Molina Healthcare Inc (MOH) 2010 Q2 法說會逐字稿

Welcome to the Molina Healthcare second quarter 2010 earnings 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, August 4, 2010. I would now like to turn the call over to Juan Jose Orellana, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lindsey. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the second quarter ended June 30, 2010.

The Company's earnings release reporting its results was issued today after the market closed and was posted for viewing on our Company website. We also issued another press release shortly after our earnings release. That second release announced our offering of common stock.

Certain securities regulations prohibit the discussion of the offering or of any of the filings that have or will be made in connection with that offering. As a result, there can be no discussion of the offering on this call or on other similar calls until the offering is complete.

The offering also limits our ability to comment on our expectations about the future. We therefore ask that during the question and answer session at the end of this call, you limit your questions to matters having only to do with our second quarter earnings announcement.

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 and take your questions.

Our comments today will contain 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 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 and 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 Form 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 August 4, 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. Hello, everyone, and thank you for joining our earnings call. I will start today's call by reviewing key Company events for the quarter and then turn the call over to John who will review the financial details of the quarter.

We have had a busy quarter. On the growth front, we were awarded a STAR+PLUS Medicaid managed care contract for the Dallas service area. Our Molina Medicaid Solutions product, Health Pass, went live in Idaho in June. And although technically not a second quarter event, we reached a definitive agreement to acquire Aubrey Health Plan, a Medicaid health plan in the state of Wisconsin. Our health plans continued to perform well with marked improvements in California and New Mexico.

Let me highlight each of these key events. In Texas, we were awarded a contract for the STAR+PLUS program. The STAR+PLUS program is the Texas Medicaid managed care program designed to provide primary care, acute care and long-term care services to the aged, blind or disabled populations.

The contract is for the Dallas service area which includes Dallas and six surrounding counties. It is estimated that there are approximately 50,000 aged, blind or disabled beneficiaries in this service area who will be making a choice in the first quarter of 2011 among Molina and two other health plans.

We are excited about this contract award as it further expands our footprint in the state of Texas and increases our involvement in the care of aged, blind or disabled beneficiaries. As a reminder, Molina Healthcare of Texas already serves approximately 42,000 Medicaid beneficiaries in the Harris service area which includes Houston and in the Bear service area which includes San Antonio. Nearly 45% of those members fall in the aged, blind or disabled category.

On May 3 of this year, we introduced Molina Medicaid Solutions, our fiscal intermediary business following the closing of our acquisition of HIM from Unisys. We are pleased to announce that we began the operations phase of our contract in the state of Idaho on June 1.

As with any major systems implementation, the updating of software or hardware may result in temporary glitches. There have been a few bumps on the road but our team in Idaho is working closely with the state and the local provider community to resolve issues arising from the new system.

A few weeks ago, we announced our entry into a definitive agreement to acquire Aubrey Health Plan in Wisconsin. Aubrey is a Medicaid managed care provider that currently participates in the BadgerCare Plus and SSI managed care programs in Wisconsin. Aubrey serves approximately 18,000 members with the bulk of the membership concentrated in the Milwaukee area.

In April, Wisconsin made contract awards for the Southeast region RFP, covering 250,000 beneficiaries to begin on September 1, 2010. Aubrey retained its current business and achieved the second highest score in the RFP. Aubrey is well positioned for auto assignment enrollments as the state developed an auto assignment algorithm that favors plans with higher scores in the RFP.

This transaction is consistent with the revenue and geographic diversification efforts that we have discussed in the past and it provides a new platform for growth in a new state for Molina. Wisconsin is a Medicaid market that is much like Michigan was when we began operating there back in 1997. In Michigan at that time, there was considerable fragmentation of Medicaid health plans which provided a fertile ground for capturing additional market share and for pursuing end market acquisitions. Wisconsin shares these characteristics.

Furthermore, additional growth could come from future successful RFP responses as Medicaid contracts covering the rest of Wisconsin will be up for renewal at the end of 2011. The consideration for the Aubrey transaction is approximately $16 million subject to standard adjustments as well as our obtaining the required state approvals.

We expect the transaction will close in the third quarter. We are excited about entering the Wisconsin Medicaid market and look forward to working with the state and the local provider community.

Moving on to the rest of our health plans, a mild seasonal flu in 2010 and our implementation of various contracting and medical management initiatives resulted in lower medical costs. Furthermore the decrease in the medical care ratio in California and New Mexico was largely the result of our contracting efforts. We have seen progress in these markets both in terms of utilization and unit costs.

Over the past year and a half, we have taken many actions to improve our earnings performance without sacrificing growth. We are pleased that our actions are bearing fruit. I look forward to updating you next quarter and I will now turn the call over to John who will provide more details regarding the financial results.

Thank you, Mario. You may have noticed in today's press release and 10-Q that we are now presenting two reportable segments in our 10-Q, our Health Plan segment and our Molina Medicaid Solutions segment.

The Health Plan segment includes all of the operations that we have in the past reported on a consolidated basis. That is, our HMOs and our corporate parent. Any revenues and expenses not specifically tied to the Solutions business such as interest expense and the cost of general corporate operations are included in the Health Plan segment.

Our 10-Q is replete with disclosure concerning Molina Medicaid Solutions segment. We have filed our 10-Q today so that you will have the benefit of that added disclosure as you review our earnings release. For now I want to point out some of the changes that you will see in the earnings release itself.

First, our income statement now include service revenue and cost of service revenue. Both of these accounts specifically capture revenue expense for the Solutions business.

Second, we're breaking out premium taxes as a separate line item on our income statements. Third, we have replaced the term core administrative ratio with the term G&A ratio. Now that we are breaking out premium taxes as a separate line item on our income statement, there is no need to talk about subcategories of the G&A ratio.

Fourth, nearly all the depreciation expense associated with the Solutions business is recorded as cost of services revenue. Also a portion of the amortization of the purchase price of the Solutions business is reported as a reduction to service revenue. This means that the depreciation and amortization as shown on our income statement is less than the amount reported for D&A on our cash flow statement.

For your convenience, we have included tables in both our earnings release and 10-Q that reconcile depreciation and amortization as recorded in our income statements and as reported on our cash flow statement. Now moving on to our results.

Operating revenue for the quarter was nearly $1 billion, up $72 million or approximately 8% from the second quarter in 2009. The primary drivers in revenue growth were growth of membership of nearly 10% and the inclusion of service revenue associated with our Molina Medicaid Solutions fiscal intermediary business. Higher enrollment contributed about two-thirds of our revenue growth while our newly acquired solutions business contributed the other third.

The growth in enrollment and in the fiscal intermediary business helped offset decreases in premium rates at several of our health plans. Declines in premium rates were approximately 4% on a per member per month basis.

The State of Michigan's decision to retroactively adjust premium rates back to October 1, 2009 lowered premium revenue for this quarter by $5.5 million and pretax income by $5 million. This equates to nearly $0.12 per share. Overall, the pressure on premium rates continues to reflect challenging budget situations across our states. However, we did receive positive news in Washington where rates increased by approximately 2.5% effective July 1, 2010.

We finished the quarter with enrollment of approximately 1.5 million members. Our enrollment has grown by 133,000 members since the second quarter of 2009. Although the enrollment growth remains ahead of historic levels, our rate of growth in 2010 to date has been less than what we experienced for the same time period in 2009.

Medical care costs decreased 5% on a PMPM basis in the second quarter of 2010 compared with the second quarter of 2009, dropping our medical care ratio in the second quarter of 2010 to 86% compared with 86.8% for the second quarter of 2009. As Mario pointed out, our implementation of various contracting and medical management initiatives was one reason for the decrease in our MCR. The pharmacy carveouts in Ohio and Missouri, a milder flu season that we experienced in 2009 and reductions in Medicaid fee schedules after June 30, 2009 were also factors.

General and administrative expenses were $78 million or 7.8% of total revenue compared with $65 million or 7% of total revenue for the same quarter last year. The increase in our G&A spend was the result of almost $7 million of Medicare related administrative costs necessary to support our expansion of that business which has nearly doubled since the second quarter of last year. We also expensed almost $2 million of acquisition costs related to the Molina Medicaid Solutions business.

Earnings per share for the second quarter were $0.41 or $10.6 million compared with earnings of $0.56 per diluted share or $14.6 million for the same period last year. Remember, the second quarter 2009 was helped by approximately $4.4 million of favorable tax benefits while the second quarter of this year was hurt by the $5.5 million Michigan retro rate adjustment or about $3.4 million after tax which I talked about earlier.

EBITDA for the second quarter of 2010 was $35 million, $6 million higher than in the second quarter 2009. Cash flow from operating activities was $52 million in the second quarter. We had positive operating cash for both quarter and year to date despite the fact that we're not receiving advanced revenue from Ohio this year.

Improved cash flow between the second quarter of 2010 and the second quarter of 2009 was predominantly due to higher depreciation and amortization expense, higher medical claims liabilities and higher accounts payable balances.

It is worth noting that the operating income as a percentage of revenue for the Molina Medicaid Solutions segment far exceeds that of our Health Plan segment. Although we expect the operating profit margin percentage of our Molina Medicaid Solutions segment to decline as our Idaho and Maine contracts commence full operations, we nevertheless believe that the operating profit margin percentage of that segment will remain greater than that of the Health Plan segment despite lower revenue base.

Excluding restricted investments, the Company had cash and investments of approximately $673 million. The parent company had unrestricted cash and investments of approximately $47 million.

I want to point out that the capital requirements of our Molina Medicaid Solutions segment are considerably less than those of our Health Plan segment subsidiaries except in the case of new contract startups. There are no cash reserve requirements and regulatory approval is not required for the subsidiary in our MMIS segment to pay dividends to us.

Days and claims payable for fee-for-service costs this quarter remained flat over last quarter at 44 days in despite of the fact that the inventory dropped. Before we open the call to take any questions, I want to remind everyone about the comments made by Juane Jose at the beginning of the call.

There can be no discussion of our common stock operating on this call. This offering limits our ability to comment on our expectations about the future. Please limit your questions to our earnings release.

Operator, that concludes our prepared remarks. We're now ready to take calls.

(Operator Instructions) Josh Raskin, Barclays Capital.

First question is on the operations. You mentioned in the press release and Mario spoke to it as well, a very difficult premium rate environment. I think that's a little different than some of the more constructive comments that we've heard from some of your peers.

So maybe you could talk about what you're seeing. Is that more of an expectation going forward or does that have to do with things like Michigan coming back with the retroactive reduction in premiums?

As we've said all along this year, we are really expecting premium rate increases in the low single digits and we think state budgets are certainly under pressure. We think that the passage of the extended [FMAP] will be helpful and we look forward to that.

The differences that you may note between us and some of the other health plans may have to do with the states that we operate in as well. We don't overlap a lot with the other publicly traded managed care plans that are in the Medicaid space. But this is our experience.

That's helpful. And then in Michigan, it looked like the net impact was $5 million, so the cost reduction was minimal. Did they not change anything on the fee schedule?

No, Josh. This is John. What happened was the state had originally submitted a range for our rates to the legislature and the state had thought they had pegged the actual point within the range at the midpoint when in fact they pegged it to the high end.

So, they went back and readjusted the rates to fix them at the midpoint of the range but that was one issue. The second issue was they had discovered that they had inadvertently enrolled some members who were eligible both for Medicare and Medicaid into the health plans which they shouldn't have done.

So they took the premium back for those members. The fact that we were able to then recoup about $0.5 million for claims that we had paid out on behalf of the members who shouldn't have been enrolled.

So they gave you a rate, you guys executed a contract and then they came back and said we decided we're just going to pay you less?

I think what they said was, we didn't intend to pay you as much as we did. We intended to pay you an actually sound rate, but that rate was supposed in the midpoint of the actuarial range and we in error put it at the high end of the range.

Okay and was there any prior period reserve [development] in the quarter?

Nothing that was outside of what our normal BPD is.

Sorry to even ask, because I have a feeling you're just not going to answer this, but did you give the breakout between primary and secondary shares in the offering?

We did not discuss the offering, no.

Are you going to be filing -- is the filing going to come for the secondary in any time soon or --?

Say that again, Josh.

I guess at some point you're going to file some sort of prospectus or something for the offering. Is that expected to come soon?

Yes and we put out a press release earlier today on the offering. So check the release.

I just didn't see any details in the release. I guess we can follow up. Okay, thanks, guys.

Chris Rigg, Susquehanna.

You commented in your press release that you observed hospitals billing for more intensive levels of care in the physician and outpatient cost segment. I guess, you know are you just trying to make a point that you're observing that or are you saying you are going back and potentially questioning the legitimacy of some of those claims? Any detail there would be great.

This is John. I think that the answer is sort of all of the above. One of the things that we have done is we have shared our data with a couple of the states that has caused them to relook at how their state fee-for-service system pays these claims. We are also going back and looking at those claims for things like suture removal which truly are not emergency in nature and talk to other hospitals and providers about those bills.

And then can you tell us how much of the year-to-date cash flow change is because of Ohio? You know, it's down about $70 million year to date. How much of that is from Ohio?

The bulk of it. Pretty much consistent with where we were at the first quarter. Ohio's practice hasn't changed. They continue to pay now mid month versus last day of the previous month.

Okay and that -- so that's not just for one month or is that for one month?

Ohio revenues can run about $90 million easily in a month.

Okay, okay.

(multiple speakers) 80 maybe.

Lastly, on Unisys, is anything tracking materially different than you had previously expected either positively or negatively?

This is Terry Bayer; no.

Okay, thanks a lot.

Tom Carroll, Stifel Nicolaus.

Question, actually more just looking for a bit more color on the challenges you're facing in Idaho and particularly does this have a chance do you think of turning into or creating an opportunity for the politicians in the market to make a lot of noise?

This is Terry Bayer. I think at this point, recall we acquired the HIM division of Unisys on May 1 and the system went live on May 31, technically June 1.

So our involvement in the pre-go-live activities was very limited. The DDI period is a several year period prior. It is not unusual to have glitches or blips when you first go live with a new system. And I'll make a couple of comments about Idaho, that it really enhanced the provider anxiety.

Due to budgetary constraints, the state did withhold Medicaid provider payments, delayed them. So it was simultaneous with the system go live. So you can imagine there's a new system and there's also been a withholding of payments.

This isn't primarily impactful to the smaller providers who are more cash flow dependent. But secondarily, there was a major provider re-enrollment in Idaho and this is not the case. As an example, our next state coming up is not experiencing that same kind of a provider re-enrollment.

So when you ask the providers to re-enroll, you are now subjected to all of the errors that can occur building in that provider database. So when you compound these with a new system, it's not surprising that we have discovered issues.

It's our responsibility to make sure going forward, we're meeting the provider's needs, the state has made advanced payments to ensure there are no cash flow problems and we have beefed up our on the ground support in Idaho and in the call centers so that in the coming months we will resolve the issues for the providers. And we're partners with the State of Idaho on this for the long haul. So we're addressing it now and learning from this as well because it's our first one.

Terry, great. That's exactly the color I was looking for in the market. Do you anticipate that the issues will be taken care of over what period of time? Within the next quarter?

It's difficult to predict, so I hesitate to do that. But we've got a joint letter going out to the providers this week and we will be keeping them posted. And again, hard to predict because we don't -- as more claims are paid out and more types of providers call in with questions, we will just resolve it as it comes and we will update you next quarter on the progress we've made.

Do you have any further opinion on rate changes as they impact 2011 for some of your larger markets like Ohio and California and Michigan, Washington I think you mentioned?

Tom, we're not going to comment on 2011.

So no more -- okay, thank you very much.

(Operator Instructions) John Rex, JPMorgan.

So during the course of the quarter, there has been a bit more talk from some others about just much lighter utilization trends. Even the Medicaid books, maybe then I'm hearing from you and I just wanting to get a little more color commentary, just straight.

So aside from the provider coding side, just what you are seeing in straight utilization trends. So I'm thinking -- I've heard talks of kind of OB being down in Medicaid populations and just broadly utilization down. Are you not seeing that to any meaningful extent?

This is Dr. Jim Howatt. We certainly have seen different utilization. The utilization in the first quarter and bleeding over into the second quarter was higher than normal for pediatric RSV infections which often require hospitalization.

And remember also that the H1N1 really started its peak in mid to late April. So we expect to see utilization trend downward and we think we're starting to see that now. But it has been relatively flat for us in the first two quarters.

Again, John, some of this may also reflect the different states that we're in as compared to other health plans.

So even when you look at your things like your bed days per member, that's held pretty steady also?

Yes it has. I mean, there's regional differences and we've also taken on some newer sicker members that -- the same story last year with rapid growth on acquisition of new members, we see higher costs. There are a whole series of moving parts here.

I understand. Then kind of the month-to-month stuff on this is a little tough in this business. But did it trend that way pretty much throughout the quarter? So again, we saw so much of this, a significant slackening in June, a lot of indications we are getting from providers out there. Is that from not from -- and I could take it also that's kind of not something you were seeing at least in your claims runs?

Yes, I think we are seeing improvement in June. We do monitor this using authorizations rather than claims and we are starting to see trends downward from earlier utilization.

I think it also fair to say that our utilization trends have been flatter perhaps than what some other people have talked about.

Right, so you're thinking just kind of on your year-over-year comp, perhaps that being a factor, okay.

John, let me also caution you. When you compare the year-over-year, you have to also remember we had $5 million net in terms of the takeback from Michigan that wasn't associated with medical costs that was pulled out and then you also had the pharmacy carveouts in Ohio and Missouri. And since we typically do pretty well on the pharmacy piece, we actually had to step back when they carved that business out. So it's really difficult necessarily to just compare MCR 2009 to 2010 and draw a lot of conclusions.

Okay, and then just your claims inventory, I think was (multiple speakers) went down 50 million sequentially. Maybe that was just getting closer to where you had been at the end of the year at the end of December as I recall. But is that kind of where you expect it to be or is that -- was there something significant there in terms of a speed up?

You know, I think that it's sort of back to where we want it to be towards the end of the year.

Those inventories -- it's Joe speaking -- those inventories tend to draw down in the summer, peak in the spring and the fall and draw down right around the middle of the summer at Christmas time.

Okay, and then just -- I understand you can't talk on outlook at this point, but do you have a plan to refresh outlook post transaction or can you even talk about that?

We can't even talk about that.

Scott Green, Bank of America Merrill Lynch.

I noticed in the press release that pharmacy unit costs were up and my understanding was that you had recontracted pharmacy towards the end of last year and I would've thought we would've seen some sort of decrease in unit costs. Can you talk about that?

I think it's a mix of Medicare members. We doubled our Medicare enrollments and I think that had a tendency to pull it up. Also when we carved out Missouri which was all TANF and Ohio where the bulk of it is TANF, those costs, those drug costs are less. So again, it's going to change the weighting.

Did you exit the California AAM program in the quarter?

We have been winding down the California AAM program. So we stopped accepting new members late last year and during this quarter, the final rollout would have occurred and been enrolled. So it's been a dwindling number but it's now over.

Okay, I guess two markets; can you talk about the MLR increase in Texas and what drove that sequentially?

This is Joe speaking. I think the main thing we're seeing in Texas is -- I can't necessarily speak sequentially but back in September 1, 2009 we had some premium [cuts from the space] specifically in the STAR+PLUS product line which is their aged, blind and disabled product line. So certainly since then we've seen relatively decreases in profitability.

I think it was up like 750 basis points sequentially though.

Well if you look at the PMPM premiums for Texas, they have gone down and the medical costs have actually gone up a little bit. So it probably reflects both the combination of the decrease in the premiums and the fact that you have got a lot of STAR+PLUS members there. So almost half of our membership are the aged, blind and disabled in Texas.

Those smaller populations like in Texas where we're at about 40,000 members also have a more inherent degree of variability in their reported medical costs. The impact of shifts in reserve development are much more profound in a population that size. Doctor Jim Howard?

Lastly, in Florida are you still complying with continuity of care issues there or just your outlook on helping to lower the medical costs there.

This is Dr. Howatt. I think you're referring especially to the pharmacy costs?

Yes.

And they are coming down quarter over quarter. They were at one point I think in the 70s or 80s. They are now in the high 20s, low 30s. It's still an issue and they are driven largely by psychotropic drugs but as we can, we are introducing generics and lower cost alternatives without disrupting treatment.

Okay, thank you.

Tom Carroll, Stifel Nicolaus.

Quick Aubrey follow-up question. Aubrey has like 3000 Medicare Advantage members that you downstream to Universal American. So the question is, what percent of the premium does Molina keep in that contract, if any?

There is a retention, but we are not going to disclose that, Tom.

Would you suggest that it is of a traditional amount that we see in contracts like this?

We don't do too many of these contracts, so I don't know.

(multiple speakers) comment on what is traditional. We don't have arrangements like this so it's hard for us to really know.

But across the industry we can see things like this. Would you suggest it's out of the ordinary or you are just not going to comment?

We are not going to comment.

Dr. Molina, there are no further questions at this time. I would now turn the call back to you.

Well, with no further questions, we want to thank all of you for joining us. We look forward to discussing next quarter's results.

Actually, we can't say that, Mario. That was a forward-looking statement.

Good bye, everybody.

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