Equity research: Molina Healthcare, Inc.

Part 3

Molina Healthcare: Why Medicaid growth should directly help Molina

Molina Healthcare, Inc. (MOH): Market overview

Medicaid is a rapidly growing segment within healthcare, which should directly benefit MOH. In addition to typical market growth of mid-single digits, there are several supplemental drivers.

MOH Margin PerformanceEnlarge Graph

Healthcare reform (Obamacare)

Under current reform provisions starting 2014, Medicaid would expand coverage to additional 11 thousand uninsured. Based on its presence within key states such as California, Michigan, and Ohio, MOH could accrue another 500 thousand members, which could lift revenue by $1.5 billion. Note that this could ultimately prove conservative if additional states opt into the expansion.

Outsourcing into managed care

As entitlement program costs continue to rise, states are increasingly receptive to managed care solutions, which can provide immediate and long-term savings over traditional fee-for-service programs. On this state-driven privatization, MOH’s presence in Florida, California, Texas, and Illinois should be a top line tailwind. In addition, following the successful defense of its Ohio, Washington, and New Mexico markets, the company faces little reprocurement risk. MOH successfully defended reprocurement of its Washington Medicaid contract in 34 counties and added one additional county, effective July 1, 2012. Similarly, in Ohio, following a protest, the company was able to defend its existing Medicaid contract in the state. The company also expanded to 38 new counties, effective June 1, 2013. Apart from this reprocurement, MOH is also looking at expansion opportunities, as many of them are in MOH’s existing markets.

MOH Eligible Duals and Revenue by StateEnlarge Graph

The dual eligible opportunity

Typically, states incur the majority of their entitlement program expenses from a small minority of patients. Most often, this cohort is eligible for both Medicare (intended for seniors) and Medicaid (for the indigent). MOH has already won dual contracts in California, Texas, Ohio, and Illinois, though the margin profile may be weak in the initial years. Under California’s Coordinated Care Initiative (or CCI), starting June 2013, MOH plans to enroll 50 thousand duals in the state of California, boosting revenues by ~$900 thousand on an annual basis. Under the California dual demonstration project (known as California’s Coordinated Care Initiative), there is mandatory managed care enrollment of the Medicaid portion of the benefit while there exists an opt-out option for the Medicare portion. The government is also integrating long-term support services (or LTSS) into the contract, which will include long-term nursing facility care, personal care adult day care, and other support services that should help boost premiums for plans and achieve desired savings. MOH has also won the Ohio and Illinois dual integration proposals, with enrollment expected to begin in Q4 2013. The company will enroll 25 thousand duals in Ohio, which would boost revenues by $400 thousand, while in Illinois, MOH could add 17 thousand duals at a PMPY (per member per year) of $25 thousand, boosting annual revenues by ~$425 thousand.

The Market Realist Take

The budget signed by California Governor Brown included funding to expand Medicaid coverage to more than $1 million low-income people in California. The expansion is anticipated to begin in January of 2014 as part of the Affordable Care Act. Funding the expansion confirms California’s commitment to expanding Medicaid, as well as Molina’s opportunity for additional enrollment growth.

The National Association of Insurance Commissioners, or NAIC, adopted rules effective December 31, 1998, which, if implemented by the states, set minimum capitalization requirements for insurance companies, HMOs, and other entities bearing risk for healthcare coverage. The requirements take the form of risk-based capital (or RBC) rules. Michigan, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin have adopted these rules, which may vary from state to state. California and Florida haven’t adopted NAIC risk-based capital requirements for HMOs and haven’t formally given notice of their intention to. These requirements, if adopted by California and Florida, may increase the minimum capital required for those states.

As of June 30, 2013, Molina’s health plans had aggregate statutory capital and surplus of approximately $627.7 million, compared with the required minimum aggregate statutory capital and surplus of approximately $363.2 million. All of its health plans complied with the minimum capital requirements on June 30, 2013. It can provide and is committed to providing additional capital to each of its health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.

The company stated that the ACA imposes an annual fee on health insurers for each calendar year, beginning on or after January 1, 2014. The fee will be imposed beginning in 2014, based on a company’s share of the industry’s net premiums written during the preceding calendar year. If the fee assessment is enacted as written, the company’s minimum capitalization requirements will increase significantly on January 1, 2014. Molina said it’s currently evaluating the impact of the fee assessment to its financial position, results of operations, and cash flows.

UnitedHealth Group Inc. (UNH), WellPoint Inc. (WLP), Health Net Inc. (HNT), Centene Corp. (CNC), Humana Inc. (HUM), Cigna Corp. (CI), and Aetna Inc. (AET) are Molina’s competitors.

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