Molina Healthcare Inc (MOH) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare third-quarter earnings 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, Tuesday October 25, 2011. I would now like to turn the conference over to Juan Jose Orellana, Vice President of Investor Relations with Molina Healthcare. Please go ahead, sir.

Thank you, Alan. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the third quarter ended September 30, 2011. The Company's earnings release reporting its results was issued today after the market closed, and is now 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; and Joseph White, our Chief Accounting Officer.

After the completion of our prepared remarks, we will open the call to take your questions. If you happen to have multiple questions, we ask that you get back in the queue so that others can have an opportunity to ask their questions as well. Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act, including statements regarding our earnings per share guidance for 2011, expected rate changes, and opportunities relating to the migration of dual eligibles into managed care. 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 2010, our Form 10-Q quarterly reports, and our Form 8-K current reports. These reports can be accessed under the Investor Relations tab at our Company website or on the SEC's website.

All forward-looking statements made during today's call represent our judgment as of October 25, 2011, 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 thanks for joining our discussion of third-quarter 2011 financial results. Let me begin by saying that I am very pleased with the performance of our business, both in financial terms as well as our strategic execution. Our team's efforts resulted in a quarter that reached the highest levels of both revenue and net income that we've ever had. For the third quarter of 2011, we earned $19 million in net income, or $0.41 per diluted share, despite operating in the most complicated premium rate environment in the history of our Company.

For fiscal year 2011, 6 out of 10 of our states actually cut their premium rates. Nevertheless, today's financial results were consistent with our expected quarterly performance towards achieving the full-year guidance of $1.55 per diluted share. Our comments today will be brief, since there was considerable discussion about our business, as well as the key drivers of our financial performance, at the Company's Investor Day held on September 15. During that presentation, we discussed various business drivers, including the premium rate environment in our industry -- and specifically, in our markets; the performance of our legacy health plans versus our newer startup health plans; and utilization trends.

Although there have been no fundamental changes to these drivers, there are a few updates that we want to share with you. Let me begin with the rates. Our forecast at the beginning of the year that premium rates in 2011 would be flat to down has borne out, as we now have full rate visibility and we believe our industry will continue to operate in a state of flat to down rates for the near future. State budgets have yet to recover, and the expiration of the enhanced federal matching funds have exerted pressure on state premium rates. You may recall that at our Investor Day, we did not have premium rate information on Florida, Michigan, and Washington, all of which became effective in either September or October of this year. We now have those rates.

In Washington, rates were reduced by approximately 1%, effective October 1. This rate decrease is consistent with our projections that rates would be flat to down. However, in a bit of positive news regarding rates, Florida and Michigan benefited from blended rate increases of approximate 7.5% and 1%, respectively. In Florida, where the rate increase was effective September 1, the increase is particularly helpful to Medicaid reform counties like Broward, where medical cost trend has outpaced premium rates for quite some time. Blended rates in Broward County increased by nearly 10%.

In Michigan, the 1% rate increase, which became effective on October 1, was consistent with our previous expectations. Given the effective date of the new premium rates for Florida, Michigan, and Washington, the revenue impact will be fully reflected in the fourth quarter of 2011 and will continue into 2012. Although rates have been a challenge, our business remains strong; and we are reaffirming our guidance of $1.55 per diluted share for 2011.

Our established or legacy health plans continue to perform well, and our consolidated medical costs have been stable. Excluding Texas, which has experienced high utilization and a considerable influx of new members, fee-for-service costs remain flat. Hospital utilization was flat when compared to the second quarter, and declined approximately 7% year over year. Our newer markets are improving financially -- for example, the medical cost at the Florida plan on a per-member-per-month basis have decreased both sequentially and year over year, primarily due to initiatives implemented to reduce pharmacy costs and a new behavioral health contract. The 7.5% premium increase that became effective on September 1 will help improve profitability in this state.

While managing medical costs is essential to our business, we remain equally focused on quality. We were very pleased earlier this month when Molina Healthcare of Missouri earned an accreditation from the National Committee on Quality Assurance. This brings the number of NCQA-accedited Molina Medicaid health plans to 9. We are especially proud that our focus on quality has attracted national attention and recognition from Consumer Reports, which ranks the top Medicaid health plans in the country.

Finally, Molina Medicaid Solutions currently shares many similarities with our Health Plan business, as it relates to contract maturity. Like the Health Plan business, our legacy or established fiscal agent contracts are stable and contributing to earnings, while the newer startup states like Maine and Idaho have resulted in short-term losses. However, we believe that once we get through the certification process, the performance of Idaho and Maine will improve. Maine has already completed its certification audit visit from CMS, and we should find out the result by the end of the year.

A substantial milestone was achieved in Idaho, when we received notice from the State of Idaho that our system was out of the pilot phase. This milestone triggered payments of approximately $10 million, which were received during the quarter. We anticipate the CMS certification audit visit for Idaho to occur in early December. As a reminder, given the accounting intricacies of the fiscal agent business, we are not recognizing revenue and expense and Idaho yet, but the payment does have a cash flow impact.

As you can see, during the first few quarters of 2011, we have executed our strategy in a way that has improved our performance for the year, while providing an even more solid foundation for the future. We believe our 31-year history in this business and our capacity for adaptation to economic cycles makes us exceptionally well-suited for this task. It positions us to succeed, even in today's challenging economic environment. Near-term economic and industry factors are also incubating new opportunities for our Company in the areas of direct delivery and care coordination for the dual eligible population.

We have long talked about our direct delivery capabilities as a vehicle for enhancing access in underserved communities. This year, our direct delivery presence has increased with the opening of four new clinics in California and one in Washington. Additional clinics are also in the pipeline in Florida and New Mexico. Another key and transformational opportunity remains the transition of the dual eligible population into managed care. I spoke about this topic in more detail at our Investor Day on September 15, so please feel free to refer back to those materials.

Currently, there are nearly 9 million beneficiaries that qualify for both Medicaid and Medicare. This population is the sickest of the sick, with multiple chronic conditions and behavioral health issues that account for nearly $300 billion annually in total spending. Three-quarters of this population live at 125% or below the federal poverty level, and many face the same challenges that plague the low-income populations currently served by our health plans. This is a population that is a natural extension of our service offerings, and that we believe will benefit the most from managed care.

We are strategically positioned to serve this population through our dual-eligible Medicare Special Needs Plan, which is currently ranked as the eighth-largest special needs plan in the country; and through our presence in three states with the largest dual eligible populations -- California, Florida, and Texas. There is already work underway, as CMS awarded 15 states planning grants for migrating dual eligibles into managed care. Three of those 15 states are also where Molina has its largest health plans. This is a huge opportunity, larger than many of the Medicaid RFPs currently in the pipeline, and we look forward to expanding our presence in assisting this vulnerable population.

Our Company began with a mission to bring quality care to those who need it most but can least afford it. In addition to our growth over the years, we remained committed to this mission. It is at the core of what makes Molina Healthcare different. We are a mission-driven culture. We have the physician-focused leadership legacy of our founder, my father, Dr. C. David Molina, and we have 31 years of experience in this industry. We have a flexible delivery model that includes health plans, fiscal agents, and direct delivery. There is no other healthcare organization that can say that.

Our results show that we are taking the right approach to this environment, and that the underlying fundamentals of our business continue to support our aspirations for the future. In the near term, that means leveraging the performance of our established health plans, while working to improve the performance in newer markets. I will now turn the call over to John, who will review our financial results in greater detail.

Thank you, Mario. Hello, everybody. We are pleased with our results today. EPS for the quarter was $0.41, up 8% from a year ago. Net income for the quarter was $19 million, up 17% over last year. And EBITDA increased by nearly 10% over the same period one year ago. As Mario mentioned, these are the highest levels we have ever achieved for these financial metrics. At the end of the quarter, our enrollment stood at 1.7 million members. Enrollment was up across the majority of our health plans on a sequential basis.

The bulk of the enrollment gains were in Texas, where the Company began serving new TANF and ABD members in the Jefferson County service area, effective September 1 of this year. Our Medicare enrollment continued to grow steadily, and topped 28,000 members during the quarter. Our year-to-date Medicare revenue grew to $280 million, nearly 50% higher than it was one year ago. As a reminder, nearly 80% of our Medicare enrollment is comprised of dual eligibles.

Consolidated premium revenues grew 13% to $1.2 billion in the third quarter of 2011, compared to the same period last year, due to an 8% increase in membership and a 5% increase in PMPM revenue, due to mix shift. Mario has already spent some time discussing the rates in his remarks, and there's no question of the impact that flat to down rates have had on our business. There were also other revenue adjustments we made in the quarter that, while not necessarily one-time in nature, nevertheless can serve to obscure the underlying strong performance we are observing across our health plans.

For example, reductions to revenue due to a minimum medical care floor in New Mexico and a profit cap in Texas had a negative $5.9 million impact in the third quarter of 2011, compared to a benefit of $2.9 million in the third quarter of 2010. This is an $8.8 million swing in results. In California, the medical care ratio jumped to nearly 89%. As we discussed at our Investor Day, the California plan accrued for the 10% provider rate reduction that the State of California announced in July. If approved by CMS, the provider rate cut and our capitation rate would be retroactive to July 1, 2011. In consideration of these intentions, we made an accrual that resulted in a $7.5 million reduction to revenue during the third quarter, without any offset to medical costs.

Absent these adjustments, which negatively impacted our financials for the quarter, our results would have been better than the strong performance we recorded today. In light of this challenging revenue environment, it is essential that we aggressively manage our costs. Excluding the Texas health plan, which has seen an increase in cost that we have previously detailed, fee-for-service costs were flat on a PMPM basis. Fee-for-service and capitation costs combined increased approximately 4%. Of note is that hospital utilization decreased approximately 7% year over year.

General and administrative expenses for the quarter remain flat, at 8.5% of revenue, despite the need to invest in preparation for healthcare reform, ICD-10 implementation, and the implementation of a new enterprise resource planning system brought on to help with our growth. You may also recall that at our Investor Day, we announced the rightsizing of our credit facility. As result of this change, we wrote off approximately $1.1 million in capitalized issuance costs. Cash flow provided by operating activities was $155 million for the 9 months ended September 30, 2011, compared with $9.5 million for the 9 months ended September 30, 2010. The Company had cash and investments of $881 million, and the parent company had cash and investments of $54 million.

[Days] in claims payable remained flat, sequentially. Our Board has authorized a share buyback program of up to $75 million. This is in addition to the $7 million program announced in July of 2011. Finally, we are reaffirming our EPS guidance of $1.55 for the year ended December 31, 2011. This concludes our prepared remarks. As a reminder, if you have multiple questions, we ask that you get back in the queue so that we have time for everyone to have an opportunity to ask questions. Alan, we are now ready to take questions.

Thank you. (Operator instructions) Josh Raskin, Barclays Capital.

A question on the Texas -- I guess I'm just a little confused -- the Texas rebate versus the Texas MLR issue. So, is it just because the new members are coming in, and that doesn't count as sort of a statewide profit? It is just -- is CHIP the only thing that counts towards that profit cap? I'm just sort of confused as to why the MLR was a lot higher, and yet you are still accruing some of these negative revenue accruals because of the rebate [you needed there].

Yes, Josh, this is John. The profit cap is based on the product line; and so, CHIP's got one -- actually, they all have one. But in CHIP, our MCR is low enough that we have to do a rebate. But the other lines of business, it's high.

Okay. You don't get to offset any of that within the state?

No, you don't.

And then -- I'm sorry, just one more quick correction or question -- you put in the press release, you talked about a potential for provider payment recoupment in California. And I was just curious what the potential size was, or how that would go about -- or how that would come about, I should say.

Well, if the fee schedule goes into effect as the State of California has planned, that would reduce the Medi-Cal fee schedule by 10%. To the extent that we have providers that we paid at the higher rate going back to July 1, we would have the ability to go back and recoup the difference between what we paid them and the new fee schedule.

And is there a way to size what that is?

We have not done that yet.

And I know they've done retro cuts before. Have you been successful in going back to providers and saying -- we overpaid CHIP, here's the new fee schedule?

The answer to that somewhere between 0% of the time and 100% of the time.

Okay. Got it. Okay, thanks, John.

Chris Rigg, Susquehanna.

Another clarifying question on the California issue. Is the 6% assumed reduction only -- would that only occur if the 10% fee schedule reduction occurs? Does one have to happen for the other to occur, is what I'm trying to ask?

Yes.

Okay. Can you give us a sense for -- I know there's been some ongoing legal issues there, court hearings. Where does that process stand at this point?

There are two separate processes going on. A prior rate change from several years ago has been contested, and it worked its way through the courts, and I believe it was heard by the Supreme Court this past month. That relates to who has standing to sue regarding the rates. The current rate year has a proposed 10% rate cut in place, and that has been submitted to CMS for approval. The two are not, at this point, connected.

Okay, all right. Thanks a lot.

Matt Borsch, Goldman Sachs.

Hi, this is Sam Wasson for Matt. I know you that mentioned that hospital utilization is down 7%. I was wondering if it'd be possible to go into any more specifics on that, whether you saw a variation across different markets?

Hi, Sam. This is Mario. No, we are not going to break it out by market. Suffice it to say we saw a 7% decrease year to date, as compared to last year, and that from the second to the third quarter, hospital utilization was flat.

Got you. And is there anything worth noting on physician or outpatient?

Well, I think we talked about what the changes were for pharmacy, physician, and outpatient, so I don't think there's anything remarkable beyond what we've described in the release.

Got you. Thanks.

Charles Boorady, Credit Suisse.

First question -- just a small nit here on the deficiency reserve release. Can you size that up for us? Was it roughly in the $0.02 to $0.04 range?

It's about -- it's Joe speaking, Charles. It's $1.8 million, so a hair over $0.02.

Okay, great. And in terms of your guidance for the year, what are you assuming for fourth-quarter influenza?

Well, Charles, we don't break it out that way. What we have said and maintain is that we are looking at $1.55 for the year.

Yes. I think, basically, should we assume that you bake in a typical flu season for the year? Which hasn't really been picking up, it's kind of early in the season, but as we look for where your guidance --

It is early, but we always take that into consideration when we develop our numbers for the year.

Got it. As we look out to the new expansions in 2012, there's some expansions in existing markets and then some new markets. How should we think about marginal admin cost that comes with some of the new contract wins?

I think we talked a lot about that at the Investor Day back on September 15, so I would refer you back to our discussions of the new and expanding markets that we talked about, especially in Texas. There will be some additional incremental admin costs, but since we're already operating in Texas, for example, it's not going to be large.

Okay, great. Those were helpful slides. There's a wide range of possibilities for 2012, still, and I guess getting some more granularity on that, when do you think you'd have a reasonable range down at the EPS level where you think putting those components together we get to next year?

Well, we are not prepared to talk about 2012 guidance at this time. So, it would probably have to wait until after the first of the year.

So, after January 1? All right, great. Just finally, as you look at the various components of medical trend, and I know you gave us some of those components on the call today -- after the quarter ended, just in the last, say, month, or as you look towards the end of the last quarter you reported, do you start to see any inflection points at all in any of those components, where costs are either continuing to decrease surprisingly or starting to bend upward?

It's too early to make any definitive statements, Charles.

(Operator Instructions) David Windley, Jefferies.

I was looking at the four states in which you had rate changes that were either not effective until after the quarter or effective for only part of the quarter. And I wondered if it was possible, or if you looked at what your MCR would have been, had those rates been effective for the full third quarter? And what would the net effect of those had been?

You know what? We didn't do that analysis. I'm not really sure how meaningful it would've been.

Okay. If I could ask one other, then.

Sure.

In Texas, on the comments around higher utilization, is that exclusively related to the new ABD members? Or is that a statement that reflects more of a broader dearth of membership that's driving utilization?

This is Terry Bayer. It's reflective of the new membership, and it ties back to what we've shared with you when we go into a new market. We run at a higher cost until we are able to institute all of our programs, so that applies in this case to the new membership in the Dallas-Fort Worth service area this year.

Okay. All right, thanks for that clarification.

Tom Carroll, Stifel Nicolaus.

A clarification on the California rev adjustment of $7.5 million -- is that just for third quarter? Or is that an amount that you expect to cover the entire second half of this year?

No, Tom. Joe, why don't you answer that?

Yes, Tom, it's Joe. That is just the estimated third-quarter impact, so about $2.5 million a month.

Okay. So, is -- if things don't get finalized, could we see a paragraph like this on your fourth-quarter call? Or do you expect to have things wrapped up by then?

It's certainly possible, Tom. It all depends on what happens with CMS and the state. But this is our best estimate, based on what they've told us and what the revenue is going to look like.

Got it.

If we [get it], it will go with the final rates. If we don't, you will see another paragraph next quarter.

Okay, that's helpful. And on your repurchase that you mentioned, the $75 million, I think this the largest repo authorization we have ever seen out of Molina, right? Certainly since your IPO. Do you have a corporate policy on how those shares are to be repurchased over time? A methodology?

I'm not sure what you mean.

So, is it going to be pro rata? Is it going to be based on some kind of share price formula, relative to a benchmark? Is going to be just purely opportunistic on your part?

The Board gave us latitude, Tom. Really, what triggered it was, for a while our shares were trading below book value, and it did not make a lot of sense for us to just have a sitdown at that level. So, to the extent that we see that the stock is undervalued, we now have the ability to deploy capital to repurchase those shares.

Okay. Thank you.

Scott Green, Bank of America.

What would be your forward view of what a normal cost trend is? And you've executed well to keep costs flat here. How long do you think that can continue?

Scott, I'm not sure that, in our business, there is one normal cost trend. We have 10 health plans with 10 different things happening in each of them. So, realistically, we don't look at what the future cost trends may be. What we have to do is manage within the budget that the state gives us.

And -- this is Mario. Let me just add -- states have the ability to influence cost trends. A good example is what's happened in California, where they are decreasing rates to providers. And this is not uncommon in the Medicaid program, for states to make adjustments to the benefits or to the payments they make to providers. And that influences what our medical cost trend will be, and that's really beyond our control. That's set by the states.

Okay. Okay, so when the states are sitting down and calculating what a rate update should be, going forward, they have to make some projection of trend. Is there some general range that they use in some of your more mature core markets?

No, I don't want to generalize it. What you saw, as an example, our rate in Florida ended up being 7.5%, because of where our population is distributed in that state, relative to the state as a whole -- which, I think the state gave out rates that were basically flat. But because of where we were and the costs in those particular submarkets of Florida, we were able to get a higher rate increase.

This is Mario again. The rates must be actuarially sound; and so, each state must look at the rates independently, based on the experience and come up with an actuarially sound rate. And they do it, typically, in rate cells. So, it may vary from geographic region to geographic region. It may vary depending on the aid code of the beneficiaries. So, it's a complex thing, and it's very difficult to generalize and pick a single number. I think you can look back over the years and probably come up with some numbers; but again, it's a mosaic. It's lots of little pieces that get blended together to come up with the final number.

Okay. And could we assume that your rate increase in Florida is adequate, so that you remain in all your counties? I think you had spoken last quarter about using the rates to gauge your future operations in a few of the reform counties.

We are happy with the rates that we received in Florida.

Okay. Thank you.

Peter Costa, Wells Fargo.

Can you give us any update on the Washington State rebid? Has there been any new information there that -- in terms of how that business is going to work, and what populations are going to be included there?

This is Terry Bayer. I believe at our Investor Day we didn't quite have the fully released RFP, so I can update now. That RFP is released. It is due back to the State on December 2. And at this time, the current populations, as well as they have added the SSI population in Washington, so that will be a new population based on this RFP.

And do you have some dollar numbers around how big that will be?

Not at this time.

Okay. And then, can you talk a little bit about the Wisconsin rate environment? You had a tough rate there at the beginning of this past year, 2011; and sort of moving -- getting closer to the 2012 rate. Have you been in discussions with them about your situation, MLR there, and what they are likely going to do with the rates in 2012?

We certainly shared our data with the Medicaid agency at the State of Wisconsin; but at this point, they haven't given us final rates.

Any feeling for which direction that's going to go, or is it too early to tell?

I think it's too early to tell.

Okay. Thank you much.

Tom Carroll, Stifel.

Question on California again. And I think it was Josh that brought it up, that you had highlighted that you haven't recorded any potential recovery of provider payments. You've only taken a hit against your potential reimbursement loss. I'm trying to think how -- I know you said you haven't thought about quantifying that yet, but tell me if this is kind of a appropriate back-of-the-envelope way of looking at it.

If you have $7.5 million this quarter, let's say you have another $7.5 million next quarter, for $15 million total. Let's assume you can mitigate half of that. Can I estimate that $7.5 million you might get back? And if I tax adjust that, that's like $0.10 a share on the full year, that your guidance could be underestimated by? Meaning you should be reporting a higher number by about $0.10? Is that a way to think about it, or am I way off base?

The challenge, Tom, is what's that -- your initial math is right -- $7.5 million and $7.5 million. The challenge is, what's the percentage that we can get back? And the real issue for us is, California tends to have more IPAs; and so, those contracts need to be negotiated one on one. And then, I believe that inpatient and pharmacy are also going to be a challenge. I think inpatient may be excluded from that rate cut, and there's something about pharmacy to where it can or can't be adjusted. That's why we haven't done it, and just try to be conservative until the rates actually come out. We certainly can't [tell the] providers now.

But -- so -- but that's the math though, right? If you could mitigate half of what I just threw out there, it would be like $0.10 a share.

That's probably right, Tom. It's just a question of -- what are the final rates going to be? How much of this fee-for-service cut can we pass on to the providers? How much of it will we be able to recoup? I think to the extent that we are paying people off the Medicaid fee schedule, recoupment shouldn't be a big problem. But as John points out, a lot of our physician payments in California are tied to capitation rates. There's definitely some upside that we are not taking into account right now, but we don't know how much. I wouldn't expect it to be a huge number.

So, it doesn't sound like that amount would be recouped in this calendar year, given the process and the nuances of California provider contracting.

You mean before the end of 2011?

Yes.

No, I don't think so. This is going to be more 2012 recoupments.

Okay, great. Thanks for that clarification.

Chris Rigg, Susquehanna.

Thanks again, guys. Next time I'm definitely not listening to the rules. [Laughter] On the bond -- buying back the [converts] versus the stock, it looks like the converts are trading at roughly $0.97 on the dollar. Obviously, the stock is where it is. Can you sort of tell us how you guys view the relative [detract in this], whether you want to buy the converts at a discount to par, or you would prefer to buy the stock here? And how do you guys think about that internally?

We look at it -- whichever purchase is going to get us the best -- ultimately, the best use of our capital. We have repurchased the convert before, and we have repurchased stock.

Any sense for what you prefer today?

Really, it goes on a day-by-day basis, what the relative prices are of the two.

Okay. And then, last question -- so, you guys came out with $1.55 of earnings, that updated number with Q2. And obviously, we talk quite a bit about that number and the impact of California at the Investor Day. Can you remind me -- when you guys came out with the updated $1.55 with second quarter, were you guys already assuming the 6% cut in California? Or were you assuming something less at that time?

No, we were assuming the 6% cut.

Okay, thanks a lot.

Dr. Molina, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Well, I just want, first of all, to thank all the employees. This has been a very challenging year from the rate standpoint, and the team has pulled together and done a great job of managing our medical costs, and at the same time, holding down the admin costs. We've managed to improve our status in terms of NCQA accreditation. So, I just want to thank everyone who's really pulled together to make this year, year to date, successful. I also want to remind everyone that we will be out in New York again for Investor Day in January. So, we look forward to seeing you there. And that concludes our presentation. Thank you.

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.