Molina Healthcare Inc (MOH) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Molina Healthcare fourth-quarter and year-end 2012 earnings conference call. During this presentation, all participant lines will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) A quick reminder, this conference is being recorded Thursday, February 7, 2013.

It is now my pleasure to turn the conference over Juan Jose Orellana, Vice President of Investor Relations. Please go ahead, sir.

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

The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and fiscal year ended December 31, 2012. 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 and take your questions. If you have multiple questions, we ask that you get back in the queue so that others can have an opportunity to ask their questions.

Our comments today will contain forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act, including without limitation statements regarding our ABD and duals membership in Illinois, growth and enrollment associated with the Medicaid expansion, our projected revenue growth over the next several years, our accreditations and quality ratings, our medical care costs, and our financial guidance for fiscal year 2013. 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, 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 February 7, 2013, and we disclaim any obligation to update such statements, except as required by securities laws. This call is being recorded, and a 30-day replay of the conference call will be available at our Company's website, molinahealthcare.com.

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

Thank you, Juan José.

Hello everyone, and thanks for joining our discussion today. Let me start by saying that we are proud of our strong fourth-quarter operational results, which reflect solid growth in our revenue, and considerable improvement in our margins. Our performance in the fourth quarter is a strong finish to 2012, a year in which we successfully managed through a difficult operating environment, resulting from margin pressure at our Texas, Wisconsin, and California health plans.

We are especially encouraged by the traction we are gaining with our operational and strategic initiatives that we have outlined in the past. The overall result was a record year for our Company, with revenue totaling $6 billion. In 2012 our Company revenue grew by nearly $1.3 billion, while our enrollment grew by an additional 100,000 members. To put this in perspective, our annual revenues have increased by over 50% in the last three years, and nearly all of this increase has come from organic growth. As we have talked about during previous presentations, our strategy calls for us to double our annual revenues in the next three years.

As we begin looking forward at 2013, I thought it would be worthwhile to think back on some of our accomplishments in 2012 and consider the solid foundation on which we can build in 2013. Our health plans in Washington and Ohio had successful Medicaid contract bids. Our Ohio health plan will expand to serve the entire state, and was selected to participate in the new contract for the dual eligibles. We helped to transition thousands of aged, blind, and disabled, or ABD members, from fee-for-service into managed care in Texas, Washington, and California. We experienced considerable growth in Texas as we implemented new contracts for ABD members in the Hidalgo and El Paso service areas.

Our Utah health plan celebrated its 15th anniversary of serving that state's Medicaid program. It was in Utah the we first demonstrated that our business model could be replicated in states other than California. In Wisconsin we made great progress and lowering health care costs by entering into new contracts with the major hospitals in our network, and we received a premium rate increase. The performance of the Florida health plan has improved as medical costs decreased, resulting from reductions in unit costs and utilization. Illinois is a new market for Molina Healthcare. We are excited to have been selected to serve members in the central Illinois region.

Starting in the second quarter of 2013, we will begin serving seniors and persons with disabilities in the Medicaid program, as the state expands its integrated care program. There are approximately 20,000 ABD patients in the central region. In the fall of 2013, our Illinois health plan will also begin serving duals in central Illinois, under the state's Medicare-Medicaid Alignment Initiative. There are approximately 18,000 dual-eligible beneficiaries in this region, and Molina Healthcare will compete against only one other plan.

Our participation in Medicare is now entering its eighth year, and we are now that sixth largest Medicare Special Needs Plan in the country. All of our eligible plans have achieved three-star ratings. We opened new clinics in California, Florida, and New Mexico this year, with more to come in 2013, to supplement our direct delivery footprint, which already included a presence in California, Virginia, and Washington. As I have said before, our direct delivery strategy does not replace our contracted physician network. Instead, it supplements access for patients in areas where access to primary care is a challenge.

Molina Medicaid Solutions achieved improved financial performance overall. With the CMS certification of our Medicaid Management Information System in Idaho in 2012, all five of our Molina Medicaid Solution states now operate systems certified by CMS. In addition, we also attained a one-year contract extension in Louisiana and were awarded a contract to use our West Virginia system to serve the US Virgin Islands.

Next year in 2014, the Affordable Care Act will continue to be implemented, and with it, expansion of Medicaid coverage to newly eligible beneficiaries. At this point, the governors of California, Illinois, New Mexico, Ohio, Michigan, and Washington, have announced they intend to proceed with expansion. In those states, expansion could add up to 4.3 million new beneficiaries. Florida, Utah, and Wisconsin are still undecided. Should these states elect to ask expand Medicaid, the potential market could increase by an additional 1.3 million new beneficiaries.

Over the next three years, we expect to double our annual revenue from $6 billion to $12 billion, while at the same time improving our profitability and enhancing our reputation for quality. We intend to accomplish this through contracts for dual-eligible members in the markets we currently serve and through increases in Medicaid enrollment in our present states. We expect to maintain NCQA accreditation in all states, and it is our goal to achieve four-star ratings for our Medicare products.

For Molina Healthcare, 2012 was a year of opportunity, challenge, and validation. As more states move beneficiaries of government programs into managed care, our experience and track record continue to open new doors of opportunity for our Company. We will continue to execute on our strategy and remain true to our mission to bring quality healthcare services to even more of those who need it most and are least able to afford it.

Thank you. Now I would like to turn the call over to John.

Thank you, Mario, and hello everyone.

As Mario noted, this year we face some challenges, but have made great progress, which is reflected in our fourth-quarter results. Today we reported earnings of $26 million, or $0.54 per diluted share, for the fourth quarter of 2012, a substantial improvement over the earnings of just $0.07 per diluted share that we reported in the third quarter, and the loss of $0.72 per diluted share for the same period last year.

There was a lot of ebb and flow in this quarter, a $12 million benefit from a retroactive rate increase in California, a $30 million benefit from prior-period claims development in Texas, and a $14 million expense for potential settlements. Had we not incurred these items, earnings per share would have been about $0.26 for the quarter. But the real story of this quarter is that we have demonstrated an ability to work with our state partners to get rates right as we increase value by encouraging members and providers to access and provide care in a more cost-effective manner. That is a reassuring message as we prepare for 2013 and 2014.

In the interest of time, I'm going to focus on Texas and California. But I want to point out everyone that seven of our nine health plans reported a decrease in their medical care ratios from the third quarter of this year to the fourth quarter of this year. As we have discussed in the past, we usually see an increase in medical care ratios from the third to the fourth quarters. But Texas is, of course, the big story.

When we reported results in the third quarter, we felt that Texas was on the right track, but we didn't yet have enough information to be certain. Today we have that information. With a benefit of the last three months of the year, we are now able to review the Texas health plan's performance over the entire 10 months that have passed since the expansion took place effective March 1 of 2012.

In the fourth quarter, we were able to reap the benefits of our approach to patient care and provider contracting. We also recognized more revenue due to increased premium rates, that more closely matched the high costs of our ABD members. The result is that our Texas health plan reported a medical care ratio of $0.78 -- 78% for the fourth quarter, with a benefit of about $30 million of lower medical costs that related primarily to the second and third quarters of 2012.

However, to understand the Texas performance in the proper context, we have to assign all revenues and medical costs to their proper periods. When we do that, we can see that the medical care ratio of the Texas health plan declined from 99% in the first and second quarters of 2012, to 90% in the third quarter, and 89% in the fourth quarter. This represents solid improvement that gives our shareholders a fair return, while also providing value and quality to the state of Texas.

For the fourth quarter, again adjusting for favorable out-of-period claims development, the Texas health plan reported pre-tax income of $4 million. We have made good on our commitment to reach breakeven by the end of 2012. While we are proud of our accomplishments in Texas, I want to be clear that we are not want to maintain a 78% medical care ratio you see reported in this fourth quarter. The adjusted medical care ratio of 89% for the fourth quarter that I mentioned a minute ago is a good starting point for 2013.

California is another example of where our perseverance has paid off. You will recall that on our third-quarter call, we talked about our efforts to demonstrate to the state that higher premiums for ABD members were appropriate. In the fourth quarter, we received a cumulative retroactive rate increase of approximately $12 million for our ABD members. About $4 million of this rate increase related to 2011, while about $8 million related to 2012.

So, just like with Texas, the medical care ratio of 89% that we reported in the fourth quarter is not indicative of where we are on a run-rate basis. When we push back the retroactive rate increase to the proper time periods, we have an adjusted medical care ratio of 94.5% for the fourth quarter.

The situation in California is analogous to our situation in Texas. Our greatest challenge is among our ABD members. After adjusting for a retroactive rate increase in California, we still had a 103% medical care ratio for the ABD members in the fourth quarter of 2012. We did achieve a 10% decline in inpatient utilization between the third and fourth quarters of 2012. This activity, coupled with the rate increase, shows we are making good progress towards improved financial performance.

General and administrative expenses grew to 9.7% of total revenue in the fourth quarter of 2012, from 8.3% in the third quarter. Absent $14 million of expense recognized for potential settlements in the fourth quarter, our administrative expense ratio was 8.8%. We will also continue to make the infrastructure investments necessary to support the growth opportunities we have previously identified. As of December 31, 2012, the Company had cash and investments of approximately $1.2 billion. The parent company had free cash and investments of approximately $45 million.

Moving on to guidance, a more comprehensive list of guidance components for our 2013 guidance can be found in today's press release. The following are some highlights. And as a reminder, all numbers are approximations. Total revenue, $7 billion. Medical care ratio, 88%. G&A ratio, 8.6%. Income before tax, $128 million. Net income, $74 million. Earnings before interest, taxes, depreciation, and amortization, or EBITDA, $245 million. Diluted EPS, $1.55. An effective tax rate, 42%.

Let me speak about our tax rate for a moment. Although we have historically experienced and guided to a tax rate of about 38%, we expect that limits in compensation deductions for health insurers as a result of the Affordable Care Act will increase our tax rate. These changes to the Internal Revenue Code apply to all health insurers beginning in 2013. For our 2013 guidance we estimate that the impact of the change in our effective tax rate from 38% to 42% results in a reduction to earnings-per-share of about $0.10.

I also want to point out everyone that we are now calculating our medical care ratio by dividing medical cost into revenue exclusive of premium tax. We made this change to allow for better comparability of the medical care ratio between periods for health plans operating in states where premium taxes have changed. Michigan and California reduced or eliminated their premium taxes during 2012.

A complete discussion of our assumptions and risk factors associated with our guidance will be discussed at our upcoming Investor Day on February 21. So, I would ask that you defer your guidance questions until then. This concludes our prepared remarks.

David, we are now ready to take questions.

Certainly. (Operator Instructions) Sarah James, Wedbush.

Thank you, and congratulations on the quarter.

Thank you, Sarah.

I appreciate all the detail on the California MLR. But I wanted to narrow in on the 103% ABD MLR post the retroactive timing of rate increase adjustments. So, when you think about bringing that down, how much progress will be driven by rates versus medical management? And then in terms of inpatient, since that is the metric that you chose to highlight in the prepared remarks, it's -- that went down 10% for the fourth quarter. How much further is there to go until you get to a range you are comfortable with?

That is a multiple-choice question there, and a lot of detail in there, Sarah. I think that we have gone back and talked to the states about the rates again because we think that even though they have looked at rate adequacy, we believe, and some other health plans believe, that perhaps we are not quite where we need to be in terms of the rates. So, part of this may come from additional rate relief. Our medical directors have done a very good job of working on getting the utilization down in terms of inpatient, and inpatient for the ABD constitutes, I would say, about 30% to 35% of all medical costs. So, we would expect to gain some further decreases because continued decreases in utilization. One month again doesn't -- or one quarter doesn't make a trend. We also have a new pharmacy contract that took effect January 1 of this year, which we expect will help with those costs as well.

Justin Lake, JPMorgan.

Thanks. Just looking ahead, can you talk a little bit about how you see the rate environment shaping up going into 2014, and specifically on the industry tax? Can you tell us any of the conversations you're having with states and your confidence in the ability to pass that through? Thanks.

Justin, on the rate environment, we're going to go through a lot of detail in a couple weeks on the rate increase -- increases, or decreases, or flat. We think the by and large, rates are going to be sort of flat again this year. State budgets are not -- they're improving, but still not in great shape. As far as the premium tax goes, I'll let Mario speak to our efforts there. But we have seen some actuarial white papers on other sorts of premium taxes. And since it is a discrete item, we believe there is a very good argument, if it is not repealed, that it is paid for as a discrete line item.

Hi, this is Mario. We continue to advocate for repeal of the tax. We believe that this excise tax really does not generate new revenue for the government, because our premiums are paid for by the government. So you're really just robbing Peter to pay Paul. However, as with other premium taxes that we have seen in the past, we expect this to be passed through. So, if there is a tax like this, we would expect that the states would increase our premium revenues accordingly, and that is consistent with actuarial practices and our previous experience in premium taxes.

Josh Raskin, Barclays.

Taxes. I'm just looking at the change in a sequential basis. And I understand the rates added $9 million, and the PPRD was $30 million. So, I'm backing into a medical cost improvement of $3 million, maybe something in the ballpark of $1 million a month of improved medical cost. So, I'm curious, did that continue to ramp through the quarter? Is that a decent run rate, or is this just the tip of the iceberg and you guys are still making significant changes in that market that you think would improve even further?

Well, what we said, Josh, was that we are starting at about an 89% medical care ratio protects us, and we think that that is a good baseline going into 2013. Of course, we're going to continue to try to work that down. We have made a lot of improvements in terms of our contracts, and we will continue to work on utilization management to see if we can push that a little bit lower.

(Operator Instructions) Chris Rigg, Susquehanna

I guess I'm just trying to figure out, when I look at the EBITDA guidance for this year of $245 million, if you look at the run rate of below-the-line items, DNA, investment income, rental, interest expense, etcetera, is there some big step-up assumption for 2013 relative to the fourth quarter? Because it looks like the bottom line --

This is Joe speaking. We don't want to go into too much on guidance, obviously, on this call. We'll save that for New York. But fair to say, we have been ramping up a lot of our infrastructure investment in anticipation of entering new markets, which inevitably has been pushing the depreciation line up.

Tom Carroll, Stifel Nicholas.

I wonder if we could just walk through some of the moving pieces here. And John, I think you said if you carve them all out, you get to a $0.26 number for the quarter. So maybe we could just start with your $0.54 reported number and work your way to the $0.26 for me on a per share basis?

It's Joe speaking. It is really the three items John called out to get there. The first item being the abnormally high prior period development number in Texas of $30 million. There's always a degree of prior period development, usually favorable in our case. We just called that number out because it is particularly big this time. So you could back that out, or you could back out the majority of that and translate that into a per share basis. And I think it's run -- on a per share basis it is about $900,000 pretax equals about a penny a share after tax. So you would just back out that $30 million.

We talked about the retro rate increase in California of about $12 million for the ABD is in California. About $2 million, or $2 million to $3 million, of that relates to fourth quarter. The rest of it is either in earlier parts of 2012 or 2011. So again, you could subtract that $10 million for that. And then we talked about $14 million of accruals related to settlements and that kind of item, which are unlikely to recur, so that would go back the other direction. So if you price all those out at around $900 pretax equals $0.01, you'll get around $0.25, $0.26, $0.27. It's a rough cut, but that will -- it is in the ballpark.

Did that help? Are we still on?

Hello?

Hello? Are we still on? Okay. We're still on. Thank you.

Ralph Giacobbe, Credit Suisse

I was hoping maybe to talk about another state, Wisconsin I think was a little bit problematic earlier in the year. Can you just talk about what you are seeing in that market at this point? Thanks.

Sure. This is Terry Bayer. The story in Wisconsin is not unlike what we've shared with you on other states where we have identified higher costs and premium shortfalls, so we embarked on a plan there to renegotiate, primarily our hospital contracts, which are major driver of cost to beef up our utilization management efforts. We brought our behavioral health management in-house late -- in late summer, and we began to see improvement there. And finally, we presented our case to the state of Wisconsin, and worked with them very closely to obtain a rate increase that took us in the right direction.

So, it is very basic. It is not completely over the hill. We have got continuing work to do there on all of those fronts -- on rates as well as on utilization management. But, we are in better shape now than we were a year ago. Does that help?

Michael Baker, Raymond James.

I was wondering if you could give us a sense for how the flu progressed during the fourth quarter? And post the quarter, how it is trending in the first quarter?

Sure. I think we try to scope out, and put I think it was $5 million is what we attribute to flu costs during the fourth quarter. As the flu moved out West, we are seeing a bit of a ramp-up in January. But again, nothing very significant, or nothing materially significant, I would say.

All right thanks.

Carl McDonald, Citigroup.

I am going to ask the EBITDA to pretax question again. It looks like the -- to make the numbers work, you'd have -- assuming that investment income and interest expense are roughly stable, you'd need to seen an increase in the DNA from $64 million this year to over $100 million in '13. Is that the expectation?

No, that is not the expectation. I'll have to take a look at that, Carl. I will have to take a look at that.

Scott Green, Bank of America Merrill Lynch.

I had a couple of questions, if we're allowed to ask more than one. First is on the Texas MLR. You talked about 89% being a good base. I would appreciate your perspective, if you have had any communications with the state leading you to believe there might be some sort of off-cycle either rate increase? I know you are in Hidalgo STAR, and [Centine] has talked about higher costs there, or maybe some decrease in Hidalgo STAR+ PLUS based on changes in your member mix.

No. We are not anticipating any off-cycle rate changes.

Okay. That's helpful. And secondly, last month you hired a new plan president in New Mexico. Is there any -- does that demonstrate your confidence in being able to win that RFP rebid?

Well, Scott, we need a plan president there, whether we win the RFP or not, so that had nothing to do with it.

Okay. And lastly, I had a question on duals. If you have been working in any of your markets to expand your provider network to incorporate more Medicare providers, I was curious if you're able to contract with them on a unit cost basis that is equivalent to the Medicare fee schedule, or maybe lower, or maybe higher?

Scott, this is Terry Bayer. We already operate Special Needs Plans in the markets where we are expanding our duals, except for Illinois, which is new. So we have not had any need yet to change any of our reimbursement methodology than what we have experienced in the past.

Okay thank you.

Peter Costa, Wells Fargo.

Good afternoon. Curious about the status of the subcontracting arrangements for the California coordinated care duals program between you and other health plans. Have you signed any of those contacts at this point, whether you as a subcontractor or subcontractors to you and your regions?

Yes. That is a very interesting question. We have a subcontract relationship in Los Angeles County for the Medicaid program. We have not signed any new or additional contracts with Health Net, and we are all waiting for further information on how the program is going to roll out in California. So, until we have more information, there is not much to add to that other than things remain status quo.

We're getting kind of close to when we would expect to have actually this all taken care of, and understanding rates, and rolling the program out. Do you believe at this point that the contracting will look similar to the way the contracts have been for the typical Medicaid business? Or do you think that there will be substantial changes?

Well, I think the first thing we have to see is what the contract between -- for the three-party agreement is going to look like between the state, the federal government, and the health plans, and we have not received that yet. So, until we know more about what the underlying contract looks like, I think it is too early to say what subcontracts will look like. But we imagine it is going to simply be an extension of our current agreement with Health Net

Okay. And then, just one last question, if you don't mind. Can you talk about the Florida long-term care bids? You were invited to negotiate and didn't end up agreeing with the state. Can you describe what exactly caused you to not agree with the state? Do think that that will have any implications for your ability to win Florida business down the road, in terms of the TANF business, when that is moved to managed care, if that is moved to managed care?

Well, those bids are under protest right now, and so we cannot comment.

Do you want to discuss what exactly the issues are around your protest?

At this point, because the protest is ongoing, we don't want to comment any further.

Okay. Thank you.

Matt Borsch, Goldman Sachs.

This is actually Sam Watts on for Matt. I was wondering if you could give any comments on rate negotiations for your duals contracts in Illinois and Ohio? I was particularly interested in any sort of savings assumptions that might be factored in?

Well, we have seen some preliminary numbers. And I think it is safe to say that, consistent with what we have said in the past, and what we have seen from (technical difficulty) that the savings assumptions are going to be on the order of 1% to 2% in the first year of the program.

Sarah James, Wedbush.

I am continuing on my earlier question of California MLR. You guys mentioned that there was a 5000 member exit. So, what product were those in? What was MLR running on that book so we can get an idea of how it may have skewed the fourth quarter as opposed to really the run rate?

We exited a region in the northern part of Los Angeles County. And the medical costs there were high, in large part because there's only a single hospital in the region. And we have had a great deal of difficulty, as have other health plans, in negotiating with them. This is an ongoing problem in -- especially in rural areas for the Medicaid program. And I hope that in the future we will get more support from the government, both in terms of the states, and perhaps looking at antitrust issues to prevent certain hospitals from holding health plans hostage. But, we had no choice but to exit that region as a result.

But no specific amount that you are willing to talk about how it may have skewed your fourth quarter MLR or what MLR they were running a?

We are not going to get into that level of detail.

Okay. Then another membership question. In Ohio, you guys had a 28,000 member loss because of eligibility errors or changes. Can you just remind us what that was, and if there's any premium give-back associated with that?

It's Joe speaking. The state had some issues with eligibility that first started surfacing, I think around July and August. They spent a couple of months fixing it, and they have gotten it fixed now. While there might be a little bit of true up back and forth, it won't be material at this stage.

Thank you.

(Operator Instructions) Chris Rigg, Susquehanna.

Tightly controlled Q&A, for sure. But I did want to follow up on the G&A. What is the one-time in there? Maybe I missed it, but just some more detail would be helpful.

The G&A -- we had a number of settlement issues. They are one-time in nature. It was about $14 million (multiple speaker). We don't expect those things to occur.

And what is behind the $14 million?

Some litigation, [fighter] settlements. Some of this goes back to 2011.

So, it is a bunch of little things, or is there one charge that makes up the majority of it?

No, it is a number of little things. If you can call $14 million little, but it is a number of little things.

Right. And then on the Texas -- obviously, that is a fairly big number. And I know, obviously, it takes time when the claims submittal process to see where things shake out. But, is there anything -- what led to the big favorable adjustment in the fourth quarter relative to Q2 and Q3?

Well, we were pretty conservative in Q2 and Q3 when we did our IBNR reserves. And I think what happened is the changes we made to provider contracts and to some of the utilization management caused those trends to go down faster than what our actuaries predicted. And so that has put the (inaudible) was for.

Okay. And then one last follow-up on the guidance. And I know you guys are trying to not talk about it too much. But is it primarily on the DNA side? Or is it an assumption there on the interest side in terms of raising some money, or any of that that might be worth highlighting, and we'll leave it at that?

No. We've talked about a big ramp-up that we're going to be experiencing over the next three years. So that's what you are seeing is in DNA, where there's nothing in there in terms of interest expense, etcetera.

We'll have to off-line, with people are having issues getting there. The model essentially envisions about $20 million of increased depreciation expense over 2012. So, I will have to talk to about why they're struggling to get to our number.

Great. Thanks a lot.

At this time we have no further questions registered. I'll turn the call back to Dr. Molina.

Thank you, everyone. We appreciate you joining our call. It has been a good quarter and we look forward to seeing you in February on the 21st in New York for our Investor Day.

Ladies and gentlemen, that will conclude our conference call for today. We thank you for your participation, and you may now disconnect your lines.