Molina Healthcare Inc (MOH) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Molina Healthcare's first quarter conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded Wednesday, April 29, 2009.

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

Thank you, Kim. Hello, everyone, and thank you for joining us.

The purpose of this call is to discuss Molina Healthcare's financial results for the first quarter ended March 31, 2009. The Company's earnings release reporting its results was issued today after the market close and is now posted for viewing on our company website.

On the call with me today are several members of our executive team. Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; Dr. James Howatt, our Chief Medical Officer; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions.

I also would like to remind you that our comments today contain numerous forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions that are subject to numerous risks, uncertainties, and other factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release, our 10K annual report, and our 10Q quarterly reports filed with the Securities and Exchange Commission. These reports can be accessed under the Investor Relations tab of our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgement as April 29, 2009, and we disclaim any obligation to update such 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 also like to take a minute to point out a few changes to our Investor Relations' activities for the remainder of 2009. Although healthcare conferences represent a great opportunity to interact with the investment community, our time with investors during such conferences is limited and the scope of topics that we can cover about our company is narrow.

Given these dynamics, we will be cutting back on the number of conferences that Molina will attend for the remainder of the year; however, this does not mean that the Company will be limiting its interaction or communications with the investment community. We remain committed to transparency and to access to management. And as an alternative, we will be supplementing our attendance at such conferences by implementing a second Investor Day this year.

We believe this will provide an enhanced opportunity to get to know our company better. The date for our second Investor Day has been set for May 28, 2009 in New York City. More details will be shared with you in the upcoming days. We look forward to seeing you there.

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

Thank you, Juan Jose. Hello, everyone, and thank you for joining us today.

We are pleased to report another quarter of solid financial results. Highlights from the first quarter include diluted earnings per share of $0.46 versus $0.44 a year ago. Membership that grew by 10% when compared to the first quarter of 2008; and also premium revenues that increased by 18% year-over-year. Our first quarter results exceeded consensus expectations and are clearly a positive step towards our financial objectives for the full year.

John will review the details of our financial performance in a few minutes; but needless to say, this was a good quarter under any circumstances, but especially when you consider the environment we are dealing with today. Rising unemployment is expected to increase the number of people eligible for Medicaid. While this growth in the number of Medicaid beneficiaries represents a tailwind for our business, it must be weighed within the context of state budgetary constraints, rising medical costs, and lower interest rates.

All of which can have the short term effect of shrinking margins; however, I believe that one of the keys to delivering the type of results we publish today even in a challenging economic environment, is the focus of our team. Throughout the first quarter, our team has maintained its focus on building on the momentum from 2008 while positioning the Company for success in 2009 and beyond.

We remain committed to be prudent stewards of public funds, a Hallmark of our company to managing our medical costs and to improving our capital allocation. All of these efforts relate back to our basic strategy, and we are very pleased with the outcomes.

Our management efforts have resulted in a strong core business. Except for California, most of our health plans performed well in the first quarter of 2009. We are encouraged by the progress of our Ohio health plan, and we are confident that the efforts that led to the improvement in Ohio can be replicated in California.

You may recall that inadequate premium rates, rising unit costs, and high utilization due to pent up demand in Ohio resulted in a drag to our earnings throughout 2008. But starting last year, around the third quarter, our contracting efforts produced new contracts with significant savings. Furthermore, through extended conversations with the state, we have been able to document the need for rate increases.

Our approach was successful and now our Ohio health plan received a 5% rate increase effective January 1st of this year. As a result of getting improved rates from the state, our contracting efforts and by managing utilization, the medical care ratio in Ohio declined by 600 basis point from a year ago.

Our founder Dr. David Molina said this is a business of nickels. By this he meant that we must pay attention to detail. We strive to provide quality healthcare at a low cost. Our Ohio plan has done just that. Lowering costs while upholding high standards of care.

In seeking to meet the demands of an evolving marketplace while improving the cost effectiveness and care in Ohio, I am pleased to report that we have always kept our focus on quality healthcare. Molina embraces the philosophy that quality healthcare and cost effectiveness need not be mutually exclusive and we are especially proud that our focus on quality in Ohio has attracted national attention.

During the first quarter of 2009, Molina Healthcare of Ohio met the rigorous accreditation standards established by the national committee for quality assurance and earned a three year new health plan accreditation from NCQA. I want to thank everyone at the Ohio health plan for their hard work and dedication leading to this achievement.

In California, low premium rate increases, higher unit costs, and pent up demand among new members resulted in medical cost trends that exceeded premium growth. The challenges in California are neither new, nor entirely unanticipated. Some California providers have responded to the current economic conditions in the state by increasing their bill charges; or in the case of a handful of providers that are essential to our network, demanding steep rates in order to participate in our network. We are working diligently to address these challenges.

I want to highlight the good results that we are seeing across some of our other state health plans. Michigan, Missouri, Texas, Washington and Utah have been performing well. Medical margin, which is the difference between premium revenue and medical costs and also represents a measure of the efficiency of healthcare delivery, increased by 16% over the first quarter of last year. We are pleased to see that our diversification strategy is working.

As we shared with you during our Investor Day, we believe that during these difficult times, Medicaid managed care is a proven and compelling solution to covering the uninsured and alleviating state's rising Medicaid budgets. Serving the healthcare needs of vulnerable populations is not for every company. It requires a real understanding of this population, and a depth of expertise to make a difference in patient's lives.

It is our--in our experience, cultural orientation and nearly 30 years of experience in Medicaid managed care that allow us to flourish in this challenging environment. We remain optimistic about the long term growth potential of our business, and I look forward to seeing you at our Investor Day next month.

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

Thank you, Mario.

As Mario noted, we are pleased with our first quarter results. Net income of $12.2 million was only slightly less than last year's $12.5 million. Earnings per share actually increased to $0.46 per share from $0.44 per share. We owe this success to increased enrollment, careful capital management, and tight administrative cost control.

It is worth noting that if investment income had not fallen by about $4 million between Q1 of 2008 and Q1 of 2009, EPS would have been another $0.09 higher this quarter. This means the results from our underlying operations are stronger this year than they were a year ago.

Enrollment grew by 2.4% between December and March even without the benefit of our Florida market entry. This enrollment growth, which was consistent with our announced guidance for 2009, enabled us to overcome a slight increase in our medical care ratio compared to 2008. Even with the slight increase in our medical care ratio, we were able to grow our medical margin by 16% year-over-year.

We took advantage of equity market conditions to continue the repurchase of both our common shares and our senior convertible debt. This focus on capital allocation allowed us to increase earnings per share in the first quarter despite the $3.9 million decrease in investment income I mentioned a minute ago.

Finally, tight control of administrative costs, again consistent with our announced guidance for 2009, allowed us to leverage our enrollment growth and reduce our core general and administrative expenses to 7.6% of total revenue. Nearly all of our health plans: Michigan, Missouri, Ohio, Texas, Utah and Washington performed well.

The improvement at our Ohio health plan is particularly satisfying. That improvement represents the culmination of three years of efforts to bring both effective and cost efficient healthcare to members there. We are especially pleased to have demonstrated both economic efficiency and care quality during the same quarter. The first quarter financial results we were discussing for Ohio today, are more meaningful because we achieved accreditation from the national committed for quality assurance.

While we face challenges in California, we continue to believe our presence there will prove to be a strategic advantage over the long run. California has the largest Medicaid population of any state in the nation, and is second in the nation in annual Medicaid expenditures. We will maintain the same focus on quality and efficiency in California as we have in Ohio and our other markets. We believe that over time, changes in provider contracting, utilization management, administrative efficiency, collaboration with state agencies, and a cost and focus on quality will lead to success in California just as they have done in Ohio.

Cash flow provided by operating activities for the quarter ended March 31, 2009, was $67 million compared with cash used by operating activities totaling $23 million for the same period in 2008, and improvement of $90 million. The increase was due primarily to two factors. First, we had a $91 million favorable change in deferred revenue in Ohio. Second, medical claims and benefits payable increased by approximately $19 million. These increases were offset by increased receivables of approximately $24 million primarily in California and Utah.

At March 31, 2009, the Company had cash and investments of approximately $707 million. At March 31, 2009, our parent company had cash and investments of approximately $70 million. Cash and investments at the parent company were up slightly from December 31, 2008 despite the repurchase of nearly $25 million in common stock and senior convertible notes during the quarter.

Given our strong cash position, our board has authorized management to buy additional shares and convertible bonds back. Days in claims payable increased sequentially to 42 days at March 31, 2009, up from 41 days at December 31, 2008. We are confirming our guidance issued on January 22, 2009 of earnings per diluted share between $2.20 and $2.40 for the full year of 2009.

Finally, I want to take a moment to remind everyone of the changes in our investor relations activities that Juan Jose discussed at the beginning the call. We look forward to seeing you at our Investor Day in New York next month.

I will now turn the call over to Dr. Jim Howatt who will be making some remarks related to the recent flu outbreak.

Thank you, John.

Molina Healthcare is closely following the developing situation around a possible flu pandemic and actively taking steps so that we are fully prepared for whatever may develop. As you are likely aware, there has been international spread of a new and unique flu strain that appears to have first emerged in Mexico. With over 150 deaths reported thus far, the strains clearly has lethal potential.

We are preparing in two ways. One way with regards to our members, and one way in regards to our personnel. First, we are working closely with public health agencies in the spirit of cooperation and collaboration that will lead to the most effective intervention. All our state plans are reviewing their programs to ensure access to care and pharmaceuticals as appropriate should this outbreak progress.

In addition, we are working to ensure business continuity in an environment where a significant portion of our workforce may fall ill, be absent for their positions caring for ill family members, or asked to stay home as part of a strategy of social distancing. The work we have done previously in the face of the threat from Avian flu, we believe will greatly assist us in our current preparations. The overall likely impact on our health costs from this virus is currently uncertain.

There are two antiviral medications: Tamiflu and Relenza, which appear to be effective against the virus. Vaccines are also being developed. Cost to treat and eventually vaccinate against the flu will likely be substantial and will probably be borne in part by government programs.

Molina Healthcare is prepared to be an active participant and partner to the overall healthcare systems of states in which we manage care for our members. All of us should keep in mind the important behaviors that will minimize the spread of the virus. Wash hands frequently; avoid touching eyes, mouth and nose; stay home when you or family members are ill; avoid contact with ill people; cover coughs and sneezes; and practice good health habits including adequate rest and nutrition.

This concludes our prepared remarks. Operator, we are ready to take questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of Tom Carroll of Stifel Nicolaus. Please go ahead.

Thank you. Good afternoon.

I wonder if you could give us a little more commentary on the ABD program in Ohio that saw the sizeable sequential drop in medical loss ratio. A competitor of yours in the same market had a similar drop, and I am wondering if there was sizeable positive development in the quarter or something else that you could maybe chat with us a little bit more about.

No, Tom, this is John.

It wasn't sizeable development. I think the ABD is where we had probably the biggest swings in terms of some the contracting efforts. Also, as you recall last year, we brought in the behavior health in-house and the majority of those costs were for the ABD population.

Tom, this is Terry. I'll just add.

Our ABD enrollment grew toward the latter part of last year. We had members new for the first time, and as we implemented our program, some of those costs came out. But our contract renegotiation on our medical management efforts were really across both product lines.

Okay. Great.

Secondly, could you maybe just give us some comment on your reserving practices, which will probably with a similar conversation like we've had in the past, but it's just been a topic of discussion recently with Molina.

Reserving methods haven't changed, Tom.

Very good, thank you.

Thank you very much.

Our next question comes from the line of John Raskin of Barclays Capital. Please go ahead.

Close enough. Good afternoon.

Couple of quick ones.

Hi, Josh.

Hi, John.

Couple of quick questions. One, with Florida, how are you accruing medical expenses now that you are sort of live on a risk basis there?

Hey, Josh. It is Joe.

Like we've talked about before, we are just accruing those at 90% of premium until the claims have had time to develop.

Then I noticed a slight deviation from that, that was the only reason I asked, was there just something in the math that makes that--?

Yes. It is just the way the math worked out, frankly. No real change in facts as we know them.

Got you. Got you. I mean it was--

Second question. The gain on the converts--the $0.04 gain in the quarter, is that now included in the guidance and should we think about their being some $0.04 offset adverse which is California or something? Or should we just think about, look we have a $0.20 range, it was $0.04 maybe we'll be towards the higher end now or something like that?

You hit the nail on the head, Josh. That's exactly why we give a pretty broad range.

Not necessarily will be towards the high end, but rather that's why we give a big range?

That's correct.

Okay.

The latter part. That's why we give a high range. We are not going to adjust guidance or pull anything out, or put anything back right now.

Okay. That makes sense.

Then just the last question on California. You know, obviously the challenge there and I guess I'm just curious, in light of the heightened MLR, the prospects not looking particularly great from a budget perspective there. Was the plan profitable?

And then in terms of remediation, you guys are really patient, I think, in Ohio and that's clearly shown benefits this year. But is three years--is this sort of a three year plan to get it to adequate margins? Is that a reasonable time frame, or can things be done quicker there? I know, obviously, you have a lot more infrastructure there.

Well, we're certainly hoping that things will turn around in California more quickly than three years. We have benefited from the experience in Ohio, and we're taking a similar approach in California, and it's really a combination of things. We need to work with the state on the premium rates, we need to be more selective in our contracting, and we need to continue working on utilization of services. And it is pretty straightforward. Part of this came about because we have not gotten, I don't think, the rate increases that we really needed given the rising medical costs in California. So that has had an effect on the margins.

I guess maybe I'll ask it a different way, Mario. How patient are you going to be with the state?

Well, as we pointed out, California is the largest Medicaid market in the country in terms of numbers. It's the second largest in terms of dollars; and so, we think that this is a very important market for us to be in.

Okay. That's what I was wondering. Thanks.

Thank you.

Our next question comes from John Rex of JPMorgan. Please go ahead.

Thanks.

On the Washington plan, I know you had a couple of rate cuts there in the 1Q, but MCR held in very steady. Anything going on there in particular? Shouldn't we expect that to be trending up here in light the rate cuts at some point?

John, I think part of the rate cut was based on some provider cuts that flowed through. So, I wouldn't expect it to trend up too much.

John, it is Joe.

I would just add, remember that rate cut came in two steps, 1% in January 1. Another roughly 2.5% which was, as John mentioned, partially offset by provider cuts came February 1. So these financials don't show the full impact of the cuts yet.

So--and were you suggesting also the flow through was kind of that aligned in terms of the rate decrease? Kind of actuarily reflected such that that was complete pass through to the providers, or--?

John. It is not going to be a complete pass through. But we are trying to take other efforts to mitigate looking at--utilization looking at provider contracts, and see where we can maximize the provider contracts and have the most favorable rates to us.

Also, John, let me just add that two of the things that we are working on in terms of medical management this year that Jim's been talking a lot about is our efforts to decrease readmissions on the DRGs, and our continuing work on lowering the emergency room utilization.

All right. Okay.

And then the Florida start up. Just maybe some commentary on how that is going. I think at Investor Day, I think you'd said you were kind of at 23,000 back in--a couple of months ago; and I think you ended the quarter at 17 or something like that. And, I guess, we had been looking for it to maybe actually grow. Just a little commentary on that maybe.

This is Terry.

Let's talk about it in two parts. The first is you'll see that we have experienced a drop in that initial enrollment. Most of that is attributed to members switching back to the fee-for-service provider side, which is still in place because the managed care is not mandatory at this time. But secondly, we're still rolling in the other counties, so we expect to still achieve the year-end target that we projected as these counties roll in. But initially, we did see a drop by those transferring back into the fee-for-service program.

Okay.

So what would have been your gross ads in the quarter? If I can just kind of think about what kind of retention you are having as you bring them in?

It is difficult to say because it's really too soon for us to know what the overall attrition rate is going to be.

Okay.

I was wondering if maybe--kind of if we started at 23 in January; and maybe it would have been 35. Kind of like half essentially out of the system or so roughly.

No, you can't.

It depends a lot on how the rollover goes and we are still in that process. Until we get to a more stable point where all of the members have been transferred over as we go into more counties, it's really too soon to say.

And I'll give you one other variable. These are different geographic areas that are rolling in, so the initial area was Dade County, but as we move on to the other counties, it could have a completely different percentage in relation to the providers in the network, the attitude of members, etc. So it's really difficult to predict.

Okay. Thank you.

Thank you.

Our next question comes from Justin Bowers of Deutsche Bank.

Hi. Good afternoon.

Just curious if you could kind of give us a sense of how your enrollment has progressed since quarter end just given that the economy does seem to be weakening a little bit; and if you are seeing noticeable pick up in any states?

Well, all I would say at this point is that the enrollment growth is consistent with the guidance we provided and we remain on track.

Okay. Thanks.

Relative to Florida, do you have a target for your enrollment there for year end?

I am looking.

The target is 50,000.

Okay. Great.

And last one, DCPs and claims inventory were up sequentially. Should we think about 42, or 40 as a floor? Have you pretty much bottomed out there?

I will take that question. It is Joe speaking.

I think it is probably fair to say that the DCP is going to hang around where it is at right now. We closed the quarter at 42. It is not going to go up much or below--very far below that number, barring something unforeseen.

Okay, great. Thank you.

Thank you.

Our next question comes from Carl McDonald of Oppenheimer.

Thanks.

Just wanted to check to see if you have an updated view in terms of the impact of the new membership, it may still be a little bit early in terms of actually seeing those members join the plan. But there's the question in some prior quarters in terms of whether there'd be an increased amount of utilization initially.

Carl, this is John.

I think it's probably too early to tell. Traditionally new members tend to have higher utilization, higher costs; and then they go down after about two quarters. But you've got the compacting factor of it being the first quarter where seasonality suggests that utilization runs higher than normal anyways. So it is a bit early to tell.

Great. Thank you.

Thank you.

Our next question comes from Daryn Miller of Goldman Sachs.

Good afternoon.

Question on the Ohio MCR. Given the seasonality we typically see in the first quarter, do you think we can actually see some improvement in that--in the MCR going into the second and third quarter?

We hate to peg the MCRs, Daryn. It's going to be a function of maintaining good utilization management and then ensuring that we direct the patients to the most cost effective providers.

The other thing that makes it difficult is that we haven't really had a stable population. Over the past year, we had a lot of new patients being rolled in. So we're finally, I think, reaching a stable equilibrium where we can begin to see what the seasonal trends look like in Ohio.

Okay.

Question on SG&A leverage. How much more improvement do you guys think you can see there?

If you go back to our first Investor Day. We had discussed having about a 10% "organic growth", and bringing our admin down to about 7.5% and for this quarter it was 7.6%. So we're right on track with where we want to be.

Great.

And then expectations in terms of picking up any SCHIP enrollment? What states do you think that you have the best opportunity to get some of that enrollment, and have you gotten anything so far?

Well, California is the state that has the biggest SCHIP population for us. In some states, such as New Mexico and Ohio, the SCHIP is sort of buried within the Medicaid so you don't really see it separated out. We think we are well-positioned in all the states that we're in to pick up additional membership as it comes on.

What states do you think are going to come on sooner--or first?

I don't think you can say that there is one state--any one state that is more likely than the others. I think that the program is nationwide, the economic downturn is affecting all states, and part of this reflects--will depend on the state's willingness to invest more money in the SCHIP program because it is a matching program.

Great.

And then one last one. Can you just remind me of where we are in terms of California rate activity, and what was the last changes that were made in California rates?

We shared with you at our Investor Day in January there really have been no changes since then. We took a rate reduction in Los Angeles October '08 that continues through October '09. Riverside, San Bernardino, and then San Diego had increases in October '08, and back in '07/'08, and our Sacramento rate increase is still pending. So no change from January 22nd.

Great. Thank you.

Thank you.

Our next question comes from Greg Nersessian of Credit Suisse.

Thanks.

Most of my questions were answered. I just had one on the Michigan and Missouri RFPs. Could you just give us an update on the timing in both of those states, maybe any changes that either of the states are considering, and your view on whether or not you see that as an opportunity to take share, sort of the status quo, or perhaps lose share in each of those states?

I will start out with the facts of the submissions and then others may want to comment.

In Missouri, we are awaiting news of the results of the RFP. It's been submitted, and we've returned comments. We are confident that as an incumbent we'll continue, but we'll know about that shortly. And the Michigan RFP is in process. We're in the process of putting together our response, and that will be for an October 1 effective date, as is Missouri for an October 1 effective date.

And there's no big programmatic changes that should affect enrollment significantly.

Any sense on the number of other bidders or any new market entrants going after those?

We are not seeing anything, but that doesn't mean that there won't be.

Okay. Just any other rate activity going on either in Michigan or in any of your other states worth highlighting?

I don't think there's been any change since the Investor Day in January. No new news.

Okay.

No news is good news I guess.

In this economy, yes.

Thank you.

Our next question comes from Matt Perry of Wachovia Capital.

Hi. Good afternoon.

Maybe this is a just very simple answer to this type of question, but at some point in '09, as a lot of people who have lost their jobs may begin to qualify for Medicaid programs in various states. Is this a population when they may enroll in your plan, would you expect their behavior and utilization patterns to be very similar to your current membership, or would there be any reason why they might utilize more or less services?

I think going back to what John said earlier, we typically see higher utilization in the first six months on the plan. Pretty much regardless of the A category. So we don't think that the pattern of utilization is really going to change. And we think that we're already seeing that because we've seen growth in 2008 which is continuing in 2009 consistent with the downturn in the economy. And the increase in the number of Medicaid beneficiaries.

Okay.

And then I know the Medicaid population has little or no cost sharing or co-pays. But is there any recession related kind of changes you'd expect in your current membership's behavior patterns at all?

No.

Okay. All right. Thank you.

Thank you very much.

(Operator Instructions).

Our next question is a follow-up question from Tom Carroll of Stifel Nicolaus.

Hey, just a quick follow-up, actually related to Greg's question as well.

Did you guys evaluate the Mississippi RFP, looking at the chronically ill population at all?

Tom, it is our practice not to comment on potential growth opportunities whether they be new RFPs or acquisitions.

Okay.

And then secondly, you guys are in Texas, not one of your biggest markets, but did you see or have you seen or able to tease out any higher level of claim activity related to the flu given the high prevalence of the flu in Texas this year?

Nothing that we are aware of. It's Joe speaking.

Nothing we have come across, no.

Nothing you've come across.

Okay. Thank you very much.

Thank you.

Mr. Molina, there are no further questions at this time. I will turn the call back to you.

Thank you very much.

We appreciate you participating in our call and we look forward to seeing you at our next Investor Day in May in New York.

Ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation, and we ask that you please disconnect your lines.