Molina Healthcare reports net loss of $37.3 million for second quarter 2012

Molina Healthcare, Inc. (NYSE: MOH) today reported its financial results for the second quarter and six months ended June 30, 2012.

Net loss for the quarter was $37.3 million, or $0.80 per diluted share, compared with net income of $17.4 million, or $0.38 per diluted share, for the quarter ended June 30, 2011.

"The second quarter of 2012 illustrated both the opportunities and the challenges facing Molina Healthcare today," said J. Mario Molina, M.D., chief executive officer of Molina Healthcare, Inc. "The opportunities before us are clear. The renewal of our contract in Ohio, the continued development of the dual eligible opportunity across many of our markets, our entry into the Florida Nursing Home Diversion Program, the certification of our Idaho MMIS, and the Supreme Court's decision upholding many aspects of the Affordable Care Act make it clear that our company's revenue potential is far greater than it ever has been. However, developments in Texas during the second quarter emphasize the importance of adequate rates and disciplined cost control for new populations and markets. I remain confident that Molina Healthcare will overcome the challenges that come with the many opportunities before us, delivering much improved financial results in the future."

Earnings Per Share Guidance

Because of uncertainties surrounding the pace at which our medical cost containment initiatives in Texas will take effect, we previously withdrew and are not issuing fiscal year 2012 guidance with respect to matters related to or derived from medical costs, including earnings guidance.

Overview of Financial Results

The Company's financial performance in the second quarter of 2012 was impacted by the previously disclosed challenges with the Company's aged, blind or disabled, or ABD, contracts in Texas, particularly in the Hidalgo and El Paso service areas, and losses in Missouri (where our health plan terminated operations effective June 30, 2012) and in Wisconsin. The Company believes that its financial performance issues in the quarter were limited to its Texas, Missouri, and Wisconsin health plans. Excluding the Texas, Missouri, and Wisconsin health plans, the Company's overall medical care ratio was 85.3% and 84.4% for the three and six months ended June 30, 2012, respectively. The Company will receive rate increases in Texas effective September 1, 2012, which, together with various initiatives to reduce utilization and decrease unit costs, are expected to improve the performance of the Texas health plan. As stated above, the Company has now exited the Missouri market.

Health Plans Segment Results

Second Quarter 2012 Compared with Second Quarter 2011

Premium Revenue

Premium revenue for the second quarter of 2012 increased 32% over the second quarter of 2011, due primarily to membership increases, a shift in member mix to populations generating higher premium revenue per member per month (PMPM), and increased revenue linked to benefit expansions.

Membership at the Texas health plan more than doubled year over year, while also growing significantly in Ohio and Washington. Growth in the Company's ABD membership led to higher premium revenue PMPM in 2012. ABD membership, as a percent of total membership, has increased over 40% year over year. Premium revenue PMPM also increased in the second quarter of 2012 as a result of the inclusion of revenue from the pharmacy benefit for the Ohio health plan effective October 1, 2011, and as a result of the inclusion of revenue from the inpatient facility and pharmacy benefits across all of the Texas health plan's membership effective March 1, 2012.

Medical Care Costs

Medical care costs increased in the second quarter of 2012 primarily due to high costs at the Texas health plan and the addition of the pharmacy benefit in Ohio effective October 1, 2011. The Company's medical margin deteriorated year over year primarily due to:

• Higher medical costs in Texas and higher medical costs for ABD members in California; and
• Rate decreases of approximately 2% in Ohio effective January 1, 2012, and of approximately 3% in California effective July 1, 2011.

Individual Health Plan Analysis

The Texas health plan added 172,000 members and $255.1 million in revenue year over year. Most of this growth was due to regional and benefit expansions effective March 1, 2012. The medical care ratio of the Texas health plan was 109.4% for the second quarter of 2012, compared with 95.0% for the second quarter of 2011. Because revenues of the Texas health plan constituted nearly 25% of the Company's total premium revenue for the second quarter of 2012, the high medical care ratio in that state had a disproportionately large impact on the Company's overall financial results. Absent $14.1 million of unfavorable prior period development of claims reserves from the first quarter of 2012 and the impact of the $10.0 million premium deficiency reserve discussed below, the medical care ratio of the Texas health plan would have been approximately 102.7% in the second quarter of 2012.

The following table captures the effect of prior period development and the premium deficiency reserve on the Texas health plan's medical care ratio and medical care costs for the quarter ended June 30, 2012:

As previously disclosed, the Company believes that premium rates associated with the ABD contracts in the Hidalgo and El Paso service areas are not adequate to cover the medical costs associated with serving members under existing conditions. Utilization of long-term care services, including personal attendant services and adult day health care services, is currently far exceeding the utilization of those services elsewhere in the state and also far exceeding the utilization assumptions used by the state of Texas in the development, and the Company's evaluation of, premium rates.

The Company recorded a premium deficiency reserve for the Texas health plan at June 30, 2012, of $10.0 million. This premium deficiency reserve encompasses the two months ending August 31, 2012. The state of Texas has released preliminary rates effective September 1, 2012. The Company believes that these preliminary rates, if enacted, will yield a blended rate increase of approximately 6% overall (approximately $7.4 million per month) for the Texas health plan. The Company believes that the premium rates effective in Texas on September 1, 2012, together with various medical cost containment initiatives, will allow the Texas health plan to return to profitability during Texas state fiscal year 2013 (September 1, 2012, through August 31, 2013). Accordingly, the Company does not believe that a premium deficiency reserve will be required in Texas subsequent to September 1, 2012.

The medical care ratio for the ABD membership in the Hidalgo and El Paso service areas was 139% and 146%, respectively, during the second quarter of 2012. Absent unfavorable prior period development from the first quarter of 2012 and the premium deficiency reserve, the medical care ratios of the ABD membership in the Hidalgo and El Paso service areas would have been 116% and 133%, respectively, consistent with the Company's previously disclosed estimates. The medical care ratio for the aggregate ABD membership in Texas was approximately 119%. Absent unfavorable prior period development of claims reserves and the premium deficiency reserve, the medical care ratio for the aggregate ABD membership in Texas was approximately 109%. ABD membership overall constitutes approximately 70% of all Texas health plan revenue. ABD membership in the Hidalgo and El Paso service areas alone contributed 28% of the Texas health plan's total revenue for the second quarter of 2012.

The Company estimates that its current monthly loss before taxes for the Texas health plan overall is approximately $14 million, inclusive of payments made under its management services agreement with Molina Healthcare, Inc., the corporate parent of the Texas health plan. The Company believes that the profitability of the Texas health plan will improve over time by the estimated amounts shown below. The Company also believes that enrollment may decrease at the Texas health plan during the third quarter of 2012.

The increase in the medical care ratio of the California health plan year over year was primarily due to premium rate reductions effective July 1, 2011, and the mandatory assignment of ABD members previously served under fee-for-service arrangements. These members were transitioned into managed care plans effective upon their month of birth beginning in June 2011. The last of these members were transitioned into managed care in May 2012. The medical care ratio for these new members is approximately 95%, compared with a medical care ratio of approximately 85% for ABD members not subject to mandatory enrollment. Individuals who are new to managed care often have higher utilization of medical services upon initially enrolling into managed care plans. Utilization of heath care services is declining, however, for those ABD members added earlier in the mandatory enrollment process. This data leads the Company to believe that medical care costs will decrease for the mandatory ABD members over time.

Profitability at the Florida health plan improved substantially year over year due to a premium rate increase effective September 1, 2011, the re-contracting of portions of the health plan's specialty care network, and lower inpatient utilization.

The medical care ratio of the Michigan health plan increased to 87.1% in the second quarter of 2012 from 78.7% in the second quarter of 2011. The higher medical care ratio in 2012 was the result of a reduction to premium rates that was linked to a decrease in premium taxes, and higher pharmacy and inpatient facility costs. Partially offsetting the higher medical care ratio was a decrease of $8.7 million in premium tax expense. Both premium taxes and premium rates were reduced equivalently effective April 1, 2012. If the reduction to premium rates linked to a decrease in premium taxes had been in effect in the prior year, the medical care ratio for the second quarter of 2011 would have been approximately 82%.

The medical care ratio of the Missouri health plan increased to 104.9% in the second quarter of 2012 compared with 90.2% in the second quarter of 2011. The increase in the medical care ratio was primarily the result of higher inpatient utilization and high dollar claims. Unfavorable prior period development of claims reserves from the first quarter of 2012 was $7.6 million in the second quarter of 2012.

Profitability at the New Mexico health plan improved substantially year over year due to the absence in 2012 of contractually required reductions to revenue made in 2011.

The medical care ratio of the Ohio health plan increased to 82.6% for the second quarter of 2012 from 77.6% for the second quarter of 2011. The increase in the Ohio health plan's medical care ratio was primarily the result of a 2% rate reduction effective January 1, 2012, together with the assumption of the lower margin pharmacy benefit effective October 1, 2011. Although the Ohio health plan's medical care ratio increased in 2012, the medical margin (measured as total premium revenue less total medical care costs) remained constant.

Absent a one-time revenue benefit of $12.1 million recorded in the second quarter of 2011, the medical care ratio of the Utah health plan decreased to 82.5% in the second quarter of 2012 from 89.4% in the second quarter of 2011.

Lower inpatient facility costs tied to reduced inpatient utilization led the Washington health plan to report improved profitability year over year.

The Wisconsin health plan reported a medical care ratio of 121.1% for the second quarter of 2012 compared with 80.8% for the second quarter of 2011. The Company believes that premium rates associated with its contract in the state of Wisconsin are not adequate to cover the costs of servicing that contract. Accordingly, the Company recorded a premium deficiency reserve for the Wisconsin health plan at June 30, 2012, of $3.0 million. The Wisconsin health plan will receive new premium rates effective January 1, 2013. Absent the $3.0 million premium deficiency reserve, the medical care ratio of the Wisconsin health plan would have been approximately 105.2% for the second quarter of 2012.

Molina Medicaid Solutions Segment Results

Performance of the Molina Medicaid Solutions segment was as follows:

Operating income for the Company's Molina Medicaid Solutions segment improved $12.1 million and $18.8 million for the three months and six months ended June 30, 2012, respectively. This improvement was primarily the result of stabilization of the Company's newest Medicaid Management Information Systems, or MMIS, in Idaho and Maine. On July 17, 2012, the Company announced that the Centers for Medicare and Medicaid Services, or CMS, had certified the MMIS implemented by Molina Medicaid Solutions in Idaho retroactive to June 1, 2010. This certification will allow the state of Idaho to receive 75% federal financial participation for the operation of the MMIS retroactive to that date. Among the reasons cited by the Company for purchasing Molina Medicaid Solutions effective May 1, 2010, was the benefit of reducing the Company's reliance on health plan operations. For the quarter ended June 30, 2012, the Molina Medicaid Solutions segment gross profit margin rate was 27%, compared with 8% for the Health Plans segment.

Cash Flow

Cash provided by operating activities was $236.0 million for the six months ended June 30, 2012, compared with $114.9 million for the six months ended June 30, 2011. Deferred revenue was a source of operating cash amounting to $125.4 million in 2012, compared with $38.1 million in 2011.

At June 30, 2012, the Company had cash and investments of $1.1 billion, and the parent company had cash and investments of $39.8 million.