781 $ 182.21 84.7 % $ 26,032
Three Months Ended December 31, 2007
Premium RevenueMedical Care Costs

Medical Care

Ratio

Premium Tax

Expense

TotalPMPMTotalPMPM
California $ 98,138 $ 111.48 $ 81,274 $ 92.33 82.8 % $ 2,724
Michigan 122,087 193.83 103,067 163.63 84.4 6,551
Missouri 30,730 226.65 26,396 194.69 85.9
Nevada 2,015 1,370.58 1,705 1,160.11 84.6
New Mexico 77,042 360.74 62,415 292.26 81.0 2,650
Ohio 124,385 301.65 112,287 272.31 90.3 5,598
Texas 24,047 272.35 13,010 147.35 54.1 458
Utah 28,434 183.90 28,360 183.43 99.7
Washington 163,716 192.78 127,562 150.21 77.9 2,727
Other (1) 11 4,763 7
Consolidated $ 670,605 $ 199.27 $ 560,839 $ 166.65 83.6 % $ 20,715
Year Ended December 31, 2008
Premium RevenueMedical Care Costs

Medical Care

Ratio

Premium Tax

Expense

TotalPMPMTotalPMPM
California $ 417,027 $ 112.06 $ 363,776 $ 97.75 87.2 % $ 12,503
Michigan 509,782 201.86 405,683 160.64 79.6 26,710
Missouri 225,280 247.62 184,298 202.58 81.8
Nevada 8,037 1,106.45 9,099 1,252.61 113.2
New Mexico 348,576 359.45 286,004 294.92 82.1 11,713
Ohio 602,826 301.76 549,182 274.91 91.1 30,505
Texas 110,178 316.32 84,324 242.09 76.5 1,995
Utah 155,991 236.75 139,011 210.98 89.1
Washington 709,943 202.02 575,085 163.64 81.0 11,668
Other (1) 3,600 24,850 21
Consolidated $ 3,091,240 $ 210.97 $ 2,621,312 $ 178.90 84.8 % $ 95,115
Year Ended December 31, 2007
Premium RevenueMedical Care Costs

Medical Care

Ratio

Premium Tax

Expense

TotalPMPMTotalPMPM
California $ 378,934 $ 108.29 $ 310,226 $ 88.66 81.9 % $ 11,338
Michigan 487,032 187.55 409,230 157.59 84.0 28,493
Missouri 30,730 226.65 26,396 194.69 85.9
Nevada 2,438 1,440.73 2,069 1,222.76 84.9
New Mexico 268,115 333.94 221,567 275.97 82.6 9,088
Ohio 436,238 278.39 394,451 251.72 90.4 19,631
Texas 88,453 263.90 68,173 203.40 77.1 1,598
Utah 116,907 197.19 109,895 185.36 94.0
Washington 652,970 190.96 519,763 152.00 79.6 10,844
Other (1) 552 18,313 28
Consolidated $ 2,462,369 $ 190.13 $ 2,080,083 $ 160.62 84.5 % $ 81,020

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

MOLINA HEALTHCARE, INC.
SELECTED FINANCIAL DATA

(Dollars in thousands except PMPM amounts)

(Unaudited)

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

Three Months Ended

December 31, 2008

Three Months Ended

December 31, 2007

AmountPMPM

% of Total

Medical

Care Costs

AmountPMPM

% of Total

Medical

Care Costs

Fee-for-service $ 447,479 $ 119.07 65.3 % $ 359,536 $ 106.84 64.0 %
Capitation 115,022 30.61 16.8 98,464 29.26 17.6
Pharmacy 92,812 24.70 13.6 76,009 22.59 13.6
Other 29,468 7.83 4.3 26,830 7.96 4.8
Total $ 684,781 $ 182.21 100.0 % $ 560,839 $ 166.65 100.0 %

Year Ended

December 31, 2008

Year Ended

December 31, 2007

AmountPMPM

% of Total

Medical

Care Costs

AmountPMPM

% of Total

Medical

Care Costs

Fee-for-service $ 1,709,806 $ 116.69 65.2 % $ 1,343,911 $ 103.77 64.6 %
Capitation 450,440 30.74 17.2 375,206 28.97 18.0
Pharmacy 356,184 24.31 13.6 270,363 20.88 13.0
Other 104,882 7.16 4.0 90,603 7.00 4.4
Total $ 2,621,312 $ 178.90 100.0 % $ 2,080,083 $ 160.62 100.0 %

The following table provides the details of the Company’s medical claims and benefits payable as of the dates indicated:

Dec. 31,

2008

Sept. 30,

2008

Dec. 31,

2007

Fee-for-service claims incurred but not paid (IBNP) $ 236,492 $ 238,967 $ 264,385
Capitation payable 28,111 33,443 27,840
Pharmacy payable 18,837 18,136 14,676
Other 9,002 8,241 4,705
Total medical claims and benefits payable $ 292,442 $ 298,787 $ 311,606
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 years” represent the amount by which our 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 year”). The following table shows the components of the change in medical claims and benefits payable for the years ended December 31, 2008 and 2007:

Year Ended

December 31,

20082007
Balances at beginning of period $ 311,606 $ 290,048
Medical claims and benefits payable from business acquired during the period 14,876
Components of medical care costs related to:
Current year 2,683,399 2,136,381
Prior years (62,087 ) (56,298 )
Total medical care costs 2,621,312 2,080,083
Payments for medical care costs related to:
Current year 2,413,128 1,851,035
Prior years 227,348 222,366
Total paid 2,640,476 2,073,401
Balances at end of period $ 292,442 $ 311,606
Benefit from prior period as a percentage of:
Balance at beginning of period 19.9 % 19.4 %
Premium revenue 2.0 % 2.3 %
Total medical care costs 2.4 % 2.7 %
Days in claims payable 41 52
Number of members at end of period 1,256,000 1,149,000
Number of claims in inventory at end of period 87,300 161,400
Billed charges of claims in inventory at end of period $ 115,400 $ 212,000
Claims in inventory per member at end of period 0.07 0.14
Billed charges of claims in inventory per member at end of period $ 91.88 $ 184.51
Number of claims received during the period 11,095,100 9,578,900
Billed charges of claims received during the period $ 7,794,900 $ 6,190,900

Contacts:

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

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