Molina Healthcare Inc (MOH) 2006 Q1 法說會逐字稿

Welcome to the Molina Healthcare first quarter 2006 conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, May 4, 2006.

I would now like to turn the conference over to Mr. Juan Jose Orellana, Vice President of Investor Relations. Please go ahead, sir.

Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's results for the first quarter of 2006. The Company's results were issued today after the market closed, and they can be viewed at our company Website.

With me here today are Dr. Mario Molina, our CEO, John Molina, our CFO, Dr. Bill Bracciodieta, our Chief Medical Officer, and Terry Bayer, our Chief Operating Officer. After the completion of our prepared remarks, we will open the call to take your questions.

Our comments today contain forward-looking statements. All forward-looking statements are subject to numerous risk factors that may cause actual results to differ materially. Such factors include risks related to the following -- the success of the Company's initiatives to manage and contain its medical care costs; the Company's ability to accurately estimate incurred, but not reported, medical costs; the timely closing of the CAPE acquisition; the availability of financing to fund our acquisitions; Medicaid enrollment growth in Ohio and enrollment growth in our Medicare Advantage Special Needs Plans that conforms to our projections; high-dollar claims related to catastrophic illness; unexpected utilization or seasonality trends; the successful renewal and continuation of the government contracts of the Company's health plans; the favorable resolution of pending litigation or arbitration; and other risks and uncertainties as detailed in the Company's reports and filings with the Securities and Exchange Commission, and available on its Website at www.SEC.gov. All forward-looking statements represent the Company's judgment as of May 4, 2006. The Company disclaims any obligation to update its forward-looking statements. This call is being recorded, and a 30-day replay of the conference call will be available over the Internet through the Company's Website at www.MolinaHealthcare.com.

I would now like to turn the call over to Dr. Mario Molina.

Thank you, Juan Jose, and thanks to everyone on the phone for joining our call today. I would like to start by discussing key points from the quarter, both in terms of strengths and challenges, and then highlight a few developments that will have an effect on our company in the upcoming quarters. As we have done in the past, I will defer to John to walk you through our financials results in greater detail.

In terms of key points, we achieved earnings of $8.6 million, or $0.31 per diluted share, in the first quarter of 2006. Our financial results for this quarter, combined with the positive momentum generated in the previous two quarters, are indicative of the progress we have made operationally, financially and strategically.

Over the past few quarters we have remain focused on delivering results based upon the action plan we developed (technical difficulty) our medical costs increased in 2005. Today, we are encouraged to report that the medical management initiatives we began deploying last year are continuing to move in the right direction. Specifically, our medical management initiatives have centered on improving areas such as network and contract management, case and disease management, utilization management, and accuracy of claims payment. These areas, as you may recall, are what Dr. Bill Bracciodieta, our Chief Medical Officer, discussed in prior calls. Both Dr. Bracciodieta and Terry Bayer, our Chief Operating Officer, have worked very diligently over the past nine months to overcome many of our challenges.

Despite the noticeable improvement in our medical care cost trends, there is still much to be done, and we remain committed to the execution of our cost containment strategies. While we are cautiously optimistic, we have said before that the results of the first full half of 2006 will provide a more reliable measure of our financial progress.

Since the increase to our medical costs did not become evident until the second quarter of 2005, our second-quarter results for 2006 will complete the time interval necessary to make better comparisons.

During our last conference call we discussed some of the medical management issues that we believed would continue to affect our visibility into medical cost trends. As we head into the second quarter, these issues are still relevant. And given their impact on our results, I would like to briefly highlight them again.

First, the implementation of our cost containment strategies is ongoing, and the time needed for these actions to take effect will continue to limit medical cost predictability. Second, the impact of our cost containment strategies will be more apparent in the second half of 2006, as these initiatives will benefit from longer application. Finally, both the impact of these initiatives and their corresponding effect on costs will also be influenced by inherent seasonal changes in our business.

In addition to our medical management efforts, there are other developments that will also play a role in the evolving financial picture of the second half of 2006. For example, we continue to expect the CAPE transaction in Michigan will close sometime in the second quarter of 2006. This transaction will add about 85,000 members to our Michigan health plan.

As many of you may recall, last month Molina Healthcare of Ohio was selected to proceed into the Readiness Review phase in all four regions of the state for which we had submitted applications. Molina's selection in these four regions translates into a service area expansion of 47 additional counties. We are currently assessing how this may affect our expected enrollment levels in that state.

Our Special Needs Plans under Medicare Advantage were launched on January 1st of this year. According to company estimates, and estimates by the Centers for Medicare and Medicaid, there are approximately 400,000 non-institutionalized, dual-eligible beneficiaries in our targeted states and counties. There is significant opportunity to grow enrollment in this program. For 2007, the Company plans to renew its Medicare Advantage contracts in the four states in which we operate this program.

We will continue to address the events that manifested themselves last year, even though we have made progress. Last year's events have required us to reassess our operations. And as a result, we have greater focus on medical management, improved some of our processes, and are leveraging our data through tools like many MedInsight. These improvements are important for our future success as we expand our business base and continue our pursuit of high-quality medical services and accreditation by the National Committee on Quality Assurance. We recognize that our success will depend not only on delivering quality healthcare services today, but also on our ability to prepare our organization to meet our customers' needs in the future. We are hard at work to deliver on that goal.

I would now like to turn the call over to John.

Thank you, Mario. Hello, everyone. Net income for the quarter ended March 31, 2006, was $8.6 million, compared to net income of $15 million for the quarter ended March 31, 2005. On a fully diluted share basis, net income in the first quarter was $0.31 per diluted share, versus $0.53 per diluted share for the same quarter a year ago.

Premium revenues for the first quarter ended March 31, 2006 were $449 million, up 15% from $392 million in the same quarter last year. Enrollment growth was the main driver of our revenue increase. New enrollment in our start-up plans in Ohio and Indiana, and the closing of our contract acquisitions in San Diego in the third quarter of 2005, contributed to the higher year-over-year revenue figures.

As of March 31, 2006, our enrollment stood at 918,000 members, up 14% from 803,000 a year ago. Sequentially, enrollment grew by approximately 25,000 members, or 3%, fueled by enrollment gains in Indiana, Ohio, Utah, and Washington. California enrollment decreased by approximately 9000 members. The decline, for the most part, appears concentrated in the Los Angeles and San Diego markets. In each county, one contracted physician provider group with a significant level of membership terminated their contract. In San Diego, the provider exited the Medicaid market to focus on serving only their commercial population, while the Los Angeles provider group contracted with another health plan.

Our medical care ratio for the first quarter of 2006 increased to 85.3% of revenue, as compared to 84.9% in the first quarter of 2005. Normally, we analyze medical care ratio trends by looking at the current quarter as compared to the results from the same quarter for the prior year. However, given the events that transpired in the second quarter of 2005, comparing the first quarter of 2006 to both the first and second halves of 2005 will be a better measure of the progress that is being made.

Our medical care ratio, excluding unfavorable provider settlement costs, for the first six months of 2005 was 88.3%. We believe that the decrease in our first-quarter medical care ratio from that of the first half of 2005 is a measure of the impact of the cost containment initiatives we have undertaken since the start of the third quarter of 2005.

Our medical care ratio for the second half of 2005 was 85.0%. Sequentially, our first-quarter medical care ratio increased by 30 basis points from the second half of 2005. We believe this sequential increase is related to normal seasonality observed during our business during the first quarter.

Our general and administrative expenses increased to 11.3% of revenue in the first quarter of 2006, compared to 8.5% in the first quarter of 2005. General and administrative expenses, excluding premium taxes or core G&A, increased to 8.5% in the first quarter of 2006, as compared to 5.9% in the first quarter of 2005. Elements affecting G&A this quarter were investments in infrastructure to support the Company's medical cost and quality initiatives, administrative expenses associated with the Company's development of its Medicare Advantage Special Needs Plans, and stock compensation expenses. Our stock compensation costs reflected in our G&A, due to the adoption of FAS 123(R), were approximately $815,000, or $0.02 for the quarter.

Overall, the increase in core G&A as a percentage of revenue reflects our investment in the administrative infrastructure before the benefits of such investments are apparent. These benefits include reduced medical costs and the creation of economies of scale that will come with our anticipated enrollment growth. We believe that over time, administrative costs will move to lower levels. Nevertheless, we will make the infrastructure investments necessary to take advantage of the new opportunities Mario discussed earlier.

Cash flow from operating activities provided approximately $41 million for the quarter ending March 31, 2006. Increases in medical claims and benefits payable were responsible for nearly half of our cash from operating activities in the quarter. This is to be expected given the growth in our business during the quarter and our practice of using consistent reserving methodologies that attempt to maintain an allowance for adverse claims development. We continue to believe that we are adequately reserved, and we continue to monitor medical costs and utilization trends.

Recognition that our claims reserving methodology has been consistently applied at both March 31, 2006 and December 31, 2005 is necessary if we are to draw the proper conclusions from the Company's schedule of the change in medical claims and benefits payable for the first quarter of 2006. It is important to differentiate between the presence of positive prior period development and the impact that such development will have on a single quarter's results. Assuming consistent reserving methodology, positive out-of-period claims development in any period will be balanced out by the allowance for adverse claims development incorporated into the liability recorded at the end of the current period.

Historically, we have seen higher positive prior period development during the first quarter equal to approximately 3% of medical costs for the quarter. For the first quarter of 2006, the prior period development was approximately 6.5% of medical costs. This increased percentage needs to be weighed against the increase in our claims liability at March 31, 2006 of $18.2 million.

Our consistent reserving methodology is confirmed by increases to our days in claims payable. Days in claims payable were 57 days at the end of the first quarter of 2006, up from 55 days at the end of the fourth quarter of 2005. This is the fifth consecutive quarter in which our days in claims payable has increased.

Turning to liquidity, we ended the first quarter of 2006 with cash and investments at the parent company of approximately $30 million. Our subsidiaries had a combined $53 million in statutory equity in excess of regulatory capital. Our $180 million credit facility continues to remain undrawn, but it may be utilized for CAPE or future acquisitions.

You may recall the Company issued fiscal year 2006 guidance on February 22, 2006. Given all the moving parts that both Mario and I have discussed, such as the implementation of our medical management initiatives, the program rollout in Ohio, the CAPE transaction, and the inherent seasonal changes in our business, the Company will not revise guidance until there is greater clarity on these issues.

I would like to turn the call back to Mario.

Thanks, John. Operator, that concludes our prepared remarks. We will now be open for questions.

(OPERATOR INSTRUCTIONS). Greg Nersessian, Lehman Brothers.

I guess my first question is on the [PPRD] in the quarter, the 24.6. Is there a component of that that you would characterize as onetime in nature, or maybe above and beyond what you would normally accrue for in your provision for adverse claims deviation?

I don't think so, Greg. I think what you need to look that is the $24 million in prior period development offset by the increase in medical claims liability of 18.2 million. And also note that historically, that is about twice as high as we would have expected. But then we also would have expected that medical claims payable would have gone down. So, you have got a couple of moving parts right there.

Also, the days in claims payable is up. So, it is a fairly consistent reserving methodology, one of timing. If you look at just one period compared to the next, you may come to the wrong conclusion. That is why we have made an emphasis on medical claims payable is up quarter over quarter, as are the days in claims payable.

I guess what I am trying to figure out is in the previous earnings guidance, you gave the 86% MLR for the full year. If we were to back out the impact of onetime PPRD in the quarter, not including any of the other business that's coming -- not including CAPE, not including Ohio, just the base book of business -- would that 86% guidance still apply, adjusting for those items?

Yes. As of right now, 86% is our guidance.

But that guidance would change based on Ohio and the other -- and CAPE and the other items?

What we said is that at this point, there are a lot of uncertainties about what the enrollment is going to look like in Ohio, when the CAPE transaction is going to close. So, we have issued guidance, and we are sticking with that number for right now.

You mentioned the Ohio. Do you have any clarity on the timing there yet, or at least when we will have clarity on the timing?

No, there's really not a lot to say about Ohio. There is a meeting scheduled with the plans in mid-June, but we don't have any firm timelines on the implementation yet.

Just to get back to the medical costs for one second, I don't know if Dr. Bracciodieta is there, but in the last quarter, you gave some stats around your bed days per thousand being down 5%, your ER visits down 10%. Could we get an update on how those are tracking in the first quarter? Are those in line with expectations? Do they continue to come down, and what are the expectations for the full year?

We are tracking about at the same level as we have mentioned on our last call.

So, no further improvements? You have sort of stabilized there?

That's the way it looks like at this point in time, yes.

Tom Carroll, Stifel Nicolaus.

To add on to Greg's question on Ohio, you really have no idea when Ohio is going to be implemented? Can you take a guess?

Let me tell you what we do know. There was a meeting scheduled with the plans for mid-May. That meeting has been pushed back to mid-June. So if I had to guess, I would say it probably will not be implemented before July. You also know that the central region is going through another procurement because they only selected two plans, and that may delay things a little bit, too. So, that is really the state of our knowledge about Ohio right now.

If we think about rolling in Ohio to our estimates -- fourth quarter sometime? Is that -- would that be completely out of the ballpark, or --?

I don't know, Tom. I would imagine -- I would hope that they would be able to get the program off the ground by the fourth quarter, but we'll wait and see. So far, actually, things have gone pretty smoothly with Ohio. Of the states that we have been in, they have kept their timelines fairly well. But that's no guarantee what the future is going to hold.

Understood. In Michigan, can you spike out for us your experience in Grand Rapids versus Detroit? I think you have said on prior calls that Grand Rapids was really more of the problem in the market. Have you seen any improvement in Grand Rapids since we spoke last?

We have seen some stabilization of utilization trends in Western and Northeast Michigan. So, we are seeing some improvement there. Tom, on your question on Ohio -- remember that we are currently in operation in Ohio. So, it is not unreasonable that we will see some membership growth, even though the program is not rolled out yet.

Ed Kroll, Cowen & Co.

Back on the reserves and the days of medical claims payable -- it would appear, given that the days are up, even though you had a pretty big favorable prior period development, that you replenished the reserve amount for adverse developments going forward. Is that a fair statement?

That is a very fair statement.

And then, can we -- just to kind of close the loop, can we say the same thing about IBNR, maybe even that you were a little more conservative at 3/31 on the IBNR than you were at 12/31?

More consistent in methodology for IBNR. And one of the things you have to realize is just from a pure numeric standpoint, as we grow and the base IBNR gets bigger, and we apply consistent methodology and the same factors for potential adverse deviation, it's going to grow.

Fair enough. I'm sorry; I missed the cash -- the free cash was 30 million at March 31. And you said you had some excess still at the subsidiary level.

53 million.

Thanks. In terms of the way the rest of the year should look from a quarterly EPS standpoint, or a seasonal standpoint, any change in the historic pattern, in terms of what portion of the full year guidance that you are affirming today should come from the second half? I think it's usually, what, 65-or-so% of your full year EPS come in Q3, Q4? Should that still be the case?

It's probably going to be a little less back-end loaded.

But I think the general seasonal trends still apply, if that's what you are asking.

Yes. And then the rollout of MedInsight; where do we stand on that? How many markets is that up and running in?

It is up and running in California, Washington, Michigan, New Mexico. And then we are bringing on Indiana now that we have sufficient data.

And in Utah, you're not -- you're still operating on a non-risk basis, right?

That's correct, although we are implementing it in Utah as well.

Carl McDonald, CIBC.

If I can just summarize all the other comments on reserves, would it be a fair statement to say that your assertion is there was no net impact on earnings from favorable reserve releases this quarter?

Carl, I would say as compared to historical, no, there has been no change. Remember, we have historically experienced 3% positive prior period development. So, as we are doing our guidance and our forecast, that is sort of built in as a run rate. So there is always a component of the prior period development built in the current numbers.

Built into current prior period development, or built into current earnings?

Built into current earnings.

Of the 24.6 million, anything you would highlight in terms of -- 26 million and 24.6 million in favorable development -- anything you would highlight in terms of component geography, where that's coming from?

No.

Any significant contribution from the Medicare SNP plan in the quarter?

No. We didn't talk about the Medicare SNP plan. We look at this really more as an experiment for us, an opportunity for us to learn the Medicare business. And that is why we haven't talk about the financials. Right now, they account for only about 1% of revenue, so we didn't feel it was worth mentioning. And if you look at our guidance for 2006, you'll also note that we didn't include the Medicare in the guidance.

There has been a lot of conversation in the market about the central region of Ohio, particularly the provider contracting environment there. Maybe you could just offer some comments about your existing contract in Columbus, and how that's changed over time.

What I would say is it has been a very difficult market in terms of contracting. I think part of the reason that we have done well in Ohio is due to Jon Buss, who has spent quite a bit of time there developing relationships and knocking on doors and giving us the contracts that we needed. We have been in Ohio for a long time working on this, probably longer than anybody else but CareSource, and I think that that has a lot to do with the contracts that we have gotten.

So you're comfortable with the level of capitation that the Children's Hospital is requesting in that market?

What I would say is this, Karl. There has been a lot of discussion about certain contract negotiations. And obviously, we can't disclose the terms of any one contract that we have. But we are comfortable with the contracts that we have in Ohio. It was a long process. They were well negotiated. It was a diligent effort on the part of Jon Buss.

Joe France, Banc of America Securities.

I thought I understood what you were saying about reserves until you answered Carl's question. The $24.6 million that you have in prior period development, was any of that released during the first quarter? In other words, were expenses as reported in the income statement as they were experienced, or was that reduced by some amount to reflect reserve releases?

I'm not quite sure -- can you rephrase your question, Joe?

Well, the $24.6 million is presumably the amount by which you assume prior periods' medical expenses were overestimated, or they were lower than you expected by that amount?

No.

Can you explain what the number means then?

The number means that when we did our reserving, and we looked back at 12/31, the addition for potential adverse claims deviation was brought down for that period, but offset by a similar amount for Q1. And perhaps I can delve into an analogy which might clarify things.

If we had estimated at 12/31, or at the end of a period, that we had $100 million in medical claims and benefit liability, and we added a factor of 5% -- now, I am just throwing these numbers out as an example; these are not what we did (multiple speakers) that we did -- then we would record $105 million on our balance sheet in terms of liability. If at the end of the next period, the end of the first quarter, we estimate our medical claims and benefits payable again at $100 million, but in our review of the fourth quarter we realize we were exactly on $100 million -- there was no adverse deviation -- we would then take that $5 million down. But likewise, we use the same 5% factor -- we would add 5% to the end of the first quarter.

That is precisely what I wanted to hear.

It would show up as positive development of $5 million, but it would have no impact on the pure medical expense.

That's fine; that's exactly what I wanted to make sure I understood. The last question I had, to follow-up on your comment earlier about SG&A -- you indicated, as I understood it, that it was higher than the normalized rate will be going forward. Could you suggest a normalized rate going forward?

What we said in our guidance was 7%, I believe, for the core G&A for the year. That's excluding premium taxes. It's higher this year quarter because we had a number of development issues. We have got the Medicare SNP program that came online. And for a lot of these infrastructure expenses, we have been expecting them as we go along, and we are not recording them as onetime charges.

(OPERATOR INSTRUCTIONS). Matt Perry, Wachovia Securities.

A question related to 1Q 2006 and your outlook for the full year. Are your premium yields or premium rate increases running at a higher level than your cost trends?

Yes, they are.

And they did that in the first quarter?

Well, yes, but also remember, too, there are things some things that are changing. Didn't we have a change in the benefit structure in New Mexico? So we had a carve-out there.

But I mean as far as on a same-store basis, there is a positive spread between premium yields and cost trends. Is that correct?

Yes.

And then in Michigan, you had talked about maternity costs and an issue of a provider -- an increase in provider reimbursement that was not accompanied by an increase in payments to managed care plans. Has that been addressed at all?

It's been addressed; it hasn't changed. We have been out talking to the staff in Michigan about their rates, and the Governor has proposed a rate increase this year of about 5%. It made it into the Governor's budget. It has made it through the Senate. It is in the House in the State of Michigan right now. But it has not been resolved. We are actively working on that issue.

Just a quick question on the prior period development, the positive development in the quarter. Could you say that that was more related to first-half 2005 or second-half 2005?

Second-half 2005. It really relates to, again, the additional amounts for potential adverse claims development.

In Ohio, I think your prior comments had been that you expected to get 70,000 members, something like 70,000 members into 2006. Is it correct to say that you have not changed that guidance?

What we said was that we expected to get 70,000 members, and that was based on the premise that we wouldn't be successful in two regions.

So, anything above and beyond that 70,000 would be incrementally a higher -- it would raise your expectations, basically?

Yes.

Bill Georges, JP Morgan.

My first question is a follow-up on the SG&A and the Ohio buildout. We have talked about how your year-end outlook is for 7%. Would you expect to have to expend additional spending there for the Ohio buildout? And if so, is that embedded in that 7% year-end expectation?

I think you hit a good point. There is a possibility that the admin costs are going to be higher for Ohio because of the additional regions that we were selected in. And there is a component to the admin costs that is tied directly to the number of members that we get. So, that is a variable cost. Now, when we gave our guidance of 7%, it did not include those additional regions.

Do you have any sense -- a magnitude of impact that that might have if those regions come online this year?

Not at this point.

The next question is a follow-up on some of the Ohio contracting issues. I don't know if you're willing to get into this. Can you guys talk about whether or not you are signed on to any global capitation contracts in the region?

Yes, I think we have talked about that before. We have one global contract that includes physicians, hospital, and pharmacy, with one provider. The remainder of our contracts are fee-for-service. And if you look across the Company as a whole, the majority of our contracts now are fee-for-service; about 85%.

Can you give any incremental data on rate updates and medical cost trends that you're seeing in the different cost trend segments?

What we are expecting for the year, based on the guidance -- the revenue guidance that we gave in February, we are expecting about a 2.5% increase in revenue related to rates. Overall, we expect the medical cost trend to decrease by about [1 point to 31.5%]. And the components are about 3% increase in pharmacy, negative 2% in inpatient, about a 1% increase in physician costs. All other, or all costs [would be about 1.1%].

Ed Kroll, Cowen & Co.

On the cash flow, you had a very strong cash flow quarter. And I am just wondering what you're thinking for the full year maybe as a multiple of net income, if you want to do it that way. And what kind of timing issues might have impacted Q1? I see the deferred revenue, 5.4 million. Just any color you can give us on what kind of the run rate operating cash flow is?

The deferred revenue related to Ohio. We had a check in early. I think it came in on a Friday, when the last day of the month was on a weekend, or something of that nature. There's always an issue, Ed, on the timing of payments, because the payments come in such few checks from the states. So one day, one way or the other, can have an effect on the cash flow.

I think what I would say in terms of the cash flow is, consistently, we have said over time, cash flow is going to equal net earnings plus depreciation and amortization. As we grow, the cash flow should exceed that, because we get paid up front and don't receive all the claims for a number of months. So, as we go in places like Ohio, as our Medicare program continues to build out, we should see some good cash flow.

What I would say, though, is we have also made a big initiative -- and this is one of the things describing our G&A costs -- to streamline and to increase our electronic commerce. And so our goal there is to make it easier for our providers to submit their claims directly to us electronically so that we can turn around and process those and pay the providers electronically. And so it would not be surprising to me if probably along the fourth quarter we start to see the days in claims payable go down, as we are able to increase the efficiency with which we pay.

Thank you. Dr. Molina, there are no further questions at this time. I will turn the conference back over to you.

If there are no further questions, thank you, everyone, for joining us, and we'll talk to you next quarter.

Ladies and gentlemen, that does conclude the conference call for today.