Molina Healthcare Inc (MOH) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare First Quarter 2010 Earnings Conference Call. (Operator Instructions). As a reminder, this conference is being recorded, Wednesday, May 5, 2010.

I would now like to turn the conference over to Mr. Juan Jose Orellana, Vice President, Investor Relations. Sir, the floor is yours.

Thank you, Patrick.

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, 2010. The Company's earnings release reporting its results was issued today after the market closed and it was posted for viewing on our company website.

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

Our comments today will contain numerous forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act including statements regarding our earnings, guidance and operations for 2010. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release or in our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report for fiscal year 2009, our Form 10-Q quarterly reports and our 8-K current reports. 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 judgment as of May 5, 2010, 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 MolinaHealthcare.com.

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

Thank you, Juan Jose, and thanks to all of you for joining us today. I hope you've had a chance to review the press release issued after the market closed today.

For the first quarter, we reported earnings of $0.41 per share. Although this is a significant improvement over our fourth quarter 2009 results, we still have some work ahead of us in order to return to our previous levels of profitability. Nevertheless, we are encouraged by the positive results of this quarter and believe this provides a good foundation for meeting our financial goals for 2010.

We identified four primary factors that affected our results last quarter -- margin compression due to state budget issues, higher medical costs due to the flu, higher cost of new members, and higher emergency room costs. Let me briefly talk about where we stand on each of these factors, and then I would like to spend some time discussing our latest investments in growth.

Let's start with margin compression. While we reported a 13% increase in premium revenue as compared to the first quarter of 2009, our premium revenue actually decreased on a per member per month basis. This is because of declines in premium rates at several of the company's health plans. This is consistent with our experience in managing through other economic downturns. As state coffers become depleted due to poor economic conditions, their premium rate environment becomes more challenging and margins compress as premium rate increases do not keep up with medical cost trends. As a result, our 2010 guidance only includes rates that are currently known.

The second factor we discussed last quarter was the substantial impact that high flu-related costs had on our fourth quarter results. In the first quarter of this year, our state health plans have experienced a relatively mild flu season. Although admission rates for respiratory illness have increased approximately 4% over the first quarter of 2009 and prescriptions issued for respiratory illness are essentially unchanged period-over-period, these measures for the first quarter have been driven more by diagnoses such as pneumonia, other respiratory ailments and allergies rather than by the diagnosis of the flu. We should keep in mind, however, that a relatively mild flu season in the first quarter of 2009 was followed by widespread flu outbreaks later in the year.

The third factor is the higher medical cost associated with new members. During the first quarter of 2010, we continued to experience substantial organic growth, with aggregate membership up nearly 14% over the first quarter of 2009 and 2% sequentially. Although we believe the medical cost of new members will come down over time, the continuous influx of new members to our plans has partially slowed the rate of the cost decline associated with members who have been enrolled for longer periods. As we have previously stated, we expect enrollment growth to decelerate as the economy recovers.

The fourth factor we identified was higher medical costs including emergency room costs. We are making some progress in our ER cost containment efforts and continue with the implementation of technology to assist us in identifying and reaching at-risk members in need of extra support. Specific areas that are being targeted include high-risk pregnancy and hospital discharge management. Additionally, we continue working on realigning our provider contracts and on improving our unit costs. Although emergency room utilization increased approximately 6% compared to the first quarter of 2009, emergency room cost per visit actually dropped approximately 2%. We will remain focused on both emergency room utilization and unit costs.

Next I want to talk about opportunities that are very exciting for all of us here at Molina Healthcare. Let me begin with Molina Medicaid Solutions. Molina Medicaid Solutions is the name of our new subsidiary that was formerly known as HIM and that we acquired from Unisys. The transaction closed on May 1, and we've embarked on this new venture. This is an exciting way to kick off 2010, Molina Healthcare's 30th year in business. Molina Medicaid Solutions is a fiscal intermediary that delivers design, development, implementation and business process solutions to state governments for their Medicaid Management Information Systems, referred to in the industry as MMIS.

Molina Medicaid Solutions shares many characteristics with our health plans. At its core, a health plan is an organization that processes and uses healthcare information. We are required to manage member eligibility, benefits, provider information, and we also pay claims. This is essentially what Molina Medicaid Solutions does on behalf of state Medicaid agencies. In addition, the common use of the [QNX] platform across all of our health plans, and Molina Medicaid Solutions will enable us to leverage our systems expertise and help expedite our integration efforts.

Our acquisition is a strategic move that creates a springboard for future growth. Molina Healthcare can now address the future information, technology and healthcare management needs of state Medicaid programs.

Terry Bayer, our Chief Operating Officer, has been deeply involved in the early stages of our integration efforts. Let me turn the call over to Terry for a few remarks on our progress.

Thank you, Dr. Molina.

I would like to take this opportunity to underscore the strategic importance of this acquisition, because it is important not only to state agencies but also to the federal government. The federal government provides an incentive to states to modernize their systems by funding 90% of the design, development and implementation of Medicaid information systems. The American Recovery and Reinvestment Act of 2009 also includes over $20 billion to aid in the development of a robust IT infrastructure.

In addition, the requirements of CMS Medicaid Information Technology Architecture initiative, known as MITA, will make many legacy Medicaid systems obsolete, and the enhanced funding will encourage states to replace existing systems. Health information technology and management will become increasingly important in the context of healthcare reform. We are in a great position to benefit from these market dynamics through our new subsidiary.

A snapshot of the combined businesses reflects that we now operate in 15 states, support the care of 4.3 million Medicaid beneficiaries, process payments to 189,000 providers, and employ almost 4,000 staff. We are taking a systematic approach to the integration. The first step was to close the transaction. That is now done. The second step is to fully transition the operation of the business to Molina. The management team is in place and we expect the transaction to be seamless to our state customers. The team is now focused on bringing systems up in Idaho and Maine and cultivating opportunities in additional states.

Services previously provided by Unisys to the HIM division including human resources, finance, legal and compliance were transitioned to Molina effective with the close of the transaction. During the coming months we will complete the transition of other services provided by Unisys.

On a parallel track, we have created a dedicated transition team including experienced staff acquired through the acquisition. This group will complete a thorough review of the operations and identify areas to leverage talent across both our managed care and health information management lines of business. As we work through our various integration activities, we've been very pleased with the positive reception from our new Molina employees. I wanted to express appreciation both to our new employees and to the staff at Molina who worked long hours to close the transaction.

At this early stage, it appears that our combination is off to a great start and that our broader product offering will expand our ability to meet state customer needs. We will look forward to keeping you updated on our progress.

Now back to you, Dr. Molina.

Thank you, Terry.

Adding Molina Medicaid Solutions has propelled us to a new level. We are no longer just a managed care or insurance company; we are now a company with three distinct solutions for government-sponsored programs. First, we can address the states' needs through our full risk health plans. Second, we can offer our direct delivery and professional services that include clinics, nurse advice and care management. And third, we can provide fiscal intermediary services including healthcare information technology and claims processing through our new subsidiary. No other company in our space can do all three.

And speaking of professional services, we are thrilled with the successful February launch of our first primary care clinic in the State of Washington. In collaboration with Compass Behavioral Health, we launched a Molina primary care clinic at one of their locations. We established a person-centered healthcare home dedicated to serving the primary care medical needs of those with serious mental illness. Already over 850 patients are being seen at the clinic, confirming that the demand is high for a clinic that integrates behavioral health systems -- I'm sorry, behavioral services and primary care.

While we're pleased with the progress we are making, we are well aware that many challenges still exist. We expect state budgets to remain constrained despite better economic times. Our ability to reach our financial goals depends on our ability to realize the potential of our new subsidiary, manage our medical and administrative costs, and balance current and future growth opportunities.

I would now like to turn the call over to John who will talk about our results for the quarter in greater detail.

In celebration of Cinco de Mayo, let me start by saying, gracias, Mario, y bienvenidos todos. Thank you, Mario, and welcome, everyone.

Premium revenue for the quarter was $965 million, up $108 million or approximately 13% from the first quarter of 2009. This was due to membership increases of nearly 14% as of March 31, 2010 compared with membership for the same period last year. Sequentially, membership increased 2%. On a per member per month or PMPM basis, consolidated premium revenue decreased slightly, because of declines in premium rates at several of the company's health plans. The most significant declines in premium rates were in Ohio and Missouri where the pharmacy benefit was carved down, and in Washington where rate cuts in 2009 were not matched by reductions to benefits.

Earnings per share for the first quarter were $0.41 or $11 million compared with earnings of $0.46 per diluted share or $12 million for the same period last year. As Mario pointed out, today's results are a notable improvement from the fourth quarter of 2009, when we reported an $0.18 loss.

Our membership was nearly 1.5 million members, up 2% from the previous quarter and 14% from a year ago. The sequential overall enrollment growth of 2% was also achieved despite a decline in enrollment of approximately 10,000 members in Los Angeles County resulting from the network refinement efforts we've talked about in the past. Membership grew across the company but was particularly strong in the Medicare line of business, where enrollment grew by over 5,000 lives or 47% since the end of last year.

Medical care costs decreased 1.7% on a PMPM basis in the first quarter of 2010 compared with the first quarter of 2009. This was primarily due to a less severe flu season, the various contracting and medical management initiatives implemented by the company, the transition of payment for pharmacy benefits back to the states in Ohio and Missouri, and reductions in the Medicaid fee schedules in Washington in the third quarter of 2009. Our medical care ratio decreased to 85.3% in the first quarter of 2010 compared with 86.1% for the first quarter of 2009 and 87.5% in the fourth quarter of 2009.

General and administrative expenses, including premium taxes, were $113 million for the quarter, representing 11.7% of total revenue, compared with $92 million or 10.7% of total revenue for the same quarter last year. Our premium tax increased $7.5 million or 3.5% of revenue in the first quarter of 2010, up from 3.1% of revenue in the first quarter of 2009. The year-over-year increase is attributable to the assessment of higher premium taxes in the State of Ohio.

Core G&A, or G&A less premium taxes, increased to 8.2% in the first quarter of 2010 as compared with 7.6% in the first quarter of 2009. The year-over-year increase in core G&A was primarily due to the increased insurance assessment rates in New Mexico and Washington and the cost of further building out our Medicare infrastructure.

The year-to-date cash flow from operations was a negative $26 million, reflecting a $91 million decrease in deferred revenue from December 31, 2009. This is a timing issue driven by premium receipts at our Ohio health plan. We believe, as we've said before, that over time, cash flow from operations will approximate net income plus depreciation and amortization.

Earnings before interest, taxes, depreciation and amortization or EBITDA for the quarter was $30 million, down 5% from the same quarter last year. I want to take a minute to point out that EBITDA will become an even more relevant metric as we integrate the MMIS business. First, on historical basis, the company had allocated lower amounts to goodwill from our acquisitions when compared to our peers. Second, depreciation and amortization is much higher in a software and technology business. Therefore, EBITDA will provide a better insight to our cash earnings, which is an important metric for operating our business.

Excluding restricted investment, the company had cash and investments of approximately $670 million. The parent company had unrestricted cash and investments of approximately $80 million. Of this, approximately $30 million was used in the acquisition of HIM.

Now I want to point out a couple of changes you will be seeing on our financial reporting. First, I want to talk about days and claims payable or DCP. As we've said before, we do not view DCP as a very important metric. We set our reserves monthly based upon the analysis performed by our management and our actuaries. Our independent auditors then review the reserves quarterly. Many factors are considered when we set our reserves. Joe White, our Chief Accounting Officer, gave a presentation on our reserve-setting process at our investor day in May 2009. I encourage anyone who is interested to go back and review that presentation, which is available on our website.

For now, let me just remind everyone that we do not consider DCP when setting reserves. DCP is simply an output of our reserve-setting process, not an input. In other words, we do not reverse-engineer our claims liability based upon DCP. DCP is the result of our claims liability, not the other way around.

Nevertheless, we understand that many investors and analysts believe that DCP is a meaningful measure of the adequacy of our reserves. Therefore, we want to make DCP as meaningful and as transparent as we can. We are adjusting the calculation to limit its focus to only those expenses and liabilities that are most subject to estimation risk and therefore most likely to affect the adequacy of our reserves.

Previously, we've calculated DCP to include all medical care costs. Some of these costs such as capitation and pharmacy are not subject to a large degree of estimation risk. These expenses are determined within a very small degree of variability by the time we file our financial statements. Accordingly, we've decided to remove these expenses along with their related liabilities from our calculation of DCP.

Fee-for-service medical costs, on the other hand, are subject to substantial estimation risk. Incurred but not paid medical claims, or IBNP, comprise the majority of that estimation risk. By including only fee-for-service medical costs and liabilities in this computation, the company's days and claims payable metric will be more indicative of the adequacy of the company's reserves reliability subject to substantial degree of estimation risk. We have reported DCP calculated under both methods in our current earnings release so that you may see the transition from one method to the other.

Next I want to talk about our presentation of income tax expense. We have previously included the Michigan modified gross receipts tax as part of our income tax. This gross receipts tax is a tax of about 1% on modified gross receipts which for most taxpayers is defined as receipts less purchases from other firms. Managed care organizations, however, are not currently allowed do deduct payments to providers in determining modified gross receipts. We therefore believe that presentation of the Michigan gross receipts tax as a premium tax makes the company's financial statements more useful to the reader and have reclassified this tax in our presentation of 2009 income to be consistent with our 2010 presentation.

Now let me talk about Molina Medicaid Solutions. The fiscal intermediary business is a low-revenue but higher-margin business with low variability in earnings once the initial system design stage is complete. It will provide a good opportunity for us to upstream cash to the parent. In contrast, our health plan business is essentially a high-revenue, low-margin business with high variability in earnings. We believe the combination of these two business models will give us more stability in earnings.

Although we went into greater detail at our investor day, I want to remind everyone of the revenue recognition approach in the fiscal intermediary business and how it differs from risk-based business. In essence, revenue is recognized for the health plans concurrent with the expenses. For the fiscal intermediary, revenues can be deferred for extended periods of time but some expenses can't. This transaction will affect our 2010 outlook, so let me spend a little time updating the components that make up our estimates.

Although estimated earnings per share is only changing by $0.01 from what we presented at the beginning of the year, there are three important reasons why we have chosen to update guidance. First, we made a commitment when we released guidance in January that we would update our estimates once the acquisition of Molina Medicaid Solutions was finalized. Second, we believe that the acquisition of Molina Medicaid Solutions, we owe you investors a clear presentation of how that acquisition will impact our results for the rest of the year. And lastly, we expect the performance of our health plan business for all of 2010 will be better than we expected when we most recently released 2010 guidance.

So let's move to the guidance numbers. Please bear in mind that all of these figures are approximations.

For our health plan business, we expect health plan revenue to be approximately $3.9 billion. Our medical care ratio will be 85.3%, G&A ratio will be 11.6% with core G&A, or G&A excluding premium tax, at 8.1%. For our fiscal intermediary business, we expect service revenue to be approximately $103 million, the cost of service revenue to be approximately $85 million, and other administrative costs to be approximately $12 million. For the combined entity, we expect investment income will be $6 million, depreciation and amortization to be $49 million, interest expense to be $17 million, with consolidated net income of $40 million, diluted shares outstanding of 26.3 million and a diluted EPS of $1.51.

Our new EPS includes $0.21 of dilution in 2010 from our new fiscal intermediary business. The dilution is a result of the transaction integration and amortization costs that includes financing costs, interest expense and depreciation and amortization. This is offset by an increase in the earnings related to our health plan business of $0.22 per share. Thus, our overall EPS guidance goes from $1.50 to $1.51.

You will also note in our earnings release that we've presented separate columns for the health plan business for Molina Medicaid Solutions and the combined transaction financing and amortization expenses associated with the acquisition of Molina Medicaid Solutions, all adding up for our consolidated estimates. We anticipate reporting results for the health plan business and for Molina Medicaid Solutions including purchased related amortization separately beginning in the second quarter of 2010. At that time, transaction, financing and some corporate costs will be included only with consolidated results.

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

Thank you. (Operator Instructions). Our first question comes from the line of Josh Raskin of Barclays Capital. Please proceed with your question.

Hi, thanks, good afternoon, guys. My question relates to, I guess, was there any favorable development booked in the first quarter that was sort of extraordinary and not replenished? And maybe relating that to the flu, how much better -- you guys gave us some great detail in the fourth quarter how much worse flu was than expected, so I'm just curious what, how much better flu was than expected in 1Q.

Well, Josh, if you look at roll forward table, what you see on the development side is the positive development from Q1 of 2010, it's pretty close to what it was a year ago. So I wouldn't say that, no, there's nothing extraordinary that wasn't replenished in this quarter. As far as the statistics for dollar amounts related to flu, I think Mario covered that. We're still sort of digging into it. If you recall, a lot of the work that we did was around ILI, which is influenza-like illness.

Yes.

That's down. We didn't quantify it to the same extent we did a year ago because it wasn't as prevalent. What we did see though is an uptick in other respiratory illnesses like asthma and allergy, interestingly enough.

Yes.

That was up a bit over last year.

So I guess just on a relative basis, so there's no way to sort of ballpark what your typical ILI costs are in the first quarter. I guess you put the two together for the fourth quarter, but it doesn't sound we get that sort of granularity I guess in the first quarter. Is that fair?

No. To be real honest, the past I'd say six weeks or so where would normally do a lot of that work, we were sort of consumed with the final details of the acquisition.

Hey, Josh, this is Mario. There is one other thing I want to add. I wouldn't say that there's a typical flu cost. If you look back over the years, what you'll see is that the incidence of flu-like illness has been highly variable, so it's difficult to say what a typical number would be. We do know what the typical seasonality is and we did not see that typical seasonality last year, but aside from that, I don't think you can say what a typical cost would be.

Okay. Okay, that's helpful. And then I think the last question, I think the answer is there's no impact, but the change in the Michigan MGRT tactic that you guys described, there's no net income impact, right? That number didn't change, it's just reclassification?

That's correct, Josh.

Okay. Okay, thanks.

Our next question comes from the line of Sarah James of Wedbush. Please proceed with your question.

Thank you. I was wondering if you could speak to some of the moving pieces in MLR. It looks like New Mexico and California came in a little bit lower and Utah a little bit higher. Are there any things that you can tell sort of driving those trends?

Well, I think as far as New Mexico goes, New Mexico sort of runs counter to our typical seasonality. They generally have a good first quarter and, ironically, third quarter tends to be worst. In Utah, we did get an awful -- a fairly big influx of Medicare patients in Utah which I think drove the cost up, as well as just we're still moving from a non-risk to risk basis, and I frankly think there was a mispricing in terms of the rates for Utah.

Okay. And California?

Well, California -- this is Mario -- I think California is a combination of things. Part of it is decrease in the flu costs, and remember that California is primarily a tenant state and so it was more heavily affected by the flu, and just some of the general management things that we've been doing to try and improve medical cost. You see that across a number of states we have seen some improvement in the medical cost.

And, Sarah, let me just say one other thing though that Mario left out. We did see some improvement but California's medical care ratio is still higher than we think is appropriate over the long term. So we're not by any means celebrating too loudly for California.

Got it. Thank you. And my last question is on the Rx carve-outs, I was wondering if going forward given that managed care plans are going to have access to some of the drug rebates, if you're in discussions with any states or if the tone has changed at the state level about how they think about that going forward.

Sarah, this is Mario. No, we have not had any discussions with the states that would lead us to think that there's going to be any change in the contracts or the pharmacy programs in the near future.

Okay. Thank you.

So in other words, I think it's going to be status quo to where we are right now.

(Operator Instructions)

Our next question comes from the line of Brian Wright of Collins Stewart. Please proceed with your question.

Thanks, good afternoon. On your comments about breaking out separately the capitation medical cost versus fee-for-service medical cost on the DCP, are you going to do a change as far as your reserve roll forward to exclude that as well, or are you going to also -- are you going to keep things as they are with the reserve roll forward line?

This is John, Brian. I think we'll just keep the reserve roll forward the same.

Great, that'd by my preference. Thank you.

We'll get it for you, Brian.

Thanks.

(Operator Instructions)

Our next question comes from the line of Kevin Fischbeck of Bank of America. Please proceed with your question.

Hi, this is Scott Green in for Kevin. Could you break out what the insurance assessment fees were in the period and then more broadly on SG&A? Do you think that a sub-8% core G&A going forward is achievable, maybe achievable next year?

Hi, it's Joe speaking. I think if we look at the -- and we have to be careful here, we have to talk specifically to the health plan business, to the HMO business -- yes, I think 8% is achievable going forward. What we're looking at this year, the spike in insurance assessment I think was about $2 million, the -- there's also the cost to the Medicare development line in terms of developing Medicare, in terms of broker commissions, everything we've done to build out the Medicare line of business. But yes, I would think -- I think it's possible to get to 8% or slightly below going forward in the HMO-only line of business.

Okay, great. And then could you talk about the performance in Washington? Was there benefits in the period from -- I think you exited King County to start the year, and what's the strategy to lower cost there? Any state-specific initiatives going on?

Well, we exited King County for one contract, the BH or the Basic Health, so we still have the Medicaid, the core Medicaid products there. So we would expect to see some, probably -- some benefit going forward, I'm not sure how material it's going to be. We have a number of initiatives including our opening up our clinic which we think will improve the quality of care and lower cost over time.

Okay. And then last question, more broadly on the MLR, just over MLR seasonality for the year, I guess typically you've said before that first quarter is the highest. It seems like based on guidance you're expecting the other quarters on average to be flat from where the first quarter was. Are there any headwinds you would call out as to why there would be no improvement in the MLR? Is it just the assumption of no rate increases going forward?

That's what I would characterize that, no rate increases going forward.

Okay. And previously you had assumed no medical management or very small contribution from medical management initiatives for the full-year MLR. Going forward, is there any expectation there that's changed?

I think it's too early to see if we're getting traction from our medical management initiatives, there's a lot of activity, and I think that we hope that they will take traction, but we're not putting anything at this point into our guidance.

Okay, great. Thank you.

We have no further questions at this time. I will now turn the conference back over to our speakers.

Well, thank you for joining us, everyone. We hope you will enjoy the rest of Cinco de Mayo. And we look forward to talking to you next quarter.

Adios.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you now please disconnect your lines. Have a great day, everyone.