The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. As of December 31, 2018, we were no longer a party to any variable interest entities following the termination of certain agreements earlier in the year and in the fourth quarter of 2018. Such variable interest entities were insignificant. All significant inter-company balances and transactions have been eliminated in consolidation. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the periods presented have been included; such adjustments consist of normal recurring adjustments.
The determination of medical claims and benefits payable of our Health Plans segment;
The assessment of long-lived and intangible assets, and goodwill, for impairment;
The determination of reserves for potential absorption of claims unpaid by insolvent providers;
The determination of unrecognized tax benefits.
2. Significant Accounting Policies
Certain of our significant accounting policies are discussed within the note to which they specifically relate.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily convertible into known amounts of cash and have a maturity of three months or less on the date of purchase. The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows. The restricted cash and cash equivalents presented below are included in “Restricted investments” in the accompanying consolidated balance sheets.
|
| | | | | | | | | | | |
| December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Cash and cash equivalents | $ | 2,452 |
| | $ | 2,826 |
| | $ | 3,186 |
|
Restricted cash and cash equivalents, non-current | 56 |
| | 100 |
| | 95 |
|
Restricted cash and cash equivalents, current | — |
| | — |
| | 9 |
|
Total cash and cash equivalents, and restricted cash and cash equivalents presented in the consolidated statements of cash flows | $ | 2,508 |
| | $ | 2,926 |
| | $ | 3,290 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Cash and cash equivalents | $ | 2,826 |
| | $ | 3,186 |
| | $ | 2,819 |
|
Restricted cash and cash equivalents, non-current | 100 |
| | 95 |
| | 93 |
|
Restricted cash and cash equivalents, current | — |
| | 9 |
| | — |
|
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the consolidated statements of cash flows | $ | 2,926 |
| | $ | 3,290 |
| | $ | 2,912 |
|
Investments
Our investments are principally held in debt securities, which are grouped into two separate categories for accounting and reporting purposes: available-for-sale securities, and held-to-maturity securities. Available-for-sale (“AFS”) securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income, net of applicable income taxes. Held-to-maturity securities are recorded at amortized cost, which approximates fair value, and unrealized holding gains or losses are not generally recognized. Realized gains and losses and unrealized losses judged to be other than temporary with respect to available-for-sale and held-to-maturity securities are included in the determination of net income (loss). The cost of securities sold is determined using the specific-identification method.
Our investment policy requires that all of our investments have final maturities of less than 10 years, or less (excluding variable rate securities where interest rates may be periodically reset), and that thethan 10 years average maturity be three years or less.life for structured securities. Investments and restricted investments are subject to interest rate risk
and will decrease in value if market rates increase. Declines in interest rates over time will reduce our investment income.
In general, our available-for-saleAFS securities are classified as current assets without regard to the securities’ contractual maturity dates because they may be readily liquidated. We monitor our investments for other-than-temporary impairment. For comprehensive discussions of the fair value and classification of our investments, see Note 4, “Fair“Fair Value Measurements” Note 5, “Investments,,” and Note 9, “Restricted Investments.5, “Investments.”
Long-Lived Assets, including Intangible Assets
Long-lived assets consist primarily of property, equipment, capitalized software (see Note 7, “Property,“Property, Equipment, and Capitalized Software, Net”Net”), and intangible assets resulting from acquisitions. Finite-lived, separately-identified intangible assets acquired in business combinations are assets that represent future expected benefits but lack physical substance (such as purchased contract rights and provider contracts). Intangible assets are initially recorded at fair value and are then amortized on a straight-line basis over their expected useful lives, generally between five and 15 years.
Our intangible assets are subject to impairment tests when events or circumstances indicate that a finite-lived intangible asset’s (or asset group’s) carrying value may not be recoverable. Consideration is given to a number of potential impairment indicators, including the ability of our health plan subsidiaries to obtain the renewal by amendment of their contracts in each state prior to the actual expiration of their contracts. However, there can be no assurance that these contracts will continue to be renewed. Following the identification of any potential impairment indicators, to determine whether an impairment exists, we would compare the carrying amount of a finite-lived intangible asset with the greater of the undiscounted cash flows that are expected to result from the use of the asset or related group of assets, or its value under the asset liquidation method. If it is determined that the carrying amount of the asset is not recoverable, the amount by which the carrying value exceeds the estimated fair value is recorded as an impairment. Refer to Note 8, “Goodwill9, “Goodwill and Intangible Assets, Net”Net,” for further details.
Leases
Right-of-use (“ROU”) assets represent our right to use the underlying assets over the lease term, and lease liabilities represent our obligation for lease payments arising from the related leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease terms may include options to extend or terminate the lease when we believe it is reasonably certain that we will exercise such options. If applicable, we account for lease and non-lease components within a lease as a single lease component.
Because most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate to determine the present value of lease payments. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term, and the related ROU assets and liabilities are reduced to the present value of the remaining lease payments at the end of each period. Finance lease payments reduce finance lease liabilities, the related ROU assets are amortized on a straight-line basis over the lease term, and interest expense is recognized using the effective interest method.
The significant majority of our operating leases consist of long-term operating leases for office space. Short-term leases (those with terms of 12 months or less) are not recorded as ROU assets or liabilities in the consolidated balance sheets. For certain leases that represent a portfolio of similar assets, such as a fleet of vehicles, we apply a portfolio approach to account for the related ROU assets and liabilities, rather than account for such assets and the related liabilities individually. A nominal number of our lease agreements include rental payments that adjust periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For further information, including the amount and location of the ROU assets and lease liabilities recognized in the accompanying consolidated balance sheet, see Note 8, “Leases.” For further information regarding our adoption and implementation of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), see “Recent Accounting Pronouncements Adopted,” below.
Goodwill and Business Combinations
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment on an annual basis and more frequently if impairment indicators are present. Such events or circumstances may include experienced or expected operating cash-flow deterioration or losses, significant losses of membership, loss of state funding, loss of state contracts, and other factors. Goodwill is impaired if the carrying amount of the reporting unit (one of our state health plans)
exceeds its estimated fair value. This excess is recorded as an impairment loss and adjusted if necessary for the impact of tax-deductible goodwill. The loss recognized may not exceed the total goodwill allocated to the reporting unit. Our reporting units consist of our individual health plans.
During the fourth quarter of 2018, we changed the date of our annual impairment testing of goodwill from December 31 to October 1. When testing goodwill for impairment, we may first assess qualitative factors, such as industry and market factors, the dynamic economic and political environments in which we operate, cost factors, and changes in overall performance, to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. If our qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, we perform the quantitative assessment.
We may also elect to bypass the qualitative assessment and proceed directly to the quantitative assessment. The dynamic economic and political environments in which we operate may necessitate the performance of a quantitative test to prove that goodwill is not impaired. If performing a quantitative assessment, we generally estimate the fair values of our reporting units by applying the income approach, using discounted cash flows.
For the annual impairment test under a quantitative assessment, the base year in the reporting units’ discounted cash flows is derived from the annual financial budgetingplanning cycle, for which the planning process commences in the fourth quarter of the year. When computing discounted cash flows, we make assumptions about a wide variety of internal and external factors, and consider what the reporting unit’s selling price would be in an orderly transaction between market participants at the measurement date. Significant assumptions include financial projections of free cash flow (including significant assumptions about membership, premium rates, health carehealthcare and operating cost trends, contract renewal and the procurement of new contracts, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods, and discount rates. When determining the discount rate, we consider the overall level of inherent risk of the reporting unit, and the expected rate an outside investor would expect to earn. As part of a quantitative assessment, we may also apply the asset liquidation method to estimate the fair value of individual reporting units, which is computed as total assets minus total liabilities, excluding intangible assets and deferred taxes. Finally, we apply a market approach to reconcile the value of our reporting units to our consolidated market value. Under the market approach, we consider publicly traded comparable company information to determine revenue and earnings multiples which are used to estimate our reporting units’ fair values. The assumptions used are consistent with those used in our long-range business plan and annual planning process. However, if these assumptions differ from actual results, the outcome of our goodwill impairment tests could be adversely affected.
Accounting for acquisitionsbusiness combinations requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the final determination of the values of assets acquired or liabilities assumed, or one year after the date of acquisition, whichever comes first, any subsequent adjustments are recorded within our consolidated statements of operations. Refer to Note 8, “Goodwill9, “Goodwill and Intangible Assets, Net”Net,” for further details.
Revenue Recognition
We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) effective January 1, 2018, using the modified retrospective approach. The insurance contracts of our Health Plans segment are excluded from the scope of Topic 606 because the recognition of revenue under these contracts is dictated by other accounting standards governing insurance contracts. The cumulative effect of initially applying the guidance, relating entirely to the contracts of our recently divested MMS subsidiary, resulted in an immaterial impact to beginning retained earnings as of January 1, 2018. Such impact is presented in the accompanying consolidated statement of stockholders’ equity.
Premium RevenueMedicare Program
PremiumMedicare premium revenue increased by $169 million in 2019, primarily due to an 8% increase in premium revenue PMPM. PMPMs improved due to increased revenue resulting from risk scores that are more commensurate with the acuity of our population. Member months were essentially flat in 2019 compared to 2018.
The Medical Margin for Medicare increased $8 million, or 2%, in 2019 when compared with 2018, primarily due to the increase in premium revenue discussed above.
The Medicare MCR increase was primarily due to the increase in medical care costs PMPM, which was partially offset by the increase in the premium revenue PMPM discussed above. The increase in medical care costs PMPM is mainly attributed to fluctuations of medical care costs in certain markets.
Marketplace Program
Marketplace premium revenue decreased $416 million in 2019, driven by lower membership, partially offset by premium rate increases and increased premiums tied to risk scores. Marketplace membership declined from 362,000 at December 31, 2018, to 274,000 at December 31, 2019. Additionally, the decrease in premiums in 2019 reflects a relatively smaller benefit from prior year Marketplace risk adjustment settlements in 2019, when compared with 2018.
The Marketplace Medical Margin decreased $312 million in 2019, when compared with 2018, primarily due to a decrease in premium revenues, and the increase in the Marketplace MCR. Additionally, the decrease in Medical Margin in 2019 was partially driven by the impact of the $81 million CSR reimbursement recognized in 2018. The CSR benefit related to 2017 dates of service and was recognized following the federal government’s confirmation that the reconciliation would be performed on an annual basis. In the fourth quarter of 2017, we had assumed a nine-month reconciliation of this item pending confirmation of the time period to which the 2017 reconciliation would be applied.
The Marketplace MCR increased 930 basis points in 2019, which is mainly attributable to the impact of the $81 million CSR reimbursement recognized in 2018, and the relatively smaller benefit from prior year Marketplace risk adjustment settlements in 2019, when compared with 2018, as discussed above.
OTHER
The Other segment includes the historical results of the MMIS and behavioral health subsidiaries we sold in late 2018, as well as certain corporate amounts not allocated to the Health Plans segment. Beginning in 2019, we no longer report service revenue or cost of service revenue as a result of the sales of the MMIS and behavioral health subsidiaries noted above. In 2019 and 2018, the Other segment margin was insignificant to our consolidated results of operations.
LIQUIDITY AND FINANCIAL CONDITION
LIQUIDITY
We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.
We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company. Our regulated health plan subsidiaries generate significant cash flows from premium revenue. Such cash flows are our primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity. We generally receive premium revenue a short time before we pay for the related health care services. The majority of the assets held by our regulated health plan subsidiaries is in the form of cash, cash equivalents, and investments.
When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general corporate purposes. The regulated health plan subsidiaries paid dividends to the parent company amounting to $1,373 million in 2019, and $288 million in 2018. The parent company contributed capital of $43 million and $145 million in 2019 and 2018, respectively, to our regulated health plan subsidiaries to satisfy statutory net worth requirements.
Cash, cash equivalents and investments at the parent company amounted to $997 million and $170 million as of December 31, 2019, and 2018, respectively. The increase in 2019 was mainly due to the dividends received from regulated health plan subsidiaries, as described above, and proceeds from borrowings under the Term Loan Facility. These cash inflows were partially offset by principal repayments of our outstanding 1.125% Convertible Notes and common stock purchases, as described further below in “Cash Flow Activities.”
Investments
We generally invest cash of our regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, marketable debt securities to improve our overall investment return. These investments are purchased pursuant to board approved investment policies which conform to applicable state laws and regulations.
Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels.
Our restricted investments are invested principally in cash, cash equivalents, and U.S. Treasury securities; we have the ability to hold such restricted investments until maturity. All of our unrestricted investments are classified as current assets.
Molina Healthcare, Inc. 2019 Form 10-K | 39
Cash Flow Activities
Our cash flows are summarized as follows: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | Change |
| (In millions) |
Net cash provided by (used in) operating activities | $ | 427 |
| | $ | (314 | ) | | $ | 741 |
|
Net cash (used in) provided by investing activities | (293 | ) | | 1,143 |
| | (1,436 | ) |
Net cash used in financing activities | (552 | ) | | (1,193 | ) | | 641 |
|
Net decrease in cash, cash equivalents, and restricted cash and cash equivalents | $ | (418 | ) | | $ | (364 | ) | | $ | (54 | ) |
Operating Activities
We typically receive capitation payments monthly, in advance of payments for medical claims; however, government agencies may adjust their payment schedules, positively or negatively impacting our reported cash flows from operating activities in any given period. For example, government agencies may delay our premium payments, or they may prepay the following month’s premium payment.
Net cash provided by operations was $427 million in 2019, compared with $314 million of net cash used in 2018. The $741 million increase in cash flow was mainly due to the impact of timing of premium receipts and settlements with government agencies, the latter being primarily related to the final 2017 CSR settlement paid in 2019.
Investing Activities
Net cash used in investing activities was $293 million in 2019, compared with $1,143 million of net cash provided in 2018, a decrease in cash flow of $1,436 million. The year over year decline was primarily due to increased purchases of investments, net of lower proceeds from sales and maturities of investments, in the year ended December 31, 2019.
Financing Activities
Net cash used in financing activities was $552 million in 2019, compared with $1,193 million in 2018. In 2019, net cash paid for the aggregate 1.125% Convertible Notes-related transactions amounted to $730 million, and we paid $47 million for common stock purchases, partially offset by proceeds of $220 million borrowed under the Term Loan Facility. In 2018, net cash used in financing activities included net cash paid for the aggregate 1.125% Convertible Notes-related transactions of $837 million, a $300 million repayment of the Credit Facility, and $64 million repayment of the 1.625% Convertible Notes.
FINANCIAL CONDITION
We believe that our cash resources, borrowing capacity available under our Credit Agreement as discussed further below in “Future Sources and Uses of Liquidity—Future Sources,” and internally generated fromfunds will be sufficient to support our operations, regulatory requirements, debt repayment obligations and capital expenditures for at least the next 12 months.
On a consolidated basis, as of December 31, 2019, our working capital was $2,698 million compared with $2,216 million as of December 31, 2018. At December 31, 2019, our cash and investments amounted to $4,477 million, compared with $4,629 million of cash and investments at December 31, 2018.
Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by our unregulated parent. For more information, see the “Liquidity”discussion presented earlier in this section of the MD&A.
Regulatory Capital and Dividend Restrictions
Each of our regulated HMO subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To the extent our HMO subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus (net assets) requirement for these subsidiaries was estimated to be approximately $1,110 million at December 31, 2019,
compared with $1,040 million at December 31, 2018. Our HMO subsidiaries were in compliance with these minimum capital requirements as of both dates.
Under applicable regulatory requirements, the amount of dividends that may be paid by our HMO subsidiaries without prior approval by regulatory authorities as of December 31, 2019, is approximately $41 million in the aggregate. Our HMO subsidiaries may pay dividends over this amount, but only after approval is granted by the regulatory authorities.
Debt Ratings
Our 5.375% Notes and 4.875% Notes are rated “BB-” by Standard & Poor’s, and “B2” by Moody’s Investor Service, Inc. A downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs.
Financial Covenants
Our Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. Such ratios, presented below, are computed as defined by the terms of the Credit Agreement.
|
| | | |
Credit Agreement Financial Covenants | Required Per Agreement | | As of December 31, 2019 |
| | | |
Net leverage ratio | <4.0x | | 1.0x |
Interest coverage ratio | >3.5x | | 14.5x |
In addition, the indentures governing the 4.875% Notes, the 5.375% Notes, and the 1.125% Convertible Notes contain cross-default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture. As of December 31, 2019, we were in compliance with all covenants under the Credit Agreement and the indentures governing our outstanding notes.
FUTURE SOURCES AND USES OF LIQUIDITY
Future Sources
Our Health Plans segment contracts, includingregulated subsidiaries generate significant cash flows from premium revenue, which we generally receive a short time before we pay for the related health care services. Such cash flows are our primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity.
Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent company to be used for general corporate purposes. For more information on our regulatory capital requirements and dividend restrictions, refer to Notes to Consolidated Financial Statements, Note 17, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions,” and Note 20, “Condensed Financial Information of Registrant—Note C - Dividends and Capital Contributions.”
Credit Agreement Borrowing Capacity. As of December 31, 2019, we had available borrowing capacity of $380 million under the Term Loan Facility, following our draw down of $220 million in the first half of 2019. Under the Term Loan Facility, we may request up to ten advances, each in a minimum principal amount of $50 million, until July 31, 2020. In addition, we have available borrowing capacity of $499 million under our Credit Facility. See further discussion in the Notes to Consolidated Financial Statements, Note 11, “Debt.”
Savings from the IT Restructuring Plan. Management’s margin recovery plan identified and implemented various profit improvement initiatives. This included the plan to restructure our information technology department (the “IT Restructuring Plan”) in 2018, which is reported in the Other segment. In connection with this plan, in early 2019, we entered into services agreements with an outsourcing vendor who manages certain of our information technology services. The IT Restructuring Plan is substantially complete. We reduced annualized run-rate expenses by approximately $14 million in 2019, and expect to reduce such expenses by approximately $25 million to $30 million by the end of the fifth full year of the contract. Such savings, when achieved, reduce Other segment general and administrative expenses in our consolidated statements of operations. Further details of the restructuring plans, including costs associated with such plans, are described in the Notes to Consolidated Financial Statements, Note 15, “Restructuring Costs.”
Future Uses
Common Stock Purchases. In early December 2019, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program is funded by existing cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management, based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law.
As described in the Notes to Consolidated Financial Statements, Note 14, “Stockholders' Equity,” pursuant to a Rule 10b5-1 trading plan, we purchased approximately 400,000 shares of our common stock for $54 million in December 2019 (average cost of $135.30 per share), including approximately 55,000 shares purchased for $7 million in late December 2019, and settled in early January 2020. In January 2020 through February 7, 2020, we purchased 1,533,000 shares for $203 million (average cost of 132.69 per share).
Acquisitions. Our strategic focus has shifted to a disciplined and steady approach to growth. Organic growth, which includes leveraging our existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will consider targeted inorganic growth opportunities that provide a strategic fit, leverage operational synergies, and lead to incremental earnings accretion. This will include “bolt-on” membership opportunities in our current states and health plans in new states. As noted below, we entered into two acquisition agreements in the fourth quarter of 2019, pursuant to which we expect to add Medicaid membership in Illinois and New York in 2020.
On December 31, 2019, we entered into a definitive agreement to purchase NextLevel Health Partners, Inc., a Medicaid managed care organizationsorganization. Upon the closing of this transaction, expected to occur in the first half of 2020, we will assume the right to serve approximately 50,000 Medicaid and Managed Long-Term Services and Supports members in Cook County, Illinois. The purchase price of approximately $50 million will be funded with available cash, and the closing is subject to customary closing conditions.
In October 2019, we entered into a definitive agreement to acquire certain assets of YourCare Health Plan, Inc. Upon the closing of this transaction, expected to occur in the first half of 2020, we will serve approximately 46,000 Medicaid members in seven counties in western New York. The purchase price of approximately $40 million will be funded with available cash, and the closing is subject to customary closing conditions.
Regulatory Capital Requirements and Dividend Restrictions. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with minimum statutory capital requirements.
1.125% Convertible Notes. On January 15, 2020, we repaid the 1.125% Convertible Notes for $39 million, which amount reflected final settlement of both the principal amount outstanding and the 1.125% Conversion Option. Refer to the Notes to Consolidated Financial Statements, Note 11, “Debt,” for a detailed discussion of our convertible notes, including recent transactions.
CRITICAL ACCOUNTING ESTIMATES
When we operate asprepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Actual results could differ from these estimates, and some differences could be material. Our most significant accounting estimates, which include a subcontractor. Premium revenue is generally receivedhigher degree of judgment and/or complexity, include the following:
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• | Medical claims and benefits payable. See discussion below, and refer to the Notes to Consolidated Financial Statements, Notes 2, “Significant Accounting Policies,” and 10, “Medical Claims and Benefits Payable” for more information. |
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• | Contractual provisions that may adjust or limit revenue or profit. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.” |
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• | Quality incentives. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.” |
| |
• | Goodwill and intangible assets, net. At December 31, 2019, goodwill and intangible assets, net, represented approximately 3% of total assets and 9% of total stockholders’ equity, compared with 3% and |
12%, respectively, at December 31, 2018. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” and Note 9, “Goodwill and Intangible Assets, Net.”
MEDICAL CARE COSTS, MEDICAL CLAIMS AND BENEFITS PAYABLE
Medical care costs are recognized in the period in which services are provided and include fee-for-service claims, pharmacy benefits, capitation payments to providers, and various other medically-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on per
member per monthactual utilization of hospital and physician services. Such medical care costs include amounts paid by us as well as estimated medical claims and benefits payable for costs that were incurred but not paid as of the reporting date (“PMPM”IBNP”) rates established. Pharmacy benefits represent payments for members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates based on historical and current utilization of prescription drugs and contractual provisions. Capitation payments represent monthly contractual fees paid to providers, who are responsible for providing medical care to members, which could include medical or ancillary costs like dental, vision and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered. These premium revenuescovered and are recognizednot subject to significant accounting estimates. Other medical care costs include all medically-related administrative costs, amounts due to providers pursuant to risk-sharing or other incentive arrangements, provider claims, and other healthcare expenses. Examples of medically-related administrative costs include expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Additionally, we include an estimate for the cost of settling claims incurred through the reporting date in our medical claims and benefits payable liability.
Medical claims and benefits payable consist mainly of fee-for-service IBNP, unpaid pharmacy claims, capitation costs, other medical costs, including amounts payable to providers pursuant to risk-sharing or other incentive arrangements and amounts payable to providers on behalf of certain state agencies for certain state assessments in which we assume no financial risk. IBNP includes the costs of claims incurred as of the balance sheet date which have been reported to us, and our best estimate of the cost of claims incurred but not yet reported to us. We also include an additional reserve to ensure that our overall IBNP liability is sufficient under moderately adverse conditions. We reflect changes in these estimates in the consolidated results of operations in the period in which they are determined.
The estimation of the IBNP liability requires a significant degree of judgment in applying actuarial methods, determining the appropriate assumptions and considering numerous factors. Of those factors, we consider estimated completion factors (measures the cumulative percentage of claims expense that will ultimately be paid for a given month that members are entitled to receive health care services, and premiums collected in advance are deferred. The state Medicaid programsof service based on historical payment patterns) and the federal Medicare program periodically adjust premiums. Additionally, manyassumed healthcare cost trend (the year-over-year change in per-member per-month medical care costs) to be the most critical assumptions. Other relevant factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels, changes in membership, product mix, seasonality, benefit changes or changes in Medicaid fee schedules, provider contract changes, prior authorizations and the incidence of catastrophic or pandemic cases.
For claims incurred more than three months before the financial statement date, we mainly use estimated completion factors to estimate the ultimate cost of those claims. Completion factors measure the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical claims payment patterns. We analyze historical claims payment patterns by comparing claim incurred dates to claim payment dates to estimate completion factors. The estimated completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claims cost for a given month’s incurred claim activity. The difference between the estimated ultimate claims cost and the claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our IBNP liability.
For claims incurred within three months before the financial statement date, actual claims paid are a less reliable measure of our contracts contain provisionsultimate cost since a large portion of medical claims are not submitted to us until several months after services have been submitted. Accordingly, we estimate our IBNP liability for claims incurred during these months based on a blend of estimated completion factors and assumed medical care cost trend. The assumed medical care cost trend represents the year-over-year change in per-member per-month medical care costs, which can be affected by many factors including, but not limited to, our ability and practices to manage medical and pharmaceutical costs, changes in level and mix of services utilized, mix of benefits offered, including the impact of co-pays and deductibles, changes in medical practices, changes in member demographics, catastrophes and epidemics, and other relevant factors.
Actuarial standards of practice generally require a level of confidence such that our overall best estimate of the IBNP liability has a greater probability of being adequate versus being insufficient, where the liability is sufficient to account for moderately adverse conditions. Adverse conditions are situations that may adjustcause actual claims to be higher than the otherwise estimated value of such claims at the time of the estimate, such as changes in the magnitude or limit revenueseverity of claims, uncertainties related to our entry into new geographical markets or profit, as described below. Consequently,provision of services to new populations, changes in state-controlled fee schedules, and modifications or upgrades to our claims processing systems and practices. Therefore, in many situations, the claim amounts ultimately settled will be less than the estimate that satisfies the actuarial standards of practice.
When subsequent actual claims payments are less than we estimated, we recognize premium revenuea benefit for favorable prior period development that is reported as itpart of “Components of medical care costs related to: “Prior periods” in the table presented in Note 10, “Medical Claims and Benefits Payable.” Our reserving practice is earned underto consistently recognize the actuarial best estimate including a provision for moderately adverse conditions for each current period. This provision is reported as part of “Components of medical care costs related to: Current period” in the table presented in Note 10. Assuming stability in the size of our membership, the use of this consistent methodology, during any given period, usually results in the replenishment of reserves at a level that generally offsets the benefit of favorable prior period development in that period. In the case of material growth or decline of membership, replenishment can exceed or fall short of the favorable development, assuming all other factors remain unchanged.
Because of the significant degree of judgment involved in estimation of our IBNP liability, there is considerable variability and uncertainty inherent in such provisions.estimates. The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2019 that would result if we change our completion factors for the fourth through the twelfth months preceding December 31, 2019, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. Dollar amounts are in millions.
|
| | | |
Increase (Decrease) in Estimated Completion Factors | Increase (Decrease) in Medical Claims and Benefits Payable |
(6)% | $ | 472 |
|
(4)% | 315 |
|
(2)% | 157 |
|
2% | (157 | ) |
4% | (315 | ) |
6% | (472 | ) |
The following table summarizes premium revenuereflects the hypothetical change in our estimate of claims liability as of December 31, 2019 that would result if we alter our assumed medical care cost trend factors by geography for the periods indicated:percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in millions.
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total |
| (Dollars in millions) |
California | $ | 2,150 |
| | 12.2 | % | | $ | 2,701 |
| | 14.3 | % | | $ | 2,378 |
| | 14.4 | % |
Florida | 1,790 |
| | 10.2 |
| | 2,568 |
| | 13.6 |
| | 1,938 |
| | 11.8 |
|
Illinois | 793 |
| | 4.5 |
| | 593 |
| | 3.1 |
| | 603 |
| | 3.7 |
|
Michigan | 1,601 |
| | 9.1 |
| | 1,596 |
| | 8.5 |
| | 1,527 |
| | 9.3 |
|
New Mexico | 1,356 |
| | 7.7 |
| | 1,368 |
| | 7.3 |
| | 1,305 |
| | 7.9 |
|
Ohio | 2,388 |
| | 13.6 |
| | 2,216 |
| | 11.8 |
| | 1,967 |
| | 12.0 |
|
Puerto Rico | 696 |
| | 3.9 |
| | 732 |
| | 3.9 |
| | 726 |
| | 4.4 |
|
South Carolina | 495 |
| | 2.8 |
| | 445 |
| | 2.4 |
| | 378 |
| | 2.3 |
|
Texas | 3,244 |
| | 18.4 |
| | 2,813 |
| | 14.9 |
| | 2,461 |
| | 15.0 |
|
Washington | 2,361 |
| | 13.4 |
| | 2,608 |
| | 13.8 |
| | 2,222 |
| | 13.5 |
|
Other (1) | 738 |
| | 4.2 |
| | 1,214 |
| | 6.4 |
| | 940 |
| | 5.7 |
|
| $ | 17,612 |
| | 100.0 | % | | $ | 18,854 |
| | 100.0 | % | | $ | 16,445 |
| | 100.0 | % |
|
| | | |
(Decrease) Increase in Trended Per Member Per Month Cost Estimates | (Decrease) Increase in Medical Claims and Benefits Payable |
(6)% | $ | (159 | ) |
(4)% | (106 | ) |
(2)% | (53 | ) |
2% | 53 |
|
4% | 106 |
|
6% | 159 |
|
_______________________There are many related factors working in conjunction with one another that determine the accuracy of our estimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to quantify the impact that any single factor has on a change in estimate. Given the variability inherent in the reserving
process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” for a discussion of recent accounting pronouncements that affect us.
CONTRACTUAL OBLIGATIONS
In the table below, we present our contractual obligations as of December 31, 2019. Some of the amounts included in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future periods may vary from those reflected in the table.
Additionally, we have a variety of other contractual agreements related to acquiring services used in our operations. However, we believe these other agreements do not contain material non-cancelable commitments. We are not a party to off-balance sheet financing arrangements.
|
| | | | | | | | | | | | | | | | | | | |
| Total (1) | | 2020 | | 2021-2022 | | 2023-2024 | | 2025 and after |
| (In millions) |
Medical claims and benefits payable | $ | 1,854 |
| | 1,854 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Principal amount of debt (2) | 1,262 |
| | 18 |
| | 738 |
| | 176 |
| | 330 |
|
Amounts due government agencies | 664 |
| | 664 |
| | — |
| | — |
| | — |
|
Finance leases | 400 |
| | 23 |
| | 45 |
| | 43 |
| | 289 |
|
Purchase commitments | 255 |
| | 90 |
| | 99 |
| | 51 |
| | 15 |
|
Interest on long-term debt | 230 |
| | 63 |
| | 120 |
| | 40 |
| | 7 |
|
Operating leases | 80 |
| | 28 |
| | 34 |
| | 15 |
| | 3 |
|
Total | $ | 4,745 |
| | $ | 2,740 |
| | $ | 1,036 |
| | $ | 325 |
| | $ | 644 |
|
| |
(1) | “Other” includesAs of December 31, 2019, we have recorded approximately $20 million of unrecognized tax benefits. The table does not contain this amount because we cannot reasonably estimate when or if such amount may be settled. For further information, refer to Notes to Consolidated Financial Statements, Note 13, “Income Taxes.”
|
| |
(2) | Represents the Idaho, Mississippi, New York, Utahprincipal amounts due on the 1.125% Convertible Notes due 2020, 5.375% Notes due 2022, Term Loan Facility due 2024, and Wisconsin health plans, which are not individually significant4.875% Notes due 2025. The 1.125% Convertible Notes due 2020 were settled in January 2020. For further information, refer to our consolidated operating results.Notes to Consolidated Financial Statements, Note 11, “Debt.” |
Certain components
INFLATION
We use various strategies to mitigate the negative effects of premium revenuehealthcare cost inflation. Specifically, our health plans try to control medical care costs through contracts with independent providers of healthcare services. Through these contracted providers, our health plans emphasize preventive healthcare and appropriate use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate medical care cost inflation will be successful. Competitive pressures, new healthcare and pharmaceutical product introductions, demands from healthcare providers and customers, applicable regulations, or other factors may affect our ability to control medical care costs.
COMPLIANCE COSTS
Our health plans are regulated by both state and federal government agencies. Regulation of managed care products and healthcare services is an evolving area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to additional costs related to the implementation of additional systems, procedures and programs that we have not yet identified.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and financial position are exposed to financial market risk relating to changes in interest rates, and the resulting impact on investment income and interest expense.
Substantially all of our investments and restricted investments are subject to accounting estimatesinterest rate risk and fall into the following categories:
Contractual Provisions That May Adjust or Limit Revenue or Profit
Medicaid Program
Medical Cost Floors (Minimums),will decrease in value if market interest rates increase. Assuming a hypothetical and Medical Cost Corridors. A portion of our premium revenue may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded a liability under the terms of such contract provisions of $103 million and $135 millionimmediate 1% increase in market interest rates at December 31, 20182019, the fair value of our fixed income investments would decrease by approximately $49 million. Declines in interest rates over time will reduce our investment income.
For further information on fair value measurements and our investment portfolio, please refer to the Notes to Consolidated Financial Statements, Note 4, “Fair Value Measurements,” and Note 5, “Investments.”
Borrowings under our Credit Agreement bear interest based, at our election, on a base rate or other defined rate, plus in each case the applicable margin. As of December 31, 2017, respectively,2019, $220 million was outstanding under the Term Loan Facility. See Notes to amounts due government agencies. Approximately $87 millionConsolidated Financial Statements, Note 11, “Debt,” for more information.
Molina Healthcare, Inc. 2019 Form 10-K | 46
MOLINA HEALTHCARE, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Molina Healthcare, Inc. 2019 Form 10-K | 47
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions, except per-share data) |
Revenue: | | | | | |
Premium revenue | $ | 16,208 |
| | $ | 17,612 |
| | $ | 18,854 |
|
Premium tax revenue | 489 |
| | 417 |
| | 438 |
|
Health insurer fees reimbursed | — |
| | 329 |
| | — |
|
Service revenue | — |
| | 407 |
| | 521 |
|
Investment income and other revenue | 132 |
| | 125 |
| | 70 |
|
Total revenue | 16,829 |
| | 18,890 |
| | 19,883 |
|
Operating expenses: | | | | | |
Medical care costs | 13,905 |
| | 15,137 |
| | 17,073 |
|
General and administrative expenses | 1,296 |
| | 1,333 |
| | 1,594 |
|
Premium tax expenses | 489 |
| | 417 |
| | 438 |
|
Health insurer fees | — |
| | 348 |
| | — |
|
Depreciation and amortization | 89 |
| | 99 |
| | 137 |
|
Restructuring costs | 6 |
| | 46 |
| | 234 |
|
Cost of service revenue | — |
| | 364 |
| | 492 |
|
Impairment losses | — |
| | — |
| | 470 |
|
Total operating expenses | 15,785 |
| | 17,744 |
| | 20,438 |
|
Loss on sales of subsidiaries, net of gain | — |
| | (15 | ) | | — |
|
Operating income (loss) | 1,044 |
| | 1,131 |
| | (555 | ) |
Other expenses, net: | | | | | |
Interest expense | 87 |
| | 115 |
| | 118 |
|
Other (income) expenses, net | (15 | ) | | 17 |
| | (61 | ) |
Total other expenses, net | 72 |
| | 132 |
| | 57 |
|
Income (loss) before income tax expense (benefit) | 972 |
| | 999 |
| | (612 | ) |
Income tax expense (benefit) | 235 |
| | 292 |
| | (100 | ) |
Net income (loss) | $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
| | | | | |
Net income (loss) per share: | | | | | |
Basic | $ | 11.85 |
| | $ | 11.57 |
| | $ | (9.07 | ) |
Diluted | $ | 11.47 |
| | $ | 10.61 |
| | $ | (9.07 | ) |
Weighted average shares outstanding: | | | | | |
Basic | 62 |
| | 61 |
| | 56 |
|
Diluted | 64 |
| | 67 |
| | 56 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Net income (loss) | $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
Other comprehensive income (loss): | | | | | |
Unrealized investment income (loss) | 16 |
| | (3 | ) | | (5 | ) |
Less: effect of income taxes | 4 |
| | (1 | ) | | (2 | ) |
Other comprehensive income (loss), net of tax | 12 |
| | (2 | ) | | (3 | ) |
Comprehensive income (loss) | $ | 749 |
| | $ | 705 |
| | $ | (515 | ) |
See accompanying notes.
Molina Healthcare, Inc. 2019 Form 10-K | 48
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (Dollars in millions, except per-share amounts) |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 2,452 |
| | $ | 2,826 |
|
Investments | 1,946 |
| | 1,681 |
|
Receivables | 1,406 |
| | 1,330 |
|
Prepaid expenses and other current assets | 134 |
| | 149 |
|
Derivative asset | 29 |
| | 476 |
|
Total current assets | 5,967 |
| | 6,462 |
|
Property, equipment, and capitalized software, net | 385 |
| | 241 |
|
Goodwill and intangible assets, net | 172 |
| | 190 |
|
Restricted investments | 79 |
| | 120 |
|
Deferred income taxes | 79 |
| | 117 |
|
Other assets | 105 |
| | 24 |
|
Total assets | $ | 6,787 |
| | $ | 7,154 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | |
Medical claims and benefits payable | $ | 1,854 |
| | $ | 1,961 |
|
Amounts due government agencies | 664 |
| | 967 |
|
Accounts payable and accrued liabilities | 455 |
| | 390 |
|
Deferred revenue | 249 |
| | 211 |
|
Current portion of long-term debt | 18 |
| | 241 |
|
Derivative liability | 29 |
| | 476 |
|
Total current liabilities | 3,269 |
| | 4,246 |
|
Long-term debt | 1,237 |
| | 1,020 |
|
Finance lease liabilities | 231 |
| | 197 |
|
Other long-term liabilities | 90 |
| | 44 |
|
Total liabilities | 4,827 |
| | 5,507 |
|
Stockholders’ equity: | | | |
Common stock, $0.001 par value per share; 150 million shares authorized; outstanding: 62 million shares at each of December 31, 2019, and December 31, 2018 | — |
| | — |
|
Preferred stock, $0.001 par value per share; 20 million shares authorized, no shares issued and outstanding | — |
| | — |
|
Additional paid-in capital | 175 |
| | 643 |
|
Accumulated other comprehensive income (loss) | 4 |
| | (8 | ) |
Retained earnings | 1,781 |
| | 1,012 |
|
Total stockholders’ equity | 1,960 |
| | 1,647 |
|
Total liabilities and stockholders’ equity | $ | 6,787 |
| | $ | 7,154 |
|
See accompanying notes.
Molina Healthcare, Inc. 2019 Form 10-K | 49
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
| Outstanding | | Amount | | | | |
| (In millions) |
Balance at December 31, 2016 | 57 |
| | $ | — |
| | $ | 841 |
| | $ | (2 | ) | | $ | 810 |
| | $ | 1,649 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (512 | ) | | (512 | ) |
Exchange of convertible senior notes | 3 |
| | — |
| | 161 |
| | — |
| | — |
| | 161 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Share-based compensation | — |
| | — |
| | 42 |
| | — |
| | — |
| | 42 |
|
Balance at December 31, 2017 | 60 |
| | — |
| | 1,044 |
| | (5 | ) | | 298 |
| | 1,337 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 707 |
| | 707 |
|
Adoption of new accounting standards | — |
| | — |
| | — |
| | (1 | ) | | 7 |
| | 6 |
|
Partial termination of warrants | — |
| | — |
| | (550 | ) | | — |
| | — |
| | (550 | ) |
Exchange of convertible senior notes | 2 |
| | — |
| | 108 |
| | — |
| | — |
| | 108 |
|
Conversion of convertible senior notes | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Share-based compensation | — |
| | — |
| | 37 |
| | — |
| | — |
| | 37 |
|
Balance at December 31, 2018 | 62 |
| | — |
| | 643 |
| | (8 | ) | | 1,012 |
| | 1,647 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 737 |
| | 737 |
|
Common stock purchases | — |
| | — |
| | (1 | ) | | — |
| | (53 | ) | | (54 | ) |
Adoption of new accounting standard | — |
| | — |
| | — |
| | — |
| | 85 |
| | 85 |
|
Partial termination of warrants | — |
| | — |
| | (514 | ) | �� | — |
| | — |
| | (514 | ) |
Other comprehensive income, net | — |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
Share-based compensation | — |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
|
Balance at December 31, 2019 | 62 |
| | $ | — |
| | $ | 175 |
| | $ | 4 |
| | $ | 1,781 |
| | $ | 1,960 |
|
See accompanying notes.
Molina Healthcare, Inc. 2019 Form 10-K | 50
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Operating activities: | | | | | |
Net income (loss) | $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
Depreciation and amortization | 89 |
| | 127 |
| | 178 |
|
Deferred income taxes | 10 |
| | (6 | ) | | (94 | ) |
Share-based compensation | 39 |
| | 27 |
| | 46 |
|
Amortization of convertible senior notes and finance lease liabilities | 5 |
| | 22 |
| | 32 |
|
(Gain) loss on debt extinguishment | (15 | ) | | 22 |
| | 14 |
|
Loss on sales of subsidiaries, net of gain | — |
| | 15 |
| | — |
|
Non-cash restructuring charges | — |
| | 17 |
| | 60 |
|
Impairment losses | — |
| | — |
| | 470 |
|
Other, net | (5 | ) | | 4 |
| | 21 |
|
Changes in operating assets and liabilities: | | | | | |
Receivables | (76 | ) | | (530 | ) | | 103 |
|
Prepaid expenses and other current assets | 28 |
| | 6 |
| | (56 | ) |
Medical claims and benefits payable | (107 | ) | | (226 | ) | | 263 |
|
Amounts due government agencies | (303 | ) | | (574 | ) | | 341 |
|
Accounts payable and accrued liabilities | 2 |
| | 45 |
| | (12 | ) |
Deferred revenue | 38 |
| | (21 | ) | | (34 | ) |
Income taxes | (15 | ) | | 51 |
| | (16 | ) |
Net cash provided by (used in) operating activities | 427 |
| | (314 | ) | | 804 |
|
Investing activities: | | | | | |
Purchases of investments | (2,536 | ) | | (1,444 | ) | | (2,697 | ) |
Proceeds from sales and maturities of investments | 2,302 |
| | 2,445 |
| | 1,759 |
|
Purchases of property, equipment and capitalized software | (57 | ) | | (30 | ) | | (86 | ) |
Net cash received from sale of subsidiaries | — |
| | 190 |
| | — |
|
Other, net | (2 | ) | | (18 | ) | | (38 | ) |
Net cash (used in) provided by investing activities | (293 | ) | | 1,143 |
| | (1,062 | ) |
Financing activities: | | | | | |
Repayment of principal amount of convertible senior notes | (240 | ) | | (362 | ) | | — |
|
Cash paid for partial settlement of conversion option | (578 | ) | | (623 | ) | | — |
|
Cash received for partial settlement of call option | 578 |
| | 623 |
| | — |
|
Cash paid for partial termination of warrants | (514 | ) | | (549 | ) | | — |
|
Proceeds from borrowings under term loan facility | 220 |
| | — |
| | — |
|
Common stock purchases | (47 | ) | | — |
| | — |
|
Repayment of credit facility | — |
| | (300 | ) | | — |
|
Proceeds from senior notes offerings, net of issuance costs | — |
| | — |
| | 325 |
|
Proceeds from borrowings under credit facility | — |
| | — |
| | 300 |
|
Other, net | 29 |
| | 18 |
| | 11 |
|
Net cash (used in) provided by financing activities | (552 | ) | | (1,193 | ) | | 636 |
|
Net (decrease) increase in cash and cash equivalents, and restricted cash and cash equivalents | (418 | ) | | (364 | ) | | 378 |
|
Cash and cash equivalents, and restricted cash and cash equivalents at beginning of period | 2,926 |
| | 3,290 |
| | 2,912 |
|
Cash and cash equivalents, and restricted cash and cash equivalents at end of period | $ | 2,508 |
| | $ | 2,926 |
| | $ | 3,290 |
|
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
��
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
| |
Supplemental cash flow information: | | | | | |
| | | | | |
Cash paid during the period for: | | | | | |
Income taxes | $ | 239 |
| | $ | 240 |
| | $ | 7 |
|
Interest | $ | 78 |
| | $ | 93 |
| | $ | 78 |
|
| | | | | |
Schedule of non-cash investing and financing activities: | | | | | |
| | | | | |
Convertible senior notes exchange transaction: | | | | | |
Common stock issued in exchange for convertible senior notes | $ | — |
| | $ | 131 |
| | $ | 193 |
|
Component of convertible senior notes allocated to additional paid-in capital, net of income taxes | — |
| | (23 | ) | | (32 | ) |
Net increase to additional paid-in capital | $ | — |
| | $ | 108 |
| | $ | 161 |
|
| | | | | |
Common stock used for stock-based compensation | $ | (7 | ) | | $ | (6 | ) | | $ | (22 | ) |
| | | | | |
Common stock purchases not settled at end of period | $ | 7 |
| | $ | — |
| | $ | — |
|
| | | | | |
Details of sales of subsidiaries: | | | | | |
Decrease in carrying amount of assets | $ | — |
| | $ | (327 | ) | | $ | — |
|
Decrease in carrying amount of liabilities | — |
| | 85 |
| | — |
|
Transaction costs | — |
| | (15 | ) | | — |
|
Cash received from buyers | — |
| | 242 |
| | — |
|
Loss on sale of subsidiaries, net of gain | $ | — |
| | $ | (15 | ) | | $ | — |
|
| | | | | |
Details of change in fair value of derivatives, net: | | | | | |
Gain on call option | $ | 132 |
| | $ | 577 |
| | $ | 255 |
|
Loss on conversion option | (132 | ) | | (577 | ) | | (255 | ) |
Change in fair value of derivatives, net | $ | — |
| | $ | — |
| | $ | — |
|
See accompanying notes.
Molina Healthcare, Inc. 2019 Form 10-K | 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and $96 millionBasis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides managed healthcare services under the liability accrued atMedicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). We currently have 2 reportable segments: the Health Plans segment and the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
The Health Plans segment consists of health plans operating in 14 states and the Commonwealth of Puerto Rico. As of December 31, 20182019, these health plans served approximately 3.3 million members eligible for Medicaid, Medicare, and December 31, 2017, respectively, relatesother government-sponsored health care programs for low-income families and individuals including Marketplace members, most of whom receive government subsidies for premiums. The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (“HMO”).
Our state Medicaid contracts typically have terms of three to our participation in Medicaid Expansion programs.
In the third and fourth quarters of 2018, we recognized adjustments of $57 million and $24 million, respectively, mainly related to the retroactive reinstatement of the Medicaid Expansion risk corridor requirementfive years, contain renewal options exercisable by the California Department of Health Care Services, mainly forstate Medicaid agency, and allow either the state fiscal years ended June 2017 and 2018. The risk corridor provision mandates a minimum loss ratio (“MLR”) of 85% and a maximum MLR of 95%. The total impact of these adjustments resulted in a reduction to premium revenue totaling approximately $81 million in the year ended December 31, 2018.
In certain circumstances,or the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold. Receivables relatingplan to such provisions were insignificant at December 31, 2018 and December 31, 2017.
Profit Sharing and Profit Ceiling. Ourterminate the contract with or without cause. Such contracts with certainare subject to risk of loss in states contain profit-sharing or profit ceiling provisions under which we refund amountsthat issue requests for proposal (“RFP”) open to the states ifcompetitive bidding by other health plans. If one of our health plans generate profit aboveis not a successful responsive bidder to a state RFP, its contract may not be renewed.
In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain specified percentage.health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled; and regions or service areas.
Recent Developments – Health Plans Segment
Kentucky. On December 2, 2019, we announced that our Kentucky health plan subsidiary had been selected as an awardee pursuant to the Kentucky Medicaid managed care organizations RFP issued by the Kentucky Finance and Administration Cabinet in May 2019. However, in late December 2019, the newly elected Governor of Kentucky announced that he was canceling the Medicaid contracts that had been awarded by the outgoing Governor, including the contract that had been awarded to our Kentucky health plan subsidiary, and that he was reissuing the RFP for rebidding. We submitted a bid under the new RFP on February 6, 2020.
Texas. In some cases,October 2019, the Texas Health and Human Services Commission (“HHSC”) awarded contracts to our Texas health plan for the ABD program (known in Texas as “STAR+PLUS”) in two service areas, consisting of one legacy service area and one new service area. This would be a reduction from our current footprint of six service areas. We believe the initial term of each contract is expected to be three years, and such contracts are currently anticipated to be operational beginning on January 1, 2021, at the earliest. Under our existing STAR+PLUS and related Medicare-Medicaid Plan (“MMP”) contracts, we served approximately 97,000 members as of December 31, 2019, representing premium revenue of approximately $2,062 million in 2019. We are limitedcurrently exercising our protest rights of the STAR+PLUS RFP awards with HHSC.
In 2019, our Texas health plan submitted an RFP response for the TANF and CHIP programs (known in Texas as “STAR/CHIP”). HHSC has announced that the STAR/CHIP contract awards are delayed to late February 2020. Under our existing STAR/CHIP contracts, we served approximately 114,000 members as of December 31, 2019, representing premium revenue of approximately $315 million in 2019.
Illinois. On December 31, 2019, we entered into a definitive agreement to purchase NextLevel Health Partners, Inc., a Medicaid managed care organization. Upon the closing of this transaction, expected to occur in the first half of 2020, we will assume the right to serve approximately 50,000 Medicaid and Managed Long-Term Services and Supports members in Cook County, Illinois. The purchase price of approximately $50 million will be funded with available cash, and the closing is subject to customary closing conditions.
New York. In October 2019, we entered into a definitive agreement to acquire certain assets of YourCare Health Plan, Inc. Upon the closing of this transaction, expected to occur in the first half of 2020, we will serve approximately 46,000 Medicaid members in 7 counties in western New York. The purchase price of approximately $40 million will be funded with available cash, and the closing is subject to customary closing conditions.
Consolidation and Presentation
The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the periods presented have been included; such adjustments consist of normal recurring adjustments.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include:
The determination of medical claims and benefits payable of our Health Plans segment;
Health Plans segment contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;
Health Plans segment quality incentives that allow us to recognize incremental revenue if certain quality standards are met;
Settlements under risk or savings sharing programs;
The assessment of long-lived and intangible assets, and goodwill, for impairment;
The determination of reserves for potential absorption of claims unpaid by insolvent providers;
The determination of reserves for the outcome of litigation;
The determination of valuation allowances for deferred tax assets; and
The determination of unrecognized tax benefits.
2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily convertible into known amounts of cash and have a maturity of three months or less on the date of purchase. The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows. The restricted cash and cash equivalents presented below are included in “Restricted investments” in the accompanying consolidated balance sheets.
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| | | | | | | | | | | |
| December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Cash and cash equivalents | $ | 2,452 |
| | $ | 2,826 |
| | $ | 3,186 |
|
Restricted cash and cash equivalents, non-current | 56 |
| | 100 |
| | 95 |
|
Restricted cash and cash equivalents, current | — |
| | — |
| | 9 |
|
Total cash and cash equivalents, and restricted cash and cash equivalents presented in the consolidated statements of cash flows | $ | 2,508 |
| | $ | 2,926 |
| | $ | 3,290 |
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Investments
Our investments are principally held in debt securities, which are grouped into two separate categories for accounting and reporting purposes: available-for-sale securities, and held-to-maturity securities. Available-for-sale (“AFS”) securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income, net of applicable income taxes. Held-to-maturity securities are recorded at amortized cost, which approximates fair value, and unrealized holding gains or losses are not generally recognized. Realized gains and losses and unrealized losses judged to be other than temporary with respect to available-for-sale and held-to-maturity securities are included in the determination of net income (loss). The cost of securities sold is determined using the specific-identification method.
Our investment policy requires that all of our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Investments and restricted investments are subject to interest rate risk
and will decrease in value if market rates increase. Declines in interest rates over time will reduce our investment income.
In general, our AFS securities are classified as current assets without regard to the securities’ contractual maturity dates because they may be readily liquidated. We monitor our investments for other-than-temporary impairment. For comprehensive discussions of the fair value and classification of our investments, see Note 4, “Fair Value Measurements,” and Note 5, “Investments.”
Long-Lived Assets, including Intangible Assets
Long-lived assets consist primarily of property, equipment, capitalized software (see Note 7, “Property, Equipment, and Capitalized Software, Net”), and intangible assets resulting from acquisitions. Finite-lived, separately-identified intangible assets acquired in business combinations are assets that represent future expected benefits but lack physical substance (such as purchased contract rights and provider contracts). Intangible assets are initially recorded at fair value and are then amortized on a straight-line basis over their expected useful lives, generally between five and 15 years.
Our intangible assets are subject to impairment tests when events or circumstances indicate that a finite-lived intangible asset’s (or asset group’s) carrying value may not be recoverable. Consideration is given to a number of potential impairment indicators, including the ability of our health plan subsidiaries to obtain the renewal by amendment of their contracts in each state prior to the actual expiration of their contracts. However, there can be no assurance that these contracts will continue to be renewed. Following the identification of any potential impairment indicators, to determine whether an impairment exists, we would compare the carrying amount of administrative costsa finite-lived intangible asset with the greater of the undiscounted cash flows that are expected to result from the use of the asset or related group of assets, or its value under the asset liquidation method. If it is determined that the carrying amount of the asset is not recoverable, the amount by which the carrying value exceeds the estimated fair value is recorded as an impairment. Refer to Note 9, “Goodwill and Intangible Assets, Net,” for further details.
Leases
Right-of-use (“ROU”) assets represent our right to use the underlying assets over the lease term, and lease liabilities represent our obligation for lease payments arising from the related leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease terms may include options to extend or terminate the lease when we believe it is reasonably certain that we may deductwill exercise such options. If applicable, we account for lease and non-lease components within a lease as a single lease component.
Because most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate to determine the present value of lease payments. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term, and the related ROU assets and liabilities are reduced to the present value of the remaining lease payments at the end of each period. Finance lease payments reduce finance lease liabilities, the related ROU assets are amortized on a straight-line basis over the lease term, and interest expense is recognized using the effective interest method.
The significant majority of our operating leases consist of long-term operating leases for office space. Short-term leases (those with terms of 12 months or less) are not recorded as ROU assets or liabilities in calculating the refund, if any. Liabilitiesconsolidated balance sheets. For certain leases that represent a portfolio of similar assets, such as a fleet of vehicles, we apply a portfolio approach to account for profitsthe related ROU assets and liabilities, rather than account for such assets and the related liabilities individually. A nominal number of our lease agreements include rental payments that adjust periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For further information, including the amount and location of the ROU assets and lease liabilities recognized in the accompanying consolidated balance sheet, see Note 8, “Leases.” For further information regarding our adoption and implementation of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), see “Recent Accounting Pronouncements Adopted,” below.
Goodwill and Business Combinations
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment on an annual basis and more frequently if impairment indicators are present. Such events or circumstances may include experienced or expected operating cash-flow deterioration or losses, significant losses of membership, loss of state funding, loss of state contracts, and other factors. Goodwill is impaired if the carrying amount we are allowed to retain under these provisions were insignificant at December 31, 2018 and December 31, 2017.of the reporting unit (one of our state health plans)
Retroactive Premium Adjustments. State Medicaid programs periodically adjust premium rates on a retroactive basis. In these cases,exceeds its estimated fair value. This excess is recorded as an impairment loss and adjusted if necessary for the impact of tax-deductible goodwill. The loss recognized may not exceed the total goodwill allocated to the reporting unit.
When testing goodwill for impairment, we must adjust our premium revenue inmay first assess qualitative factors, such as industry and market factors, the perioddynamic economic and political environments in which we learnoperate, cost factors, and changes in overall performance, to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. If our qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, we perform the quantitative assessment. We may also elect to bypass the qualitative assessment and proceed directly to the quantitative assessment. If performing a quantitative assessment, we generally estimate the fair values of our reporting units by applying the income approach, using discounted cash flows.
For the annual impairment test under a quantitative assessment, the base year in the reporting units’ discounted cash flows is derived from the annual financial planning cycle, which commences in the fourth quarter of the adjustment, rather thanyear. When computing discounted cash flows, we make assumptions about a wide variety of internal and external factors, and consider what the reporting unit’s selling price would be in an orderly transaction between market participants at the monthsmeasurement date. Significant assumptions include financial projections of servicefree cash flow (including significant assumptions about membership, premium rates, healthcare and operating cost trends, contract renewal and the procurement of new contracts, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods, and discount rates. When determining the discount rate, we consider the overall level of inherent risk of the reporting unit, and the expected rate an outside investor would expect to earn. As part of a quantitative assessment, we may also apply the asset liquidation method to estimate the fair value of individual reporting units, which is computed as total assets minus total liabilities, excluding intangible assets and deferred taxes. Finally, we apply a market approach to reconcile the retroactive adjustment applies.value of our reporting units to our consolidated market value. Under the market approach, we consider publicly traded comparable company information to determine revenue and earnings multiples which are used to estimate our reporting units’ fair values. The assumptions used are consistent with those used in our long-range business plan and annual planning process. However, if these assumptions differ from actual results, the outcome of our goodwill impairment tests could be adversely affected.
Accounting for business combinations requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the final determination of the values of assets acquired or liabilities assumed, or one year after the date of acquisition, whichever comes first, any subsequent adjustments are recorded within our consolidated statements of operations. Refer to Note 9, “Goodwill and Intangible Assets, Net,” for further details.
Medicare Program
Medicare premium revenue increased by $169 million in 2019, primarily due to an 8% increase in premium revenue PMPM. PMPMs improved due to increased revenue resulting from risk scores that are more commensurate with the acuity of our population. Member months were essentially flat in 2019 compared to 2018.
The Medical Margin for Medicare increased $8 million, or 2%, in 2019 when compared with 2018, primarily due to the increase in premium revenue discussed above.
The Medicare MCR increase was primarily due to the increase in medical care costs PMPM, which was partially offset by the increase in the premium revenue PMPM discussed above. The increase in medical care costs PMPM is mainly attributed to fluctuations of medical care costs in certain markets.
Marketplace Program
Marketplace premium revenue decreased $416 million in 2019, driven by lower membership, partially offset by premium rate increases and increased premiums tied to risk scores. Marketplace membership declined from 362,000 at December 31, 2018, to 274,000 at December 31, 2019. Additionally, the decrease in premiums in 2019 reflects a relatively smaller benefit from prior year Marketplace risk adjustment settlements in 2019, when compared with 2018.
The Marketplace Medical Margin decreased $312 million in 2019, when compared with 2018, primarily due to a decrease in premium revenues, and the increase in the Marketplace MCR. Additionally, the decrease in Medical Margin in 2019 was partially driven by the impact of the $81 million CSR reimbursement recognized in 2018. The CSR benefit related to 2017 dates of service and was recognized following the federal government’s confirmation that the reconciliation would be performed on an annual basis. In the fourth quarter of 2017, we had assumed a nine-month reconciliation of this item pending confirmation of the time period to which the 2017 reconciliation would be applied.
The Marketplace MCR increased 930 basis points in 2019, which is mainly attributable to the impact of the $81 million CSR reimbursement recognized in 2018, and the relatively smaller benefit from prior year Marketplace risk adjustment settlements in 2019, when compared with 2018, as discussed above.
OTHER
The Other segment includes the historical results of the MMIS and behavioral health subsidiaries we sold in late 2018, as well as certain corporate amounts not allocated to the Health Plans segment. Beginning in 2019, we no longer report service revenue or cost of service revenue as a result of the sales of the MMIS and behavioral health subsidiaries noted above. In 2019 and 2018, the Other segment margin was insignificant to our consolidated results of operations.
LIQUIDITY AND FINANCIAL CONDITION
LIQUIDITY
We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.
We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company. Our regulated health plan subsidiaries generate significant cash flows from premium revenue. Such cash flows are our primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity. We generally receive premium revenue a short time before we pay for the related health care services. The majority of the assets held by our regulated health plan subsidiaries is in the form of cash, cash equivalents, and investments.
When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general corporate purposes. The regulated health plan subsidiaries paid dividends to the parent company amounting to $1,373 million in 2019, and $288 million in 2018. The parent company contributed capital of $43 million and $145 million in 2019 and 2018, respectively, to our regulated health plan subsidiaries to satisfy statutory net worth requirements.
Cash, cash equivalents and investments at the parent company amounted to $997 million and $170 million as of December 31, 2019, and 2018, respectively. The increase in 2019 was mainly due to the dividends received from regulated health plan subsidiaries, as described above, and proceeds from borrowings under the Term Loan Facility. These cash inflows were partially offset by principal repayments of our outstanding 1.125% Convertible Notes and common stock purchases, as described further below in “Cash Flow Activities.”
Investments
We generally invest cash of our regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, marketable debt securities to improve our overall investment return. These investments are purchased pursuant to board approved investment policies which conform to applicable state laws and regulations.
Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels.
Our restricted investments are invested principally in cash, cash equivalents, and U.S. Treasury securities; we have the ability to hold such restricted investments until maturity. All of our unrestricted investments are classified as current assets.
Molina Healthcare, Inc. 2019 Form 10-K | 39
Cash Flow Activities
Our cash flows are summarized as follows: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | Change |
| (In millions) |
Net cash provided by (used in) operating activities | $ | 427 |
| | $ | (314 | ) | | $ | 741 |
|
Net cash (used in) provided by investing activities | (293 | ) | | 1,143 |
| | (1,436 | ) |
Net cash used in financing activities | (552 | ) | | (1,193 | ) | | 641 |
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Net decrease in cash, cash equivalents, and restricted cash and cash equivalents | $ | (418 | ) | | $ | (364 | ) | | $ | (54 | ) |
Operating Activities
We typically receive capitation payments monthly, in advance of payments for medical claims; however, government agencies may adjust their payment schedules, positively or negatively impacting our reported cash flows from operating activities in any given period. For example, government agencies may delay our premium payments, or they may prepay the following month’s premium payment.
Net cash provided by operations was $427 million in 2019, compared with $314 million of net cash used in 2018. The $741 million increase in cash flow was mainly due to the impact of timing of premium receipts and settlements with government agencies, the latter being primarily related to the final 2017 CSR settlement paid in 2019.
Investing Activities
Net cash used in investing activities was $293 million in 2019, compared with $1,143 million of net cash provided in 2018, a decrease in cash flow of $1,436 million. The year over year decline was primarily due to increased purchases of investments, net of lower proceeds from sales and maturities of investments, in the year ended December 31, 2019.
Financing Activities
Net cash used in financing activities was $552 million in 2019, compared with $1,193 million in 2018. In 2019, net cash paid for the aggregate 1.125% Convertible Notes-related transactions amounted to $730 million, and we paid $47 million for common stock purchases, partially offset by proceeds of $220 million borrowed under the Term Loan Facility. In 2018, net cash used in financing activities included net cash paid for the aggregate 1.125% Convertible Notes-related transactions of $837 million, a $300 million repayment of the Credit Facility, and $64 million repayment of the 1.625% Convertible Notes.
FINANCIAL CONDITION
We believe that our cash resources, borrowing capacity available under our Credit Agreement as discussed further below in “Future Sources and Uses of Liquidity—Future Sources,” and internally generated funds will be sufficient to support our operations, regulatory requirements, debt repayment obligations and capital expenditures for at least the next 12 months.
On a consolidated basis, as of December 31, 2019, our working capital was $2,698 million compared with $2,216 million as of December 31, 2018. At December 31, 2019, our cash and investments amounted to $4,477 million, compared with $4,629 million of cash and investments at December 31, 2018.
Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by our unregulated parent. For more information, see the “Liquidity”discussion presented earlier in this section of the MD&A.
Regulatory Capital and Dividend Restrictions
Each of our regulated HMO subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To the extent our HMO subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus (net assets) requirement for these subsidiaries was estimated to be approximately $1,110 million at December 31, 2019,
compared with $1,040 million at December 31, 2018. Our HMO subsidiaries were in compliance with these minimum capital requirements as of both dates.
Under applicable regulatory requirements, the amount of dividends that may be paid by our HMO subsidiaries without prior approval by regulatory authorities as of December 31, 2019, is approximately $41 million in the aggregate. Our HMO subsidiaries may pay dividends over this amount, but only after approval is granted by the regulatory authorities.
Debt Ratings
Our 5.375% Notes and 4.875% Notes are rated “BB-” by Standard & Poor’s, and “B2” by Moody’s Investor Service, Inc. A downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs.
Financial Covenants
Our Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. Such ratios, presented below, are computed as defined by the terms of the Credit Agreement.
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| | | |
Credit Agreement Financial Covenants | Required Per Agreement | | As of December 31, 2019 |
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Net leverage ratio | <4.0x | | 1.0x |
Interest coverage ratio | >3.5x | | 14.5x |
In addition, the indentures governing the 4.875% Notes, the 5.375% Notes, and the 1.125% Convertible Notes contain cross-default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture. As of December 31, 2019, we were in compliance with all covenants under the Credit Agreement and the indentures governing our outstanding notes.
FUTURE SOURCES AND USES OF LIQUIDITY
Future Sources
Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which we generally receive a short time before we pay for the related health care services. Such cash flows are our primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity.
Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent company to be used for general corporate purposes. For more information on our regulatory capital requirements and dividend restrictions, refer to Notes to Consolidated Financial Statements, Note 17, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions,” and Note 20, “Condensed Financial Information of Registrant—Note C - Dividends and Capital Contributions.”
Credit Agreement Borrowing Capacity. As of December 31, 2019, we had available borrowing capacity of $380 million under the Term Loan Facility, following our draw down of $220 million in the first half of 2019. Under the Term Loan Facility, we may request up to ten advances, each in a minimum principal amount of $50 million, until July 31, 2020. In addition, we have available borrowing capacity of $499 million under our Credit Facility. See further discussion in the Notes to Consolidated Financial Statements, Note 11, “Debt.”
Savings from the IT Restructuring Plan. Management’s margin recovery plan identified and implemented various profit improvement initiatives. This included the plan to restructure our information technology department (the “IT Restructuring Plan”) in 2018, which is reported in the Other segment. In connection with this plan, in early 2019, we entered into services agreements with an outsourcing vendor who manages certain of our information technology services. The IT Restructuring Plan is substantially complete. We reduced annualized run-rate expenses by approximately $14 million in 2019, and expect to reduce such expenses by approximately $25 million to $30 million by the end of the fifth full year of the contract. Such savings, when achieved, reduce Other segment general and administrative expenses in our consolidated statements of operations. Further details of the restructuring plans, including costs associated with such plans, are described in the Notes to Consolidated Financial Statements, Note 15, “Restructuring Costs.”
Future Uses
Common Stock Purchases. In early December 2019, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program is funded by existing cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management, based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law.
As described in the Notes to Consolidated Financial Statements, Note 14, “Stockholders' Equity,” pursuant to a Rule 10b5-1 trading plan, we purchased approximately 400,000 shares of our common stock for $54 million in December 2019 (average cost of $135.30 per share), including approximately 55,000 shares purchased for $7 million in late December 2019, and settled in early January 2020. In January 2020 through February 7, 2020, we purchased 1,533,000 shares for $203 million (average cost of 132.69 per share).
Acquisitions. Our strategic focus has shifted to a disciplined and steady approach to growth. Organic growth, which includes leveraging our existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will consider targeted inorganic growth opportunities that provide a strategic fit, leverage operational synergies, and lead to incremental earnings accretion. This will include “bolt-on” membership opportunities in our current states and health plans in new states. As noted below, we entered into two acquisition agreements in the fourth quarter of 2019, pursuant to which we expect to add Medicaid membership in Illinois and New York in 2020.
On December 31, 2019, we entered into a definitive agreement to purchase NextLevel Health Partners, Inc., a Medicaid managed care organization. Upon the closing of this transaction, expected to occur in the first half of 2020, we will assume the right to serve approximately 50,000 Medicaid and Managed Long-Term Services and Supports members in Cook County, Illinois. The purchase price of approximately $50 million will be funded with available cash, and the closing is subject to customary closing conditions.
In October 2019, we entered into a definitive agreement to acquire certain assets of YourCare Health Plan, Inc. Upon the closing of this transaction, expected to occur in the first half of 2020, we will serve approximately 46,000 Medicaid members in seven counties in western New York. The purchase price of approximately $40 million will be funded with available cash, and the closing is subject to customary closing conditions.
Regulatory Capital Requirements and Dividend Restrictions. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with minimum statutory capital requirements.
1.125% Convertible Notes. On January 15, 2020, we repaid the 1.125% Convertible Notes for $39 million, which amount reflected final settlement of both the principal amount outstanding and the 1.125% Conversion Option. Refer to the Notes to Consolidated Financial Statements, Note 11, “Debt,” for a detailed discussion of our convertible notes, including recent transactions.
CRITICAL ACCOUNTING ESTIMATES
When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Actual results could differ from these estimates, and some differences could be material. Our most significant accounting estimates, which include a higher degree of judgment and/or complexity, include the following:
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• | Medical claims and benefits payable. See discussion below, and refer to the Notes to Consolidated Financial Statements, Notes 2, “Significant Accounting Policies,” and 10, “Medical Claims and Benefits Payable” for more information. |
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• | Contractual provisions that may adjust or limit revenue or profit. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.” |
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• | Quality incentives. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.” |
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• | Goodwill and intangible assets, net. At December 31, 2019, goodwill and intangible assets, net, represented approximately 3% of total assets and 9% of total stockholders’ equity, compared with 3% and |
12%, respectively, at December 31, 2018. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” and Note 9, “Goodwill and Intangible Assets, Net.”
MEDICAL CARE COSTS, MEDICAL CLAIMS AND BENEFITS PAYABLE
Medical care costs are recognized in the period in which services are provided and include fee-for-service claims, pharmacy benefits, capitation payments to providers, and various other medically-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of hospital and physician services. Such medical care costs include amounts paid by us as well as estimated medical claims and benefits payable for costs that were incurred but not paid as of the reporting date (“IBNP”). Pharmacy benefits represent payments for members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates based on historical and current utilization of prescription drugs and contractual provisions. Capitation payments represent monthly contractual fees paid to providers, who are responsible for providing medical care to members, which could include medical or ancillary costs like dental, vision and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered and are not subject to significant accounting estimates. Other medical care costs include all medically-related administrative costs, amounts due to providers pursuant to risk-sharing or other incentive arrangements, provider claims, and other healthcare expenses. Examples of medically-related administrative costs include expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Additionally, we include an estimate for the cost of settling claims incurred through the reporting date in our medical claims and benefits payable liability.
Medical claims and benefits payable consist mainly of fee-for-service IBNP, unpaid pharmacy claims, capitation costs, other medical costs, including amounts payable to providers pursuant to risk-sharing or other incentive arrangements and amounts payable to providers on behalf of certain state agencies for certain state assessments in which we assume no financial risk. IBNP includes the costs of claims incurred as of the balance sheet date which have been reported to us, and our best estimate of the cost of claims incurred but not yet reported to us. We also include an additional reserve to ensure that our overall IBNP liability is sufficient under moderately adverse conditions. We reflect changes in these estimates in the consolidated results of operations in the period in which they are determined.
The estimation of the IBNP liability requires a significant degree of judgment in applying actuarial methods, determining the appropriate assumptions and considering numerous factors. Of those factors, we consider estimated completion factors (measures the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical payment patterns) and the assumed healthcare cost trend (the year-over-year change in per-member per-month medical care costs) to be the most critical assumptions. Other relevant factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels, changes in membership, product mix, seasonality, benefit changes or changes in Medicaid fee schedules, provider contract changes, prior authorizations and the incidence of catastrophic or pandemic cases.
For claims incurred more than three months before the financial statement date, we mainly use estimated completion factors to estimate the ultimate cost of those claims. Completion factors measure the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical claims payment patterns. We analyze historical claims payment patterns by comparing claim incurred dates to claim payment dates to estimate completion factors. The estimated completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claims cost for a given month’s incurred claim activity. The difference between the estimated ultimate claims cost and the claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our IBNP liability.
For claims incurred within three months before the financial statement date, actual claims paid are a less reliable measure of our ultimate cost since a large portion of medical claims are not submitted to us until several months after services have been submitted. Accordingly, we estimate our IBNP liability for claims incurred during these months based on a blend of estimated completion factors and assumed medical care cost trend. The assumed medical care cost trend represents the year-over-year change in per-member per-month medical care costs, which can be affected by many factors including, but not limited to, our ability and practices to manage medical and pharmaceutical costs, changes in level and mix of services utilized, mix of benefits offered, including the impact of co-pays and deductibles, changes in medical practices, changes in member demographics, catastrophes and epidemics, and other relevant factors.
Actuarial standards of practice generally require a level of confidence such that our overall best estimate of the IBNP liability has a greater probability of being adequate versus being insufficient, where the liability is sufficient to account for moderately adverse conditions. Adverse conditions are situations that may cause actual claims to be higher than the otherwise estimated value of such claims at the time of the estimate, such as changes in the magnitude or severity of claims, uncertainties related to our entry into new geographical markets or provision of services to new populations, changes in state-controlled fee schedules, and modifications or upgrades to our claims processing systems and practices. Therefore, in many situations, the claim amounts ultimately settled will be less than the estimate that satisfies the actuarial standards of practice.
When subsequent actual claims payments are less than we estimated, we recognize a benefit for favorable prior period development that is reported as part of “Components of medical care costs related to: “Prior periods” in the table presented in Note 10, “Medical Claims and Benefits Payable.” Our reserving practice is to consistently recognize the actuarial best estimate including a provision for moderately adverse conditions for each current period. This provision is reported as part of “Components of medical care costs related to: Current period” in the table presented in Note 10. Assuming stability in the size of our membership, the use of this consistent methodology, during any given period, usually results in the replenishment of reserves at a level that generally offsets the benefit of favorable prior period development in that period. In the case of material growth or decline of membership, replenishment can exceed or fall short of the favorable development, assuming all other factors remain unchanged.
Because of the significant degree of judgment involved in estimation of our IBNP liability, there is considerable variability and uncertainty inherent in such estimates. The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2019 that would result if we change our completion factors for the fourth through the twelfth months preceding December 31, 2019, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. Dollar amounts are in millions.
|
| | | |
Increase (Decrease) in Estimated Completion Factors | Increase (Decrease) in Medical Claims and Benefits Payable |
(6)% | $ | 472 |
|
(4)% | 315 |
|
(2)% | 157 |
|
2% | (157 | ) |
4% | (315 | ) |
6% | (472 | ) |
The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2019 that would result if we alter our assumed medical care cost trend factors by the percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in millions.
|
| | | |
(Decrease) Increase in Trended Per Member Per Month Cost Estimates | (Decrease) Increase in Medical Claims and Benefits Payable |
(6)% | $ | (159 | ) |
(4)% | (106 | ) |
(2)% | (53 | ) |
2% | 53 |
|
4% | 106 |
|
6% | 159 |
|
There are many related factors working in conjunction with one another that determine the accuracy of our estimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to quantify the impact that any single factor has on a change in estimate. Given the variability inherent in the reserving
process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” for a discussion of recent accounting pronouncements that affect us.
CONTRACTUAL OBLIGATIONS
In the table below, we present our contractual obligations as of December 31, 2019. Some of the amounts included in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future periods may vary from those reflected in the table.
Additionally, we have a variety of other contractual agreements related to acquiring services used in our operations. However, we believe these other agreements do not contain material non-cancelable commitments. We are not a party to off-balance sheet financing arrangements.
|
| | | | | | | | | | | | | | | | | | | |
| Total (1) | | 2020 | | 2021-2022 | | 2023-2024 | | 2025 and after |
| (In millions) |
Medical claims and benefits payable | $ | 1,854 |
| | 1,854 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Principal amount of debt (2) | 1,262 |
| | 18 |
| | 738 |
| | 176 |
| | 330 |
|
Amounts due government agencies | 664 |
| | 664 |
| | — |
| | — |
| | — |
|
Finance leases | 400 |
| | 23 |
| | 45 |
| | 43 |
| | 289 |
|
Purchase commitments | 255 |
| | 90 |
| | 99 |
| | 51 |
| | 15 |
|
Interest on long-term debt | 230 |
| | 63 |
| | 120 |
| | 40 |
| | 7 |
|
Operating leases | 80 |
| | 28 |
| | 34 |
| | 15 |
| | 3 |
|
Total | $ | 4,745 |
| | $ | 2,740 |
| | $ | 1,036 |
| | $ | 325 |
| | $ | 644 |
|
| |
(1) | As of December 31, 2019, we have recorded approximately $20 million of unrecognized tax benefits. The table does not contain this amount because we cannot reasonably estimate when or if such amount may be settled. For further information, refer to Notes to Consolidated Financial Statements, Note 13, “Income Taxes.” |
| |
(2) | Represents the principal amounts due on the 1.125% Convertible Notes due 2020, 5.375% Notes due 2022, Term Loan Facility due 2024, and 4.875% Notes due 2025. The 1.125% Convertible Notes due 2020 were settled in January 2020. For further information, refer to Notes to Consolidated Financial Statements, Note 11, “Debt.” |
INFLATION
We use various strategies to mitigate the negative effects of healthcare cost inflation. Specifically, our health plans try to control medical care costs through contracts with independent providers of healthcare services. Through these contracted providers, our health plans emphasize preventive healthcare and appropriate use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate medical care cost inflation will be successful. Competitive pressures, new healthcare and pharmaceutical product introductions, demands from healthcare providers and customers, applicable regulations, or other factors may affect our ability to control medical care costs.
COMPLIANCE COSTS
Our health plans are regulated by both state and federal government agencies. Regulation of managed care products and healthcare services is an evolving area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to additional costs related to the implementation of additional systems, procedures and programs that we have not yet identified.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and financial position are exposed to financial market risk relating to changes in interest rates, and the resulting impact on investment income and interest expense.
Substantially all of our investments and restricted investments are subject to interest rate risk and will decrease in value if market interest rates increase. Assuming a hypothetical and immediate 1% increase in market interest rates at December 31, 2019, the fair value of our fixed income investments would decrease by approximately $49 million. Declines in interest rates over time will reduce our investment income.
For further information on fair value measurements and our investment portfolio, please refer to the Notes to Consolidated Financial Statements, Note 4, “Fair Value Measurements,” and Note 5, “Investments.”
Borrowings under our Credit Agreement bear interest based, at our election, on a base rate or other defined rate, plus in each case the applicable margin. As of December 31, 2019, $220 million was outstanding under the Term Loan Facility. See Notes to Consolidated Financial Statements, Note 11, “Debt,” for more information.
Molina Healthcare, Inc. 2019 Form 10-K | 46
MOLINA HEALTHCARE, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Molina Healthcare, Inc. 2019 Form 10-K | 47
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions, except per-share data) |
Revenue: | | | | | |
Premium revenue | $ | 16,208 |
| | $ | 17,612 |
| | $ | 18,854 |
|
Premium tax revenue | 489 |
| | 417 |
| | 438 |
|
Health insurer fees reimbursed | — |
| | 329 |
| | — |
|
Service revenue | — |
| | 407 |
| | 521 |
|
Investment income and other revenue | 132 |
| | 125 |
| | 70 |
|
Total revenue | 16,829 |
| | 18,890 |
| | 19,883 |
|
Operating expenses: | | | | | |
Medical care costs | 13,905 |
| | 15,137 |
| | 17,073 |
|
General and administrative expenses | 1,296 |
| | 1,333 |
| | 1,594 |
|
Premium tax expenses | 489 |
| | 417 |
| | 438 |
|
Health insurer fees | — |
| | 348 |
| | — |
|
Depreciation and amortization | 89 |
| | 99 |
| | 137 |
|
Restructuring costs | 6 |
| | 46 |
| | 234 |
|
Cost of service revenue | — |
| | 364 |
| | 492 |
|
Impairment losses | — |
| | — |
| | 470 |
|
Total operating expenses | 15,785 |
| | 17,744 |
| | 20,438 |
|
Loss on sales of subsidiaries, net of gain | — |
| | (15 | ) | | — |
|
Operating income (loss) | 1,044 |
| | 1,131 |
| | (555 | ) |
Other expenses, net: | | | | | |
Interest expense | 87 |
| | 115 |
| | 118 |
|
Other (income) expenses, net | (15 | ) | | 17 |
| | (61 | ) |
Total other expenses, net | 72 |
| | 132 |
| | 57 |
|
Income (loss) before income tax expense (benefit) | 972 |
| | 999 |
| | (612 | ) |
Income tax expense (benefit) | 235 |
| | 292 |
| | (100 | ) |
Net income (loss) | $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
| | | | | |
Net income (loss) per share: | | | | | |
Basic | $ | 11.85 |
| | $ | 11.57 |
| | $ | (9.07 | ) |
Diluted | $ | 11.47 |
| | $ | 10.61 |
| | $ | (9.07 | ) |
Weighted average shares outstanding: | | | | | |
Basic | 62 |
| | 61 |
| | 56 |
|
Diluted | 64 |
| | 67 |
| | 56 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Net income (loss) | $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
Other comprehensive income (loss): | | | | | |
Unrealized investment income (loss) | 16 |
| | (3 | ) | | (5 | ) |
Less: effect of income taxes | 4 |
| | (1 | ) | | (2 | ) |
Other comprehensive income (loss), net of tax | 12 |
| | (2 | ) | | (3 | ) |
Comprehensive income (loss) | $ | 749 |
| | $ | 705 |
| | $ | (515 | ) |
See accompanying notes.
Molina Healthcare, Inc. 2019 Form 10-K | 48
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (Dollars in millions, except per-share amounts) |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 2,452 |
| | $ | 2,826 |
|
Investments | 1,946 |
| | 1,681 |
|
Receivables | 1,406 |
| | 1,330 |
|
Prepaid expenses and other current assets | 134 |
| | 149 |
|
Derivative asset | 29 |
| | 476 |
|
Total current assets | 5,967 |
| | 6,462 |
|
Property, equipment, and capitalized software, net | 385 |
| | 241 |
|
Goodwill and intangible assets, net | 172 |
| | 190 |
|
Restricted investments | 79 |
| | 120 |
|
Deferred income taxes | 79 |
| | 117 |
|
Other assets | 105 |
| | 24 |
|
Total assets | $ | 6,787 |
| | $ | 7,154 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | |
Medical claims and benefits payable | $ | 1,854 |
| | $ | 1,961 |
|
Amounts due government agencies | 664 |
| | 967 |
|
Accounts payable and accrued liabilities | 455 |
| | 390 |
|
Deferred revenue | 249 |
| | 211 |
|
Current portion of long-term debt | 18 |
| | 241 |
|
Derivative liability | 29 |
| | 476 |
|
Total current liabilities | 3,269 |
| | 4,246 |
|
Long-term debt | 1,237 |
| | 1,020 |
|
Finance lease liabilities | 231 |
| | 197 |
|
Other long-term liabilities | 90 |
| | 44 |
|
Total liabilities | 4,827 |
| | 5,507 |
|
Stockholders’ equity: | | | |
Common stock, $0.001 par value per share; 150 million shares authorized; outstanding: 62 million shares at each of December 31, 2019, and December 31, 2018 | — |
| | — |
|
Preferred stock, $0.001 par value per share; 20 million shares authorized, no shares issued and outstanding | — |
| | — |
|
Additional paid-in capital | 175 |
| | 643 |
|
Accumulated other comprehensive income (loss) | 4 |
| | (8 | ) |
Retained earnings | 1,781 |
| | 1,012 |
|
Total stockholders’ equity | 1,960 |
| | 1,647 |
|
Total liabilities and stockholders’ equity | $ | 6,787 |
| | $ | 7,154 |
|
See accompanying notes.
Molina Healthcare, Inc. 2019 Form 10-K | 49
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
| Outstanding | | Amount | | | | |
| (In millions) |
Balance at December 31, 2016 | 57 |
| | $ | — |
| | $ | 841 |
| | $ | (2 | ) | | $ | 810 |
| | $ | 1,649 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (512 | ) | | (512 | ) |
Exchange of convertible senior notes | 3 |
| | — |
| | 161 |
| | — |
| | — |
| | 161 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Share-based compensation | — |
| | — |
| | 42 |
| | — |
| | — |
| | 42 |
|
Balance at December 31, 2017 | 60 |
| | — |
| | 1,044 |
| | (5 | ) | | 298 |
| | 1,337 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 707 |
| | 707 |
|
Adoption of new accounting standards | — |
| | — |
| | — |
| | (1 | ) | | 7 |
| | 6 |
|
Partial termination of warrants | — |
| | — |
| | (550 | ) | | — |
| | — |
| | (550 | ) |
Exchange of convertible senior notes | 2 |
| | — |
| | 108 |
| | — |
| | — |
| | 108 |
|
Conversion of convertible senior notes | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Share-based compensation | — |
| | — |
| | 37 |
| | — |
| | — |
| | 37 |
|
Balance at December 31, 2018 | 62 |
| | — |
| | 643 |
| | (8 | ) | | 1,012 |
| | 1,647 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 737 |
| | 737 |
|
Common stock purchases | — |
| | — |
| | (1 | ) | | — |
| | (53 | ) | | (54 | ) |
Adoption of new accounting standard | — |
| | — |
| | — |
| | — |
| | 85 |
| | 85 |
|
Partial termination of warrants | — |
| | — |
| | (514 | ) | �� | — |
| | — |
| | (514 | ) |
Other comprehensive income, net | — |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
Share-based compensation | — |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
|
Balance at December 31, 2019 | 62 |
| | $ | — |
| | $ | 175 |
| | $ | 4 |
| | $ | 1,781 |
| | $ | 1,960 |
|
See accompanying notes.
Molina Healthcare, Inc. 2019 Form 10-K | 50
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Operating activities: | | | | | |
Net income (loss) | $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
Depreciation and amortization | 89 |
| | 127 |
| | 178 |
|
Deferred income taxes | 10 |
| | (6 | ) | | (94 | ) |
Share-based compensation | 39 |
| | 27 |
| | 46 |
|
Amortization of convertible senior notes and finance lease liabilities | 5 |
| | 22 |
| | 32 |
|
(Gain) loss on debt extinguishment | (15 | ) | | 22 |
| | 14 |
|
Loss on sales of subsidiaries, net of gain | — |
| | 15 |
| | — |
|
Non-cash restructuring charges | — |
| | 17 |
| | 60 |
|
Impairment losses | — |
| | — |
| | 470 |
|
Other, net | (5 | ) | | 4 |
| | 21 |
|
Changes in operating assets and liabilities: | | | | | |
Receivables | (76 | ) | | (530 | ) | | 103 |
|
Prepaid expenses and other current assets | 28 |
| | 6 |
| | (56 | ) |
Medical claims and benefits payable | (107 | ) | | (226 | ) | | 263 |
|
Amounts due government agencies | (303 | ) | | (574 | ) | | 341 |
|
Accounts payable and accrued liabilities | 2 |
| | 45 |
| | (12 | ) |
Deferred revenue | 38 |
| | (21 | ) | | (34 | ) |
Income taxes | (15 | ) | | 51 |
| | (16 | ) |
Net cash provided by (used in) operating activities | 427 |
| | (314 | ) | | 804 |
|
Investing activities: | | | | | |
Purchases of investments | (2,536 | ) | | (1,444 | ) | | (2,697 | ) |
Proceeds from sales and maturities of investments | 2,302 |
| | 2,445 |
| | 1,759 |
|
Purchases of property, equipment and capitalized software | (57 | ) | | (30 | ) | | (86 | ) |
Net cash received from sale of subsidiaries | — |
| | 190 |
| | — |
|
Other, net | (2 | ) | | (18 | ) | | (38 | ) |
Net cash (used in) provided by investing activities | (293 | ) | | 1,143 |
| | (1,062 | ) |
Financing activities: | | | | | |
Repayment of principal amount of convertible senior notes | (240 | ) | | (362 | ) | | — |
|
Cash paid for partial settlement of conversion option | (578 | ) | | (623 | ) | | — |
|
Cash received for partial settlement of call option | 578 |
| | 623 |
| | — |
|
Cash paid for partial termination of warrants | (514 | ) | | (549 | ) | | — |
|
Proceeds from borrowings under term loan facility | 220 |
| | — |
| | — |
|
Common stock purchases | (47 | ) | | — |
| | — |
|
Repayment of credit facility | — |
| | (300 | ) | | — |
|
Proceeds from senior notes offerings, net of issuance costs | — |
| | — |
| | 325 |
|
Proceeds from borrowings under credit facility | — |
| | — |
| | 300 |
|
Other, net | 29 |
| | 18 |
| | 11 |
|
Net cash (used in) provided by financing activities | (552 | ) | | (1,193 | ) | | 636 |
|
Net (decrease) increase in cash and cash equivalents, and restricted cash and cash equivalents | (418 | ) | | (364 | ) | | 378 |
|
Cash and cash equivalents, and restricted cash and cash equivalents at beginning of period | 2,926 |
| | 3,290 |
| | 2,912 |
|
Cash and cash equivalents, and restricted cash and cash equivalents at end of period | $ | 2,508 |
| | $ | 2,926 |
| | $ | 3,290 |
|
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
��
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
| |
Supplemental cash flow information: | | | | | |
| | | | | |
Cash paid during the period for: | | | | | |
Income taxes | $ | 239 |
| | $ | 240 |
| | $ | 7 |
|
Interest | $ | 78 |
| | $ | 93 |
| | $ | 78 |
|
| | | | | |
Schedule of non-cash investing and financing activities: | | | | | |
| | | | | |
Convertible senior notes exchange transaction: | | | | | |
Common stock issued in exchange for convertible senior notes | $ | — |
| | $ | 131 |
| | $ | 193 |
|
Component of convertible senior notes allocated to additional paid-in capital, net of income taxes | — |
| | (23 | ) | | (32 | ) |
Net increase to additional paid-in capital | $ | — |
| | $ | 108 |
| | $ | 161 |
|
| | | | | |
Common stock used for stock-based compensation | $ | (7 | ) | | $ | (6 | ) | | $ | (22 | ) |
| | | | | |
Common stock purchases not settled at end of period | $ | 7 |
| | $ | — |
| | $ | — |
|
| | | | | |
Details of sales of subsidiaries: | | | | | |
Decrease in carrying amount of assets | $ | — |
| | $ | (327 | ) | | $ | — |
|
Decrease in carrying amount of liabilities | — |
| | 85 |
| | — |
|
Transaction costs | — |
| | (15 | ) | | — |
|
Cash received from buyers | — |
| | 242 |
| | — |
|
Loss on sale of subsidiaries, net of gain | $ | — |
| | $ | (15 | ) | | $ | — |
|
| | | | | |
Details of change in fair value of derivatives, net: | | | | | |
Gain on call option | $ | 132 |
| | $ | 577 |
| | $ | 255 |
|
Loss on conversion option | (132 | ) | | (577 | ) | | (255 | ) |
Change in fair value of derivatives, net | $ | — |
| | $ | — |
| | $ | — |
|
See accompanying notes.
Molina Healthcare, Inc. 2019 Form 10-K | 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). We currently have 2 reportable segments: the Health Plans segment and the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
The Health Plans segment consists of health plans operating in 14 states and the Commonwealth of Puerto Rico. As of December 31, 2019, these health plans served approximately 3.3 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals including Marketplace members, most of whom receive government subsidies for premiums. The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (“HMO”).
Our state Medicaid contracts typically have terms of three to five years, contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. Such contracts are subject to risk of loss in states that issue requests for proposal (“RFP”) open to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may not be renewed.
In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled; and regions or service areas.
Recent Developments – Health Plans Segment
Kentucky. On December 2, 2019, we announced that our Kentucky health plan subsidiary had been selected as an awardee pursuant to the Kentucky Medicaid managed care organizations RFP issued by the Kentucky Finance and Administration Cabinet in May 2019. However, in late December 2019, the newly elected Governor of Kentucky announced that he was canceling the Medicaid contracts that had been awarded by the outgoing Governor, including the contract that had been awarded to our Kentucky health plan subsidiary, and that he was reissuing the RFP for rebidding. We submitted a bid under the new RFP on February 6, 2020.
Texas. In October 2019, the Texas Health and Human Services Commission (“HHSC”) awarded contracts to our Texas health plan for the ABD program (known in Texas as “STAR+PLUS”) in two service areas, consisting of one legacy service area and one new service area. This would be a reduction from our current footprint of six service areas. We believe the initial term of each contract is expected to be three years, and such contracts are currently anticipated to be operational beginning on January 1, 2021, at the earliest. Under our existing STAR+PLUS and related Medicare-Medicaid Plan (“MMP”) contracts, we served approximately 97,000 members as of December 31, 2019, representing premium revenue of approximately $2,062 million in 2019. We are currently exercising our protest rights of the STAR+PLUS RFP awards with HHSC.
In 2019, our Texas health plan submitted an RFP response for the TANF and CHIP programs (known in Texas as “STAR/CHIP”). HHSC has announced that the STAR/CHIP contract awards are delayed to late February 2020. Under our existing STAR/CHIP contracts, we served approximately 114,000 members as of December 31, 2019, representing premium revenue of approximately $315 million in 2019.
Illinois. On December 31, 2019, we entered into a definitive agreement to purchase NextLevel Health Partners, Inc., a Medicaid managed care organization. Upon the closing of this transaction, expected to occur in the first half of 2020, we will assume the right to serve approximately 50,000 Medicaid and Managed Long-Term Services and Supports members in Cook County, Illinois. The purchase price of approximately $50 million will be funded with available cash, and the closing is subject to customary closing conditions.
New York. In October 2019, we entered into a definitive agreement to acquire certain assets of YourCare Health Plan, Inc. Upon the closing of this transaction, expected to occur in the first half of 2020, we will serve approximately 46,000 Medicaid members in 7 counties in western New York. The purchase price of approximately $40 million will be funded with available cash, and the closing is subject to customary closing conditions.
Consolidation and Presentation
The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the periods presented have been included; such adjustments consist of normal recurring adjustments.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include:
The determination of medical claims and benefits payable of our Health Plans segment;
Health Plans segment contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;
Health Plans segment quality incentives that allow us to recognize incremental revenue if certain quality standards are met;
Settlements under risk or savings sharing programs;
The assessment of long-lived and intangible assets, and goodwill, for impairment;
The determination of reserves for potential absorption of claims unpaid by insolvent providers;
The determination of reserves for the outcome of litigation;
The determination of valuation allowances for deferred tax assets; and
The determination of unrecognized tax benefits.
2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily convertible into known amounts of cash and have a maturity of three months or less on the date of purchase. The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows. The restricted cash and cash equivalents presented below are included in “Restricted investments” in the accompanying consolidated balance sheets.
|
| | | | | | | | | | | |
| December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Cash and cash equivalents | $ | 2,452 |
| | $ | 2,826 |
| | $ | 3,186 |
|
Restricted cash and cash equivalents, non-current | 56 |
| | 100 |
| | 95 |
|
Restricted cash and cash equivalents, current | — |
| | — |
| | 9 |
|
Total cash and cash equivalents, and restricted cash and cash equivalents presented in the consolidated statements of cash flows | $ | 2,508 |
| | $ | 2,926 |
| | $ | 3,290 |
|
Investments
Our investments are principally held in debt securities, which are grouped into two separate categories for accounting and reporting purposes: available-for-sale securities, and held-to-maturity securities. Available-for-sale (“AFS”) securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income, net of applicable income taxes. Held-to-maturity securities are recorded at amortized cost, which approximates fair value, and unrealized holding gains or losses are not generally recognized. Realized gains and losses and unrealized losses judged to be other than temporary with respect to available-for-sale and held-to-maturity securities are included in the determination of net income (loss). The cost of securities sold is determined using the specific-identification method.
Our investment policy requires that all of our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Investments and restricted investments are subject to interest rate risk
and will decrease in value if market rates increase. Declines in interest rates over time will reduce our investment income.
In general, our AFS securities are classified as current assets without regard to the securities’ contractual maturity dates because they may be readily liquidated. We monitor our investments for other-than-temporary impairment. For comprehensive discussions of the fair value and classification of our investments, see Note 4, “Fair Value Measurements,” and Note 5, “Investments.”
Long-Lived Assets, including Intangible Assets
Long-lived assets consist primarily of property, equipment, capitalized software (see Note 7, “Property, Equipment, and Capitalized Software, Net”), and intangible assets resulting from acquisitions. Finite-lived, separately-identified intangible assets acquired in business combinations are assets that represent future expected benefits but lack physical substance (such as purchased contract rights and provider contracts). Intangible assets are initially recorded at fair value and are then amortized on a straight-line basis over their expected useful lives, generally between five and 15 years.
Our intangible assets are subject to impairment tests when events or circumstances indicate that a finite-lived intangible asset’s (or asset group’s) carrying value may not be recoverable. Consideration is given to a number of potential impairment indicators, including the ability of our health plan subsidiaries to obtain the renewal by amendment of their contracts in each state prior to the actual expiration of their contracts. However, there can be no assurance that these contracts will continue to be renewed. Following the identification of any potential impairment indicators, to determine whether an impairment exists, we would compare the carrying amount of a finite-lived intangible asset with the greater of the undiscounted cash flows that are expected to result from the use of the asset or related group of assets, or its value under the asset liquidation method. If it is determined that the carrying amount of the asset is not recoverable, the amount by which the carrying value exceeds the estimated fair value is recorded as an impairment. Refer to Note 9, “Goodwill and Intangible Assets, Net,” for further details.
Leases
Right-of-use (“ROU”) assets represent our right to use the underlying assets over the lease term, and lease liabilities represent our obligation for lease payments arising from the related leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease terms may include options to extend or terminate the lease when we believe it is reasonably certain that we will exercise such options. If applicable, we account for lease and non-lease components within a lease as a single lease component.
Because most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate to determine the present value of lease payments. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term, and the related ROU assets and liabilities are reduced to the present value of the remaining lease payments at the end of each period. Finance lease payments reduce finance lease liabilities, the related ROU assets are amortized on a straight-line basis over the lease term, and interest expense is recognized using the effective interest method.
The significant majority of our operating leases consist of long-term operating leases for office space. Short-term leases (those with terms of 12 months or less) are not recorded as ROU assets or liabilities in the consolidated balance sheets. For certain leases that represent a portfolio of similar assets, such as a fleet of vehicles, we apply a portfolio approach to account for the related ROU assets and liabilities, rather than account for such assets and the related liabilities individually. A nominal number of our lease agreements include rental payments that adjust periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For further information, including the amount and location of the ROU assets and lease liabilities recognized in the accompanying consolidated balance sheet, see Note 8, “Leases.” For further information regarding our adoption and implementation of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), see “Recent Accounting Pronouncements Adopted,” below.
Goodwill and Business Combinations
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment on an annual basis and more frequently if impairment indicators are present. Such events or circumstances may include experienced or expected operating cash-flow deterioration or losses, significant losses of membership, loss of state funding, loss of state contracts, and other factors. Goodwill is impaired if the carrying amount of the reporting unit (one of our state health plans)
exceeds its estimated fair value. This excess is recorded as an impairment loss and adjusted if necessary for the impact of tax-deductible goodwill. The loss recognized may not exceed the total goodwill allocated to the reporting unit.
When testing goodwill for impairment, we may first assess qualitative factors, such as industry and market factors, the dynamic economic and political environments in which we operate, cost factors, and changes in overall performance, to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. If our qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, we perform the quantitative assessment. We may also elect to bypass the qualitative assessment and proceed directly to the quantitative assessment. If performing a quantitative assessment, we generally estimate the fair values of our reporting units by applying the income approach, using discounted cash flows.
For the annual impairment test under a quantitative assessment, the base year in the reporting units’ discounted cash flows is derived from the annual financial planning cycle, which commences in the fourth quarter of the year. When computing discounted cash flows, we make assumptions about a wide variety of internal and external factors, and consider what the reporting unit’s selling price would be in an orderly transaction between market participants at the measurement date. Significant assumptions include financial projections of free cash flow (including significant assumptions about membership, premium rates, healthcare and operating cost trends, contract renewal and the procurement of new contracts, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods, and discount rates. When determining the discount rate, we consider the overall level of inherent risk of the reporting unit, and the expected rate an outside investor would expect to earn. As part of a quantitative assessment, we may also apply the asset liquidation method to estimate the fair value of individual reporting units, which is computed as total assets minus total liabilities, excluding intangible assets and deferred taxes. Finally, we apply a market approach to reconcile the value of our reporting units to our consolidated market value. Under the market approach, we consider publicly traded comparable company information to determine revenue and earnings multiples which are used to estimate our reporting units’ fair values. The assumptions used are consistent with those used in our long-range business plan and annual planning process. However, if these assumptions differ from actual results, the outcome of our goodwill impairment tests could be adversely affected.
Accounting for business combinations requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the final determination of the values of assets acquired or liabilities assumed, or one year after the date of acquisition, whichever comes first, any subsequent adjustments are recorded within our consolidated statements of operations. Refer to Note 9, “Goodwill and Intangible Assets, Net,” for further details.
Premium Revenue
Premium revenue is generated from our Health Plans segment contracts, including agreements with other managed care organizations for which we operate as a subcontractor. Premium revenue is generally received based on per member per month (“PMPM”) rates established in advance of the periods covered. These premium revenues are recognized in the month that members are entitled to receive healthcare services, and premiums collected in advance are deferred. The state Medicaid programs and the federal Medicare program periodically adjust premiums. Additionally, many of our contracts contain provisions that may adjust or limit revenue or profit, as described below. Consequently, we recognize premium revenue as it is earned under such provisions.
The following table summarizes premium revenue by health plan for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total |
| (Dollars in millions) |
California | $ | 2,266 |
| | 14.0 | % | | $ | 2,150 |
| | 12.2 | % | | $ | 2,701 |
| | 14.3 | % |
Florida | 734 |
| | 4.5 |
| | 1,790 |
| | 10.2 |
| | 2,568 |
| | 13.6 |
|
Illinois | 1,002 |
| | 6.2 |
| | 793 |
| | 4.5 |
| | 593 |
| | 3.1 |
|
Michigan | 1,624 |
| | 10.0 |
| | 1,601 |
| | 9.1 |
| | 1,596 |
| | 8.5 |
|
New Mexico (1) | — |
| | — |
| | 1,356 |
| | 7.7 |
| | 1,368 |
| | 7.3 |
|
Ohio | 2,553 |
| | 15.8 |
| | 2,388 |
| | 13.6 |
| | 2,216 |
| | 11.8 |
|
Puerto Rico | 474 |
| | 2.9 |
| | 696 |
| | 3.9 |
| | 732 |
| | 3.9 |
|
South Carolina | 583 |
| | 3.6 |
| | 495 |
| | 2.8 |
| | 445 |
| | 2.4 |
|
Texas | 2,991 |
| | 18.5 |
| | 3,244 |
| | 18.4 |
| | 2,813 |
| | 14.9 |
|
Washington | 2,695 |
| | 16.6 |
| | 2,361 |
| | 13.4 |
| | 2,608 |
| | 13.8 |
|
Other (1) | 1,286 |
| | 7.9 |
| | 738 |
| | 4.2 |
| | 1,214 |
| | 6.4 |
|
Total | $ | 16,208 |
| | 100.0 | % | | $ | 17,612 |
| | 100.0 | % | | $ | 18,854 |
| | 100.0 | % |
_______________________
| |
(1) | “Other” includes the Idaho, Mississippi, New York, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results. In 2019, “Other” also includes the New Mexico health plan. The New Mexico health plan’s Medicaid contract terminated on December 31, 2018, and therefore its results are not individually significant to our consolidated operating results in 2019. |
Certain components of premium revenue are subject to accounting estimates and fall into the following categories:
Contractual Provisions That May Adjust or Limit Revenue or Profit
Medicaid Program
Medical Cost Floors (Minimums), and Medical Cost Corridors. A portion of our premium revenue may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded liabilities under the terms of such contract provisions of $74 million and $103 million at December 31, 2019, and December 31, 2018, respectively. Approximately $69 million and $87 million of the liabilities accrued at December 31, 2019, and December 31, 2018, respectively, relates to our participation in Medicaid Expansion programs.
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold. Receivables relating to such provisions were insignificant at December 31, 2019, and December 31, 2018.
Profit Sharing and Profit Ceiling. Our contracts with certain states contain profit-sharing or profit ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. Liabilities for profits in excess of the amount we are allowed to retain under these provisions were insignificant at December 31, 2019, and December 31, 2018.
Retroactive Premium Adjustments. State Medicaid programs periodically adjust premium rates on a retroactive basis. In these cases, we must adjust our premium revenue in the period in which we learn of the adjustment, based on our best estimate of the ultimate premium we expect to realize for the period being adjusted.
Medicare Program
Risk Adjusted Premiums: Our Medicare premiums are subject to retroactive increase or decrease based on the health status of our Medicare members (as measured by member risk score). We estimate our members’ risk scores and the related amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health status, risk scores and CMS practices. Consolidated balance sheet amounts related to anticipated Medicare risk adjusted premiums and Medicare Part D settlements were insignificant at December 31, 20182019, and December 31, 2017.2018.
Minimum MLR: Additionally, federal regulations have The Affordable Care Act (“ACA”) has established a minimum annual medical loss ratio (Minimum MLR)(“Minimum MLR”) of 85% for Medicare. The medical loss ratio represents medical costs as a percentage of premium revenue. Federal regulations define what constitutes medical costs and premium revenue. If the Minimum MLR is not met, we may be required to pay rebates to the federal government. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of operations. Aggregate balance sheetThe amounts related topayable for the Medicare Minimum MLR were insignificant at December 31, 20182019, and December 31, 2017.2018.
Marketplace Program
Risk adjustment:Adjustment: Under this program, our health plans’ composite risk scores are compared with the overall average risk score for the relevant state and market pool. Generally, our health plans will make a risk adjustment payment into the pool if their composite risk scores are below the average risk score (risk adjustment payable), and will receive a risk adjustment payment from the pool if their composite risk scores are above the average risk score.score (risk adjustment receivable). We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our consolidated statements of operations. As of December 31, 2018, and December 31, 2017, the2019, Marketplace risk adjustment payables amounted to $368 million and related receivables amounted to $63 million, for a net payable of $305 million. As of December 31, 2018, Marketplace risk adjustment payables amounted to $466 million and $917related receivables amounted to $34 million, respectively.for a net payable of $432 million.
Minimum MLR: The ACA has established a Minimum MLR of 80% for the Marketplace. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace policyholders. The Marketplace risk adjustment program is taken into consideration when computing the Minimum MLR. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of operations. Aggregate balance sheet amounts related to the Marketplace Minimum MLR were insignificant at December 31, 20182019, and December 31, 2017.2018.
A summary of the categories of amounts due government agencies is as follows:
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (In millions) |
Medicaid program: | | | |
Medical cost floors and corridors | $ | 74 |
| | $ | 103 |
|
Other amounts due to states | 84 |
| | 81 |
|
Marketplace program: | | | |
Risk adjustment | 368 |
| | 466 |
|
Cost sharing reduction | — |
| | 183 |
|
Other | 138 |
| | 134 |
|
Total | $ | 664 |
| | $ | 967 |
|
Quality Incentives
At many of our health plans, revenue ranging from approximately 1% to 3%4% of certain health plan premiums is earned only if certain performance measures are met. Such performance measures are generally found in our Medicaid and MMP contracts. As described in Note 1, “Organization and Basis of Presentation–Use of Estimates,” recognition of quality incentive premium revenue is subject to the use of estimates.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the periods presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of December 31, 2018 are not known, we have no reason to believe that the adjustments to prior periods noted below are not indicative of the potential future changes in our estimates as of December 31, 2018.
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Maximum available quality incentive premium - current period | $ | 186 |
| | $ | 182 |
| | $ | 150 |
|
| | | | | |
Amount of quality incentive premium revenue recognized in current period: | | | | | |
Earned current period | $ | 156 |
| | $ | 133 |
| | $ | 97 |
|
Earned prior periods | 38 |
| | 31 |
| | 10 |
|
Total | $ | 194 |
| | $ | 164 |
| | $ | 107 |
|
| | | | | |
Quality incentive premium revenue recognized as a percentage of total premium revenue | 1.2 | % | | 0.9 | % | | 0.6 | % |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Maximum available quality incentive premium - current period | $ | 182 |
| | $ | 150 |
| | $ | 147 |
|
| | | | | |
Amount of quality incentive premium revenue recognized in current period: | | | | | |
Earned current period | $ | 133 |
| | $ | 97 |
| | $ | 104 |
|
Earned prior periods | 31 |
| | 10 |
| | 47 |
|
Total | $ | 164 |
| | $ | 107 |
| | $ | 151 |
|
| | | | | |
Quality incentive premium revenue recognized as a percentage of total premium revenue | 0.9 | % | | 0.6 | % | | 0.9 | % |
A summary of the categories of amounts due government agencies is as follows:
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
| (In millions) |
Medicaid program: | | | |
Medical cost floors and corridors | $ | 103 |
| | $ | 135 |
|
Other amounts due to states | 81 |
| | 71 |
|
Marketplace program: | | | |
Risk adjustment | 466 |
| | 917 |
|
Cost sharing reduction | 183 |
| | 275 |
|
Other | 134 |
| | 144 |
|
| $ | 967 |
| | $ | 1,542 |
|
Medical Care Costs, and Medical Claims and Benefits Payable
Medical care costs are recognized in the period in which services are provided and include amounts that have been paid by us through the reporting date, as well as estimated medical claims and benefits payable for costs that have been incurred but not paid by us as of the reporting date. Medical care costs include, among other items, fee-for-service claims, pharmacy benefits, capitation payments to providers, and various other medically-related costs. We use judgment to determine the appropriate assumptions for determining the required estimates.
Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of hospital and physician services. Such medical care costs include amounts paid by us as well as estimated medical claims and benefits payable for costs that were incurred but not paid as of the reporting date (“IBNP”). Pharmacy benefits represent payments for members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates earned based on historical and current utilization of prescription drugs and contract terms.contractual provisions. Capitation payments represent monthly contractual fees paid to physicians and other providers, on a per-member, per-month basis, who are responsible for providing medical care to members, which could include medical or ancillary costs like dental, vision and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered and are not subject to significant accounting estimates. Due to insolvency or other circumstances, such providers may be unable to pay claims they have incurred with third parties in connection with referral services provided to our members. Depending on states’ laws, we may be held liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk. Based on our current assessment, such losses have not been and are not expected to be significant. Other medical care costs include all medically-related administrative costs, certain provideramounts due to providers pursuant to risk-sharing or other incentive costs,arrangements, provider claims, and other health carehealthcare expenses. See further discussionExamples of provider claims in Note 17, “Commitments and Contingencies.” Medically relatedmedically-related administrative costs include for example, expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Salary and benefit costs are a substantial portion of these expenses. Additionally, we include an estimate for the cost of settling claims incurred through the reporting date in our medical claims and benefits payable liability.
The following table providesMedical claims and benefits payable consist mainly of fee-for-service IBNP, unpaid pharmacy claims, capitation costs, other medical costs, including amounts payable to providers pursuant to risk-sharing or other incentive arrangements and amounts payable to providers on behalf of certain state agencies for certain state assessments in which we assume no financial risk. IBNP includes the detailscosts of claims incurred as of the balance sheet date which have been reported to us, and our consolidated medical care costs forbest estimate of the periods indicated:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Amount | | PMPM | | % of Total | | Amount | | PMPM | | % of Total | | Amount | | PMPM | | % of Total |
| (In millions, except PMPM amounts) |
Fee-for-service | $ | 11,278 |
| | $ | 232.15 |
| | 74.5 | % | | $ | 12,682 |
| | $ | 229.63 |
| | 74.3 | % | | $ | 10,993 |
| | $ | 217.84 |
| | 74.4 | % |
Pharmacy | 2,138 |
| | 44.01 |
| | 14.1 |
| | 2,563 |
| | 46.40 |
| | 15.0 |
| | 2,213 |
| | 43.84 |
| | 15.0 |
|
Capitation | 1,184 |
| | 24.38 |
| | 7.8 |
| | 1,360 |
| | 24.63 |
| | 8.0 |
| | 1,218 |
| | 24.13 |
| | 8.2 |
|
Other | 537 |
| | 11.05 |
| | 3.6 |
| | 468 |
| | 8.48 |
| | 2.7 |
| | 350 |
| | 6.94 |
| | 2.4 |
|
Total | $ | 15,137 |
| | $ | 311.59 |
| | 100.0 | % | | $ | 17,073 |
| | $ | 309.14 |
| | 100.0 | % | | $ | 14,774 |
| | $ | 292.75 |
| | 100.0 | % |
The determinationcost of our liability for fee-for-service claims incurred but not paid (“IBNP”)yet reported to us. We also include an additional reserve to ensure that our overall IBNP liability is particularly important tosufficient under moderately adverse conditions. We reflect changes in these estimates in the determination of our financial position andconsolidated results of operations in any giventhe period andin which they are determined.
The estimation of the IBNP liability requires the application of a significant degree of judgment by our management. in applying actuarial methods, determining the appropriate assumptions and considering numerous factors. Of those factors, we consider estimated completion factors and the assumed healthcare cost trend to be the most critical assumptions. Other relevant factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels, changes in membership, product mix, seasonality, benefit changes or changes in Medicaid fee schedules, provider contract changes, prior authorizations and the incidence of catastrophic or pandemic cases.
As a result,Because of the determination of IBNP is subject to an inherentsignificant degree of uncertainty. Ourjudgment involved in estimation of our IBNP claims reserveliability, there is considerable variability and uncertainty inherent in such estimates. Each reporting period, the recognized IBNP liability represents our best estimate of the total amount we will ultimately pay with respect toof unpaid claims incurred as of the balance sheet date. We estimate our IBNP monthlydate using actuarial methods based on several factors. The factors we consider whena consistent methodology in estimating our IBNP include, without limitation:
claims receipt and payment experience (and variations in that experience),
provider billing practices,
health care service utilization trends,
prior authorization of medical services,
known outbreaks of disease or increased incidence of illness such as influenza,
provider contract changes,
changes to Medicaid fee schedules, and
the incidence of high dollar or catastrophic claims.
Our assessment of these factors is then translated into an estimate ofliability. We believe our IBNP liability at the relevant measuring point through the calculation of a base estimate of IBNP, a further provision for adverse claims development, and an estimate of the administrative costs of settling all claims incurred through the reporting date. The base estimate of IBNP is derived through application of claims payment completion factors and trended PMPM cost estimates.
For the fourth month of service prior to the reporting date and earlier, we estimate our outstanding claims liability based on actual claims paid, adjusted for estimated completion factors. Completion factors seek to measure the cumulative percentage of claims expense that will have been paid for a given month of service as of the reporting date, based on historical payment patterns.
For the three months of service immediately prior to the reporting date, actual claims paid are a less reliable measure of our ultimate liability, given the inherent delay between the patient/physician encounter and the actual submission of a claim for payment. For these months of service, we estimate our claims liability based on a blend of estimated completion factors and trended PMPM cost estimates. The PMPM costscurrent estimates are designed to reflect recent trends in paymentsreasonable and expense, utilization patterns, authorized services, pharmacy utilization and other relevant factors.
After we have established our base IBNP reserve throughadequate; however, the application of completion factors and trended PMPM cost estimates, we then compute an additional liability, once again using actuarial techniques, to account for adverse development in our claim payments for which the base actuarial model is not intended to and does not account. We refer to this additional liability as the provision for adverse claims development. The provision for adverse claims development is a component of our overall determination of the adequacy of our IBNP, and averages between 8% to 10% of IBNP. It is intended to capture the potential inadequacy of our IBNP estimate as a result of our inability to adequately assess the impact of factors such as changes in the speed of claims receipt and payment, the relative magnitude or severity of claims, known outbreaks of disease such as influenza, our entry into new geographical markets, our provision of services to new populations such as the aged, blind or disabled, changes to state-controlled fee schedules upon which a large proportion of our provider payments are based, modifications and upgrades to our claims processing systems and practices, and increasing medical costs. Because of the complexity of our business, the number of states in which we operate, and the need to account for different health care benefit packages among those states, we make an overall assessment of IBNP after considering the base actuarial model reserves and the provision for adverse claims development.
The development of our IBNP estimate is a continuous process that we monitor and update monthly as additionalmore complete claims payment information and healthcare cost trend data becomes available. As additional information becomes known to us,Actual medical care costs may be less than we adjust our actuarial model accordingly.previously estimated (favorable development) or more than we previously estimated (unfavorable development), and any differences could be material. Any adjustments if appropriate, are reflectedto reflect favorable development would be
recognized as a decrease to medical care costs, and any adjustments to reflect unfavorable development would be recognized as an increase to medical care costs, in the period known. While we believe our current estimates are adequate, we have in the past been required to increase significantly our claims reserves for periods previously reported and may be required to do so again in the future. Any significant increases to prior period claim reserves would materially decrease reported earnings for the period in which the adjustment is made.adjustments are determined.
There are many related factors working in conjunction with one another that determineRefer to Note 10, “Medical Claims and Benefits Payable,” for a table presenting the accuracycomponents of our estimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to quantify the impact that any single factor has on a change in estimate. Given the variability inherentour medical claims and benefits payable, for all periods presented in the reservingaccompanying consolidated financial statements.
process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.Reinsurance
We limit our risk of catastrophic losses by maintaining high deductible reinsurance coverage. Such reinsurance coverage does not relieve us of our primary obligation to our policyholders. We report reinsurance premiums as a reduction to premium revenue, while related reinsurance recoveries are reported as a reduction to medical care costs. Reinsurance premiums amounted to $17 million, $16 million, $20 million and $30$20 million for the years ended December 31, 2019, 2018, 2017, and 2016,2017, respectively. Reinsurance recoveries amounted to $18 million, $33 million, $24 million and $65$24 million for the years ended December 31, 2019, 2018, 2017, and 2016,2017, respectively. Reinsurance recoverable of $21 million, $31 million, $16 million, and $61$16 million, as of December 31, 2019, 2018, 2017, and 2016,2017, respectively, is included in “Receivables” in the accompanying consolidated balance sheets.
Marketplace Cost Share Reduction (“CSR”)
In the year ended December 31, 2018, we recognized a benefit of approximately $81 million in reduced medical care costs related to 2017 dates of service, as a result of the federal government’s confirmation that the reconciliation of 2017 Marketplace CSR subsidies would be performed on an annual basis. In the fourth quarter of 2017, we had assumed a nine-month reconciliation of this item pending confirmation of the time period to which the 2017 reconciliation would be applied.
Premium Deficiency Reserves on Loss Contracts
We assess the profitability of our contracts to determine if it is probable that a loss will be incurred in the future by reviewing current results and forecasts. For purposes of this assessment, contracts are grouped in a manner consistent with our method of acquiring, servicing and measuring the profitability of such contracts. A premium deficiency is recognized if anticipated future medical care policies to identify groups of contracts where current operating results or forecasts indicate probable future losses. If anticipated future variableand administrative costs exceed anticipated future premiums andpremium revenue, investment income a premium deficiency reserve is recognized.and reinsurance recoveries. No premium deficiency reserves were recorded as of December 31, 20182019 and 2017.2018.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect during the year in which the basis differences reverse. Valuation allowances are established when management determines it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. For further discussion and disclosure, see Note 13, “Income Taxes.”
Taxes Based on Premiums
Health Insurer Fee (“HIF”). The federal government under the ACA imposes an annual fee, or excise tax, on health insurers for each calendar year. The HIF is based on a company’s share of the industry’s net premiums written during the preceding calendar year and is non-deductible for income tax purposes. We recognize expense for the HIF over the year on a straight-line basis. Within our Medicaid program, we must secure additional reimbursement from our state partners for this added cost. We recognize the related revenue when we have obtained a contractual commitment or payment from a state to reimburse us for the HIF, and such HIF revenue is recognized ratably throughout the year. The Consolidated Appropriations Act of 2016 provided for athe HIF moratorium in 2017.2017, and Public Law No. 115-120 provided for the HIF moratorium in 2019. Therefore, there were no health insurer fees reimbursed, nor health insurer fees incurred, in 2017.those years.
Premium and Use Tax. Certain of our health plans are assessed a tax based on premium revenue collected. The premium revenues we receive from these states include the premium tax assessment. We have reported these taxes on a gross basis, as premium tax revenue and as premium tax expenses in the consolidated statements of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments, receivables, and restricted investments. Our investments and a portion of our cash equivalents are managed by professional portfolio managers operating under documented investment guidelines. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those
investments exceeds certain levels. Our investments consist primarily of investment-grade debt securities with a maximum maturityfinal maturities of less than 10 years, and anor less than 10 years average duration of three years or less.life for structured securities. Restricted investments are invested principally in certificates of depositcash, cash equivalents and U.S. Treasury securities.
Concentration of credit risk with respect to accounts receivable is limited because our payors consist principally of the federal government, and governments of each state or commonwealth in which our health plan subsidiaries operate.
See further information below, under “Recent Accounting Pronouncements Not Yet Adopted” regarding our adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020.
Risks and Uncertainties
Our profitability depends in large part on our ability to accurately predict and effectively manage medical care costs. We continually review our medical costs in light of our underlying claims experience and revised actuarial data. However, several factors could adversely affect medical care costs. These factors, which include changes in health care practices, inflation, new technologies, major epidemics, natural disasters, and malpractice litigation, are beyond our control and may have an adverse effect on our ability to accurately predict and effectively control medical care costs. Costs in excess of those anticipated could have a material adverse effect on our financial condition, results of operations, or cash flows.
We operate health plans primarily as a direct contractor with the states (or Commonwealth), and in Los Angeles County, California, as a subcontractor to another health plan holding a direct contract with the state. We are therefore dependent upon a small number of contracts to support our revenue. The loss of any one of those contracts could have a material adverse effect on our financial position, results of operations, or cash flows. OurIn addition, our ability to arrange for the provision of medical services to our members is dependent upon our ability to develop and maintain adequate provider networks. Our inability to develop or maintain such networks might, in certain circumstances, have a material adverse effect on our financial position, results of operations, or cash flows.
Recent Accounting Pronouncements Adopted
Revenue Recognition (Topic 606). See discussion above, in “Revenue Recognition.”
Comprehensive Income. Leases. In February 2018,2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”),Topic 842, which was enactedsubsequently modified by several ASUs issued in 2017 and 2018. Topic 842 was issued to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on December 22, 2017. ASU 2018-02the balance sheet. Most prominent among the changes in Topic 842 is effectivethe recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. In addition, Topic 842’s disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Topic 842’s transition provisions are applied using a modified retrospective approach; entities may elect whether to apply the transition provisions, including disclosure requirements, at the beginning January 1, 2019; we earlyof the earliest comparative period presented or on the adoption date.
We adopted this ASUTopic 842 effective January 1, 2018. The2019, and elected to apply the transition provisions as of that date. Accordingly, we recognized the cumulative effect of initially applying the guidance resulted instandard as an immaterial impactadjustment to beginningthe opening balance of retained earnings as presentedon January 1, 2019. In addition, we elected the available practical expedients and implemented internal controls and information systems functionality to enable the preparation of financial information on adoption.
As indicated in the accompanying consolidated statements of stockholders’ equity.
Restricted Cash. In November 2016,equity, the FASB issued ASU 2016-18, Restricted Cash, which requires uscumulative effect adjustment was an increase of $85 million to includeretained earnings ($110 million, net of $25 million deferred income tax expense), relating primarily to the transition provisions for sale-leaseback arrangements that did not qualify for sale treatment. Accordingly, such arrangements were de-recognized and recorded as finance lease ROU assets and lease liabilities. The difference between the de-recognized assets and lease financing obligations resulted in an increase to retained earnings. The recognition of these arrangements as finance lease ROU assets and lease liabilities will not materially impact our consolidated statements of cash flows the changes in the balances of cash, cash equivalents, restricted cash and restricted cash equivalents. We adopted ASU 2016-18 on January 1, 2018. We have applied the guidance retrospectively to all periods presented. Such retrospective adoption resulted in a $104 million and $93 million reclassification of restricted cash and cash equivalents from “Investing activities,” to the beginning and ending balances of cash and cash equivalents in our consolidated statements of cash flows for the years ended December 31, 2017 and 2016, respectively. There was no impact to our consolidated statementsresults of operations balance sheets, or stockholders’ equity. The reconciliationover the terms of cash and cash equivalents to cash, cash equivalents, and restricted cash and cash equivalents is presented at the beginning of this note.leases.
Recent Accounting Pronouncements Not Yet Adopted
Software Licenses. In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We early adopted ASU 2018-15 is effective beginning January 1, 2020 and can be applied either retrospectively2019, using the prospective method, with no material impact to our financial condition, results of operations or prospectively to all implementation costs incurred after the date of adoption; early adoption is permitted. We are evaluating the effectcash flows. Adoption of this guidance.guidance may be significant to us in the future depending on the extent to which we use cloud computing arrangements that qualify as service contracts.
Recent Accounting Pronouncements Not Yet Adopted
Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Rather than generally recognizing, which was subsequently modified by several ASUs issued in 2018 and 2019. This standard introduces a new current expected credit loss (“CECL”) model for measuring expected credit losses when it is probable thatfor certain types of financial instruments measured at amortized cost and replaces the incurred loss has been incurred, the revised guidancemodel. The CECL model requires companiesan entity to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the companyentity expects to collect over the instrument’s contractual life. ASU 2016-13 is effective beginning January 1, 2020life after consideration of historical experience, current conditions, and must be adopted as a cumulative effect adjustmentreasonable and supportable forecasts. This standard also introduces targeted changes to retained earnings; early adoption is permitted. We are in the early stagesAFS debt securities impairment model. It eliminates the concept of evaluating the effect of this guidance.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as modified by:
ASU 2017-03, Transitionother-than-temporary impairment and Open Effective Date Information;
ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842;
ASU 2018-10, Codification Improvements to Topic 842, Leases; and
ASU 2018-11, Leases (Topic 842): Targeted Improvements.
Under Topic 842,requires an entity will be required to recognize assets and liabilities fordetermine whether any impairment is the rights and obligations created by leases on the entity’s balance sheet for both financing and operating leases. Topic 842 also requires new disclosures that depict the amount, timing, and uncertaintyresult of cash flows pertaining to an entity’s leases.a credit loss or other factors. We will adopt Topic 842326 effective January 1, 2019,2020, using the modified retrospective method.approach. Under this method we will recognize the cumulative effect of initially applyingadopting the standard as an adjustment to the opening balance of retained earnings on January 1, 2019. In addition, we have elected the transition option provided under ASU 2018-11, which allows entities to continue to apply the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption.2020.
Under Topic 842,326, we will record right-of-usean allowance for credit losses for financial assets subject to the CECL model. The most significant type of financial instrument reported in our consolidated balance sheets, subject to the CECL model, is “Receivables.” As of December 31, 2019, approximately 75%, or $1,056 million of the receivables balance constitutes receivables from state and liabilities relating primarilyfederal government agencies. Based on our analysis, we believe that the credit risk associated with such receivables is nominal due to leasesa very low risk of office space for administrativedefault.
The AFS debt securities impairment model will apply to “Investments” reported in our consolidated balance sheets. We believe that the credit risk associated with our non-government issued Investments is nominal due to the high quality of such investments.
The adoption of Topic 326 will be immaterial to our consolidated results of operations and health plan operations. Specifically,financial condition.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not have, nor does management expect such pronouncements to have, a significant impact on January 1,our present or future consolidated financial statements.
Molina Healthcare, Inc. 2019 we expect to record operating lease right-of-use assets of approximately $80 million to $90 million, and operating lease liabilities of approximately $90 million to $100 million. In addition, in connection with the transition provisions relating to failed sale-leaseback transactions, we expect to record finance lease right-of-use assets of approximately $230 million to $240 million; record finance lease liabilities of approximately $230 million to $240 million; reduce property, equipment, and capitalized software net, by approximately $75 million to $95 million; reduce lease financing obligations by approximately $195 million to $205 million; and record an increase of approximately $80 million to $100 million to opening retained earnings.Form 10-K | 62
3. Net Income (Loss) Per Share
The following table sets forth the calculation of basic and diluted net income (loss) per share:
| | | Year Ended December 31, | Year Ended December 31, |
| 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| (In millions, except net income (loss) per share) | (In millions, except net income (loss) per share) |
Numerator: | | | | | | | | | | |
Net income (loss) | $ | 707 |
| | $ | (512 | ) | | $ | 52 |
| $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
Denominator: | | | | | | | | | | |
Shares outstanding at the beginning of the period | 59.3 |
| | 55.8 |
| | 55.1 |
| 62.1 |
| | 59.3 |
| | 55.8 |
|
Weighted-average number of shares issued: | | | | | | | | | | |
Exchange of 1.625% Convertible Notes (1) | 1.4 |
| | 0.1 |
| | — |
| |
Conversion of 1.625% Convertible Notes (1) | 0.2 |
| | — |
| | — |
| |
Exchange of convertible senior notes (1) | | — |
| | 1.4 |
| | 0.1 |
|
Conversion of convertible senior notes (1) | | — |
| | 0.2 |
| | — |
|
Stock-based compensation | 0.2 |
| | 0.5 |
| | 0.3 |
| 0.1 |
| | 0.2 |
| | 0.5 |
|
Denominator for basic net income (loss) per share | 61.1 |
| | 56.4 |
| | 55.4 |
| 62.2 |
| | 61.1 |
| | 56.4 |
|
Effect of dilutive securities: | | | | | | | | | | |
1.125% Warrants (1) | 4.8 |
| | — |
| | 0.5 |
| |
1.625% Convertible Notes (1) | 0.4 |
| | — |
| | — |
| |
Warrants (2) | | 1.4 |
| | 4.8 |
| | — |
|
Convertible senior notes (1) | | — |
| | 0.4 |
| | — |
|
Stock-based compensation | 0.3 |
| | — |
| | 0.3 |
| 0.6 |
| | 0.3 |
| | — |
|
Denominator for diluted net income (loss) per share | 66.6 |
| | 56.4 |
| | 56.2 |
| 64.2 |
| | 66.6 |
| | 56.4 |
|
| | | | | | | | | | |
Net income (loss) per share: (2)(3) | | | | | | | | | | |
Basic | $ | 11.57 |
| | $ | (9.07 | ) | | $ | 0.93 |
| $ | 11.85 |
| | $ | 11.57 |
| | $ | (9.07 | ) |
Diluted | $ | 10.61 |
| | $ | (9.07 | ) | | $ | 0.92 |
| $ | 11.47 |
| | $ | 10.61 |
| | $ | (9.07 | ) |
| | | | | | | | | | |
Potentially dilutive common shares excluded from calculations: (1)(2) | | | | | | | | | | |
1.125% Warrants (1) | — |
| | 1.9 |
| | — |
| |
1.625% Convertible Notes (1) | — |
| | 0.4 |
| | — |
| |
Warrants | | — |
| | — |
| | 1.9 |
|
Convertible senior notes (1) | | — |
| | — |
| | 0.4 |
|
Stock-based compensation | — |
| | 0.3 |
| | — |
| — |
| | — |
| | 0.3 |
|
_______________________________
| |
(1) | “Convertible senior notes” in this table refer to the 1.625% convertible senior notes due 2044 that were settled in 2018. |
| |
(2) | For more information regarding the 1.625% Convertible Notes, refer to Note 11, “Debt.” For more information and definitions regarding the 1.125% Warrants,warrants, including partial termination transactions, refer to Note 14, “Stockholders' Equity.” The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method. Certain potentially dilutive common shares issuable are not included in the computation of diluted net income (loss) per share because to do so would have been anti-dilutive. |
| |
(2)(3) | Source data for calculations in thousands. |
4. Fair Value Measurements
We consider the carrying amounts of current assets and current liabilities (not including derivatives and the current portion of long-term debt) to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:
Level 1 — Observable Inputs.Level 1 financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices for identical securities in active markets.
Level 2 — Directly or Indirectly Observable Inputs. Fair value for these investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
Level 3 — Unobservable Inputs. Level 3 financial instruments are valued using unobservable inputs that represent management’s best estimate of what market participants would use in pricing the financial instrument at the measurement date. Our Level 3 financial instruments consist primarily of derivative financial instruments.
The derivatives include the 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability.liability (for detailed descriptions of these instruments, see Note 12. “Derivatives”). These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of December 31, 2018,2019, included the price of our common stock, the time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note 12, “Derivatives,” theThe 1.125% Call Option asset and the 1.125% Conversion Option liability were designed such that changes in their fair values offset, with minimal impact to the consolidated statements of operations. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.
The net changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the years ended December 31, 2018,2019, and 2017.2018.
Our financial instruments measured at fair value on a recurring basis at December 31, 2019, were as follows:
|
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In millions) |
Corporate debt securities | $ | 1,178 |
| | $ | — |
| | $ | 1,178 |
| | $ | — |
|
Mortgage-backed securities | 420 |
| | — |
| | 420 |
| | — |
|
Asset-backed securities | 127 |
| | — |
| | 127 |
| | — |
|
U.S. Treasury notes | 86 |
| | — |
| | 86 |
| | — |
|
Municipal securities | 78 |
| | — |
| | 78 |
| | — |
|
Government-sponsored enterprise securities (“GSEs”) | 49 |
| | — |
| | 49 |
| | — |
|
Foreign securities | 7 |
| | — |
| | 7 |
| | — |
|
Certificates of deposit | 1 |
| | — |
| | 1 |
| | — |
|
Subtotal | 1,946 |
| | — |
| | 1,946 |
| | — |
|
1.125% Call Option derivative asset | 29 |
| | — |
| | — |
| | 29 |
|
Total assets | $ | 1,975 |
| | $ | — |
| | $ | 1,946 |
| | $ | 29 |
|
| | | | | | | |
1.125% Conversion Option derivative liability | $ | 29 |
| | $ | — |
| | $ | — |
| | $ | 29 |
|
Total liabilities | $ | 29 |
| | $ | — |
| | $ | — |
| | $ | 29 |
|
Our financial instruments measured at fair value on a recurring basis at December 31, 2018, were as follows:
|
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In millions) |
Corporate debt securities | $ | 1,123 |
| | $ | — |
| | $ | 1,123 |
| | $ | — |
|
Asset-backed securities | 82 |
| | — |
| | 82 |
| | — |
|
U.S. Treasury notes | 181 |
| | — |
| | 181 |
| | — |
|
Municipal securities | 114 |
| | — |
| | 114 |
| | — |
|
GSEs | 163 |
| | — |
| | 163 |
| | — |
|
Foreign securities | 4 |
| | — |
| | 4 |
| | — |
|
Certificates of deposit | 14 |
| | — |
| | 14 |
| | — |
|
Subtotal | 1,681 |
| | — |
| | 1,681 |
| | — |
|
1.125% Call Option derivative asset | 476 |
| | — |
| | — |
| | 476 |
|
Total assets | $ | 2,157 |
| | $ | — |
| | $ | 1,681 |
| | $ | 476 |
|
| | | | | | | |
1.125% Conversion Option derivative liability | $ | 476 |
| | $ | — |
| | $ | — |
| | $ | 476 |
|
Total liabilities | $ | 476 |
| | $ | — |
| | $ | — |
| | $ | 476 |
|
|
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In millions) |
Corporate debt securities | $ | 1,123 |
| | $ | — |
| | $ | 1,123 |
| | $ | — |
|
U.S. Treasury notes | 181 |
| | — |
| | 181 |
| | — |
|
Government-sponsored enterprise securities (GSEs) | 163 |
| | — |
| | 163 |
| | — |
|
Municipal securities | 114 |
| | — |
| | 114 |
| | — |
|
Asset-backed securities | 82 |
| | — |
| | 82 |
| | — |
|
Certificates of deposit | 14 |
| | — |
| | 14 |
| | — |
|
Other | 4 |
| | — |
| | 4 |
| | — |
|
Subtotal - current investments | 1,681 |
| | — |
| | 1,681 |
| | — |
|
1.125% Call Option derivative asset | 476 |
| | — |
| | — |
| | 476 |
|
Total assets | $ | 2,157 |
| | $ | — |
| | $ | 1,681 |
| | $ | 476 |
|
| | | | | | | |
1.125% Conversion Option derivative liability | $ | 476 |
| | $ | — |
| | $ | — |
| | $ | 476 |
|
Total liabilities | $ | 476 |
| | $ | — |
| | $ | — |
| | $ | 476 |
|
Our financial instruments measured at fair value on a recurring basis at December 31, 2017, were as follows:
|
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In millions) |
Corporate debt securities | $ | 1,588 |
| | $ | — |
| | $ | 1,588 |
| | $ | — |
|
U.S. Treasury notes | 388 |
| | — |
| | 388 |
| | — |
|
GSEs | 253 |
| | — |
| | 253 |
| | — |
|
Municipal securities | 141 |
| | — |
| | 141 |
| | — |
|
Asset-backed securities | 117 |
| | — |
| | 117 |
| | — |
|
Certificates of deposit | 37 |
| | — |
| | 37 |
| | — |
|
Subtotal - current investments | 2,524 |
| | — |
| | 2,524 |
| | — |
|
Corporate debt securities | 101 |
| | — |
| | 101 |
| | — |
|
U.S. Treasury notes | 68 |
| | — |
| | 68 |
| | — |
|
Subtotal - current restricted investments | 169 |
| | — |
| | 169 |
| | — |
|
1.125% Call Option derivative asset | 522 |
| | — |
| | — |
| | 522 |
|
Total assets | $ | 3,215 |
| | $ | — |
| | $ | 2,693 |
| | $ | 522 |
|
| | | | | | | |
1.125% Conversion Option derivative liability | $ | 522 |
| | $ | — |
| | $ | — |
| | $ | 522 |
|
Total liabilities | $ | 522 |
| | $ | — |
| | $ | — |
| | $ | 522 |
|
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our senior notes payable are classified as Level 2 financial instruments. Fair value for these securities is determined using a market approach based on quoted market prices for similar securities in active markets or quoted prices for identical securities in inactive markets. The carrying amount and estimated fair value of the Term Loan Facility is classified as a Level 3 financial instrument, because certain inputs used to determine its fair value are not observable. As of December 31, 2019, the carrying amount of the Term Loan Facility approximated fair value because its interest rate is a variable rate that approximates rates currently available to us. |
| | | | | | | | | | | | | | | |
| December 31, 2018 | | December 31, 2017 |
| Carrying | | Fair Value | | Carrying | | Fair Value |
| Amount | | | Amount | |
| (In millions) |
5.375% Notes | $ | 694 |
| | $ | 674 |
| | $ | 692 |
| | $ | 730 |
|
4.875% Notes | 326 |
| | 301 |
| | 325 |
| | 329 |
|
1.125% Convertible Notes (1),(2) | 240 |
| | 732 |
| | 496 |
| | 1,052 |
|
Credit Facility (2) | — |
| | — |
| | 300 |
| | 300 |
|
1.625% Convertible Notes (2) | — |
| | — |
| | 157 |
| | 220 |
|
| $ | 1,260 |
| | $ | 1,707 |
| | $ | 1,970 |
| | $ | 2,631 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| Carrying | | Fair Value | | Carrying | | Fair Value |
| Amount | | | Amount | |
| (In millions) |
5.375% Notes | $ | 696 |
| | $ | 745 |
| | $ | 694 |
| | $ | 674 |
|
4.875% Notes | 327 |
| | 340 |
| | 326 |
| | 301 |
|
Term Loan Facility | 220 |
| | 220 |
| | — |
| | — |
|
1.125% Convertible Notes (1) | 12 |
| | 42 |
| | 240 |
| | 732 |
|
Total | $ | 1,255 |
| | $ | 1,347 |
| | $ | 1,260 |
| | $ | 1,707 |
|
_______________________________
| |
(1) | The fair value of the 1.125% Conversion Option derivative liability (the embedded cash conversion option), which is includedreflected in the fair value amounts presented above, amounted to $476$29 million and $522$476 million as of December 31, 2019 and 2018, respectively. For more information, including information on debt repayments in 2019 and 2017, respectively. See further discussion at2020, see Note 11, “Debt,” and Note 12, “Derivatives.” |
| |
(2) | For more information on debt repayments in the year ended December 31, 2018, refer to Note 11, “Debt.” |
5. Investments
Available-for-Sale Investments
We consider all of our investments classified as current assets to be available-for-sale. The following tables summarize our current investments as of the dates indicated:
|
| | | | | | | | | | | | | | | |
| December 31, 2019 |
| Amortized | | Gross Unrealized | | Estimated |
| Cost | | Gains | | Losses | | Fair Value |
| (In millions) |
Corporate debt securities | $ | 1,174 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1,178 |
|
Mortgage-backed securities | 420 |
| | 1 |
| | 1 |
| | 420 |
|
Asset-backed securities | 126 |
| | 1 |
| | — |
| | 127 |
|
U.S. Treasury notes | 86 |
| | — |
| | — |
| | 86 |
|
Municipal securities | 78 |
| | — |
| | — |
| | 78 |
|
GSEs | 49 |
| | — |
| | — |
| | 49 |
|
Foreign securities | 7 |
| | — |
| | — |
| | 7 |
|
Certificates of deposit | 1 |
| | — |
| | — |
| | 1 |
|
Total | $ | 1,941 |
| | $ | 7 |
| | $ | 2 |
| | $ | 1,946 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Amortized | | Gross Unrealized | | Estimated |
| Cost | | Gains | | Losses | | Fair Value |
| (In millions) |
Corporate debt securities | $ | 1,131 |
| | $ | — |
| | $ | 8 |
| | $ | 1,123 |
|
U.S. Treasury notes | 181 |
| | — |
| | — |
| | 181 |
|
GSEs | 164 |
| | — |
| | 1 |
| | 163 |
|
Municipal securities | 115 |
| | — |
| | 1 |
| | 114 |
|
Asset-backed securities | 83 |
| | — |
| | 1 |
| | 82 |
|
Certificates of deposit | 14 |
| | — |
| | — |
| | 14 |
|
Other | 4 |
| | — |
| | — |
| | 4 |
|
Total current investments | $ | 1,692 |
| | $ | — |
| | $ | 11 |
| | $ | 1,681 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Amortized Cost | | Gross Unrealized | | Estimated Fair Value |
| | Gains | | Losses | |
| (In millions) |
Corporate debt securities | $ | 1,131 |
| | $ | — |
| | $ | 8 |
| | $ | 1,123 |
|
Asset-backed securities | 83 |
| | — |
| | 1 |
| | 82 |
|
U.S. Treasury notes | 181 |
| | — |
| | — |
| | 181 |
|
Municipal securities | 115 |
| | — |
| | 1 |
| | 114 |
|
GSEs | 164 |
| | — |
| | 1 |
| | 163 |
|
Foreign securities | 4 |
| | — |
| | — |
| | 4 |
|
Certificates of deposit | 14 |
| | — |
| | — |
| | 14 |
|
Total | $ | 1,692 |
| | $ | — |
| | $ | 11 |
| | $ | 1,681 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| Amortized Cost | | Gross Unrealized | | Estimated Fair Value |
| | Gains | | Losses | |
| (In millions) |
Corporate debt securities | $ | 1,591 |
| | $ | 1 |
| | $ | 4 |
| | $ | 1,588 |
|
U.S. Treasury notes | 389 |
| | — |
| | 1 |
| | 388 |
|
GSEs | 255 |
| | — |
| | 2 |
| | 253 |
|
Municipal securities | 142 |
| | — |
| | 1 |
| | 141 |
|
Asset-backed securities | 117 |
| | — |
| | — |
| | 117 |
|
Certificates of deposit | 37 |
| | — |
| | — |
| | 37 |
|
Subtotal - current investments | 2,531 |
| | 1 |
| | 8 |
| | 2,524 |
|
Corporate debt securities | 101 |
| | — |
| | — |
| | 101 |
|
U.S. Treasury notes | 68 |
| | — |
| | — |
| | 68 |
|
Subtotal - current restricted investments | 169 |
| | — |
| | — |
| | 169 |
|
| $ | 2,700 |
| | $ | 1 |
| | $ | 8 |
| | $ | 2,693 |
|
The contractual maturities of our current investments as of December 31, 20182019 are summarized below:
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (In millions) |
Due in one year or less | $ | 453 |
| | $ | 453 |
|
Due after one year through five years | 957 |
| | 962 |
|
Due after five years through ten years | 171 |
| | 171 |
|
Due after ten years | 360 |
| | 360 |
|
Total | $ | 1,941 |
| | $ | 1,946 |
|
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (In millions) |
Due in one year or less | $ | 1,000 |
| | $ | 997 |
|
Due after one year through five years | 692 |
| | 684 |
|
| $ | 1,692 |
| | $ | 1,681 |
|
As discussed further in Note 11, “Debt,” the 4.875% Notes’ indenture required us to hold a portion of the net proceeds from their issuance in a segregated account to be used to settle the conversion of the 1.625% Convertible Notes. Prior to September 30, 2018, this account was reported as a current asset, entitled “Restricted investments,” in the accompanying consolidated balance sheets. Because this account was used to settle the conversion of the 1.625% Convertible Notes in the third quarter of 2018, current restricted investments, as of December 31, 2018, was reduced to zero.
Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Gross realized investment gains amounted to $13 million in the year ended December 31, 2019. Gross realized investment losses were insignificant in the year ended December 31, 2019. Gross realized investment gains and losses for the years ended December 31, 2018 2017 and 20162017 were insignificant.
We have determined that unrealized losses at December 31, 20182019 and 20172018 are temporary in nature, because the change in market value for these securities resulted from fluctuating interest rates, rather than a deterioration of the creditworthiness of the issuers. So long as we maintain the intent and ability to hold these securities to maturity, we are unlikely to experience losses. In the event that we dispose of these securities before maturity, we expect that realized losses, if any, will be insignificant.
The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a continuous loss position for 12 months or more as of December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | |
| In a Continuous Loss Position for Less than 12 Months | | In a Continuous Loss Position for 12 Months or More |
| Estimated Fair Value | | Unrealized Losses | | Total Number of Positions | | Estimated Fair Value | | Unrealized Losses | | Total Number of Positions |
| (Dollars in millions) |
Corporate debt securities | $ | 222 |
| | $ | 1 |
| | 167 |
| | $ | — |
| | $ | — |
| | — |
|
Mortgage-backed securities | 143 |
| | 1 |
| | 72 |
| | — |
| | — |
| | — |
|
Total | $ | 365 |
| | $ | 2 |
| | 239 |
| | $ | — |
| | $ | — |
| | — |
|
The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a continuous loss position for 12 months or more as of December 31, 2018.2018:
|
| | | | | | | | | | | | | | | | | | | | | |
| In a Continuous Loss Position for Less than 12 Months | | In a Continuous Loss Position for 12 Months or More |
| Estimated Fair Value | | Unrealized Losses | | Total Number of Positions | | Estimated Fair Value | | Unrealized Losses | | Total Number of Positions |
| (Dollars in millions) |
Corporate debt securities | $ | 509 |
| | $ | 3 |
| | 285 |
| | $ | 412 |
| | $ | 5 |
| | 298 |
|
Asset-backed securities | — |
| | — |
| | — |
| | 68 |
| | 1 |
| | 52 |
|
Municipal securities | — |
| | — |
| | — |
| | 87 |
| | 1 |
| | 90 |
|
GSEs | — |
| | — |
| | — |
| | 127 |
| | 1 |
| | 76 |
|
Total | $ | 509 |
| | $ | 3 |
| | 285 |
| | $ | 694 |
| | $ | 8 |
| | 516 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| In a Continuous Loss Position for Less than 12 Months | | In a Continuous Loss Position for 12 Months or More |
| Estimated Fair Value | | Unrealized Losses | | Total Number of Positions | | Estimated Fair Value | | Unrealized Losses | | Total Number of Positions |
| (Dollars in millions) |
Corporate debt securities | $ | 509 |
| | $ | 3 |
| | 285 |
| | $ | 412 |
| | $ | 5 |
| | 298 |
|
GSEs | — |
| | — |
| | — |
| | 127 |
| | 1 |
| | 76 |
|
Municipal securities | — |
| | — |
| | — |
| | 87 |
| | 1 |
| | 90 |
|
Asset backed securities | — |
| | — |
| | — |
| | 68 |
| | 1 |
| | 52 |
|
| $ | 509 |
| | $ | 3 |
| | 285 |
| | $ | 694 |
| | $ | 8 |
| | 516 |
|
Held-to-Maturity InvestmentsPursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities primarily in cash, cash equivalents, and U.S. Treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. The use of these funds is limited as required by regulation in the various states in which we operate, or as needed in the event of insolvency of capitated providers. Therefore, such investments are reported as “Restricted investments” in the accompanying consolidated balance sheets.
We have the ability to hold these restricted investments until maturity, and as a result, we would not expect the value of these investments to decline significantly due to a sudden change in market interest rates. Our held-to-maturity restricted investments are carried at amortized cost, which approximates fair value, and mature in one year or less. The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a continuous loss position for 12 months or more aspresents the balances of December 31, 2017.restricted investments:
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (In millions) |
Florida | $ | 12 |
| | $ | 32 |
|
New Mexico | 21 |
| | 43 |
|
Ohio | 12 |
| | 12 |
|
Puerto Rico | 11 |
| | 10 |
|
Other | 23 |
| | 23 |
|
Total Health Plans segment | $ | 79 |
| | $ | 120 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| In a Continuous Loss Position for Less than 12 Months | | In a Continuous Loss Position for 12 Months or More |
| Estimated Fair Value | | Unrealized Losses | | Total Number of Positions | | Estimated Fair Value | | Unrealized Losses | | Total Number of Positions |
| (Dollars in millions) |
Corporate debt securities | $ | 1,297 |
| | $ | 3 |
| | 561 |
| | $ | 94 |
| | $ | 1 |
| | 69 |
|
U.S. Treasury notes | 470 |
| | 1 |
| | 89 |
| | — |
| | — |
| | — |
|
GSEs | 173 |
| | 1 |
| | 69 |
| | 95 |
| | 1 |
| | 47 |
|
Municipal securities | — |
| | — |
| | — |
| | 38 |
| | 1 |
| | 48 |
|
| $ | 1,940 |
| | $ | 5 |
| | 719 |
| | $ | 227 |
| | $ | 3 |
| | 164 |
|
6. Receivables
Receivables consist primarily of amounts due from government agencies, which may be subject to potential retroactive adjustments. Because substantially all of our receivable amounts are readily determinable and substantially all of our creditors are governmental authorities, our allowance for doubtful accounts is insignificant. Any amounts determined to be uncollectible are charged to expense when such determination is made.
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (In millions) |
Government receivables | $ | 1,056 |
| | $ | 872 |
|
Pharmacy rebate receivables | 150 |
| | 146 |
|
Health insurer fee reimbursement receivables | 5 |
| | 141 |
|
Other | 195 |
| | 171 |
|
Total | $ | 1,406 |
| | $ | 1,330 |
|
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
| (In millions) |
Premiums and other receivables | 855 |
| | 695 |
|
Pharmacy administrative services receivables | 179 |
| | — |
|
Pharmacy rebate receivables | 155 |
| | 154 |
|
Health insurer fee reimbursement receivables | 141 |
| | 22 |
|
| $ | 1,330 |
| | $ | 871 |
|
7. Property, Equipment, and Capitalized Software, Net
Property and equipment are stated at historical cost. Replacements and major improvements are capitalized, and repairs and maintenance are charged to expense as incurred. Furniture and equipment are generally depreciated using the straight-line method over estimated useful lives ranging from three to seven years. Software developed for internal use is capitalized. Software is generally amortized over its estimated useful life of three years.
Leasehold improvements are amortized over the term of the lease, or over their useful lives from five to 10 years, whichever is shorter. Buildings are depreciated over their estimated useful lives of 31.5 to 40 years.
A summary of property, equipment, and capitalized software is as follows:
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (In millions) |
Capitalized software | $ | 421 |
| | $ | 373 |
|
Furniture and equipment | 213 |
| | 231 |
|
Building and improvements | 49 |
| | 154 |
|
Land | 4 |
| | 16 |
|
Total cost | 687 |
| | 774 |
|
Less: accumulated amortization - capitalized software | (351 | ) | | (320 | ) |
Less: accumulated depreciation and amortization - furniture, equipment, building, and improvements | (179 | ) | | (213 | ) |
Total accumulated depreciation and amortization | (530 | ) | | (533 | ) |
ROU assets - finance leases | 228 |
| | — |
|
Property, equipment, and capitalized software, net | $ | 385 |
| | $ | 241 |
|
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
| (In millions) |
Capitalized software | $ | 373 |
| | $ | 417 |
|
Furniture and equipment | 231 |
| | 289 |
|
Building and improvements | 154 |
| | 161 |
|
Land | 16 |
| | 16 |
|
Total cost | 774 |
| | 883 |
|
Less: accumulated amortization - capitalized software | (320 | ) | | (308 | ) |
Less: accumulated depreciation and amortization - building and improvements, furniture and equipment | (213 | ) | | (233 | ) |
Total accumulated depreciation and amortization | (533 | ) | | (541 | ) |
Property, equipment, and capitalized software, net | $ | 241 |
| | $ | 342 |
|
The following table presents all depreciation and amortization recognized in our consolidated statements of operations, whether the item appears as depreciation and amortization, or as cost of service revenue.operations: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Recorded in depreciation and amortization: | | | | | |
Amortization of capitalized software | $ | 33 |
| | $ | 42 |
| | $ | 64 |
|
Depreciation and amortization of furniture, equipment, building, and improvements | 21 |
| | 36 |
| | 42 |
|
Amortization of intangible assets | 18 |
| | 21 |
| | 31 |
|
Amortization of finance leases | 17 |
| | — |
| | — |
|
Subtotal | 89 |
| | 99 |
| | 137 |
|
Recorded in cost of service revenue: | | | | | |
Amortization of capitalized software and deferred contract costs | — |
| | 28 |
| | 41 |
|
Total depreciation and amortization recognized | $ | 89 |
| | $ | 127 |
| | $ | 178 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Recorded in depreciation and amortization: | | | | | |
Amortization of capitalized software | $ | 42 |
| | $ | 64 |
| | $ | 62 |
|
Depreciation of property and equipment | 36 |
| | 42 |
| | 45 |
|
Amortization of intangible assets | 21 |
| | 31 |
| | 32 |
|
Subtotal | 99 |
| | 137 |
| | 139 |
|
Recorded in cost of service revenue: | | | | | |
Amortization of capitalized software | 19 |
| | 28 |
| | 22 |
|
Amortization of deferred contract costs | 9 |
| | 13 |
| | 21 |
|
Subtotal | 28 |
| | 41 |
| | 43 |
|
Total depreciation and amortization recognized | $ | 127 |
| | $ | 178 |
| | $ | 182 |
|
8. Leases
As discussed in Note 2, “Significant Accounting Policies,” we elected the Topic 842 transition provision that allows entities to continue to apply the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption. Accordingly, the Topic 842 disclosures below are presented as of and for the year ended December 31, 2019, only.
We are a party to operating and finance leases primarily for our corporate and health plan offices. Our operating leases have remaining lease terms up to 9 years, some of which include options to extend the leases for up to 10 years. As of December 31, 2019, the weighted average remaining operating lease term is 4 years.
Our finance leases have remaining lease terms of 2 years to 19 years, some of which include options to extend the leases for up to 25 years. As of December 31, 2019, the weighted average remaining finance lease term is 16 years.
As of December 31, 2019, the weighted-average discount rate used to compute the present value of lease payments was 5.6% for operating lease liabilities, and 6.5% for finance lease liabilities. The components of lease expense were as follows:
|
| | | |
| Year Ended December 31, 2019 |
| (In millions) |
Operating lease expense | $ | 34 |
|
| |
Finance lease expense: | |
Amortization of ROU assets | $ | 17 |
|
Interest on lease liabilities | 15 |
|
Total finance lease expense | $ | 32 |
|
Rental expense related to operating leases amounted to $62 million and $75 million for the years ended December 31, 2018 and 2017, respectively.
Supplemental consolidated cash flow information related to leases follows:
|
| | | |
| Year Ended December 31, 2019 |
| (In millions) |
Cash used in operating activities: | |
Operating leases | $ | 36 |
|
Finance leases | 15 |
|
Cash used in financing activities: | |
Finance leases | 6 |
|
ROU assets recognized in exchange for lease obligations: | |
Operating leases | 99 |
|
Finance leases | 245 |
|
Supplemental information related to leases, including location of amounts reported in the accompanying consolidated balance sheets, follows: |
| | | |
| December 31, 2019 |
| (In millions) |
Operating leases: | |
ROU assets | |
Other assets | $ | 65 |
|
Lease liabilities | |
Accounts payable and accrued liabilities (current) | $ | 25 |
|
Other long-term liabilities (non-current) | 48 |
|
Total operating lease liabilities | $ | 73 |
|
Finance leases: | |
ROU assets | |
Property, equipment, and capitalized software, net | $ | 228 |
|
Lease liabilities | |
Accounts payable and accrued liabilities (current) | $ | 8 |
|
Finance lease liabilities (non-current) | 231 |
|
Total finance lease liabilities | $ | 239 |
|
Maturities of lease liabilities as of December 31, 2019, were as follows: |
| | | | | | | |
| Operating Leases | | Finance Leases |
| (In millions) |
2020 | $ | 28 |
| | $ | 23 |
|
2021 | 20 |
| | 24 |
|
2022 | 14 |
| | 21 |
|
2023 | 10 |
| | 21 |
|
2024 | 5 |
| | 22 |
|
Thereafter | 3 |
| | 289 |
|
Subtotal - undiscounted lease payments | 80 |
| | 400 |
|
Less imputed interest | (7 | ) | | (161 | ) |
Total | $ | 73 |
| | $ | 239 |
|
9. Goodwill and Intangible Assets, Net
Goodwill
The following table presents the changes in the carrying amounts of goodwill by segment, for the year endedperiods presented. |
| | | | | | | | | | | |
| Health Plans | | Other | | Total |
| (In millions) |
Balance, December 31, 2017 | $ | 143 |
| | $ | 43 |
| | $ | 186 |
|
Acquisitions | — |
| | — |
| | — |
|
Dispositions | — |
| | (43 | ) | | (43 | ) |
Impairment and other | — |
| | — |
| | — |
|
Balance, December 31, 2018 | 143 |
| | — |
| | 143 |
|
Acquisitions | — |
| | — |
| | — |
|
Dispositions | — |
| | — |
| | — |
|
Impairment and other | — |
| | — |
| | — |
|
Balance, December 31, 2019 | $ | 143 |
| | $ | — |
| | $ | 143 |
|
For the Health Plans segment, gross goodwill amounted to $445 million, and accumulated impairment losses amounted to $302 million, at each of December 31, 2019, and 2018. The
2017 Impairment Losses. As a result of reporting unit quantitative goodwill assessments using discounted cash flows and/or asset liquidation analyses, we recorded goodwill impairment losses were reported as “Impairment losses” inof $244 million and $190 million for the accompanying consolidated statements of operations. See Note 18, “Segments,” for a discussion of the change in our reportable segments in 2018.
|
| | | | | | | | | | | |
| Health Plans | | Other | | Total |
| (In millions) |
Historical goodwill, gross | $ | 445 |
| | $ | 233 |
| | $ | 678 |
|
Accumulated impairment losses at December 31, 2017 | (302 | ) | | (190 | ) | | (492 | ) |
Balance, December 31, 2017 | 143 |
| | 43 |
| | 186 |
|
Sale of subsidiary | — |
| | (43 | ) | | (43 | ) |
Balance, December 31, 2018 | $ | 143 |
| | $ | — |
| | $ | 143 |
|
| | | | | |
Accumulated impairment losses at December 31, 2018 | $ | 302 |
| | $ | 190 |
| | $ | 492 |
|
Impairment Analysis Results
2018. We performed a qualitative goodwill assessment of our reporting units, which resulted in no goodwill impairment lossesHealth Plans segment and Other segment, respectively, in the year ended December 31, 2018.
2017 – Health Plans Segment. We performed quantitative goodwill assessments using the discounted cash flows and asset liquidation methods, which resulted in2017. The Health Plans segment goodwill impairment losses of $244 million in the year ended December 31, 2017,were due primarily to certain health plans’ Medicaid contract terminations, and insufficient estimated future cash flows. The Other segment impairment losses were due to the following:
Medicaid contract terminations announced in early 2018 at our Florida and New Mexico health plans; and
Future cash flow projections insufficient to produce an estimated fair value in excessexpectation of the Illinois health plan’s carrying amount.
2017 – Other Segment. Our recently divested Molina Medicaid Solutions and Pathways businesses are reported in the Other segment. The quantitative goodwill assessments of these reporting units, using the discounted cash flows method, resulted in goodwill impairment losses of $190 million in the year ended December 31, 2017, primarily due to the following:
Management’s conclusion that Molina Medicaid Solutions would provide fewer future benefits, for its support of the Health Plans segment; and
Management’s conclusion that Pathways would not provide future benefits relating to the integration of its operations with the Health Plans segment to the extent previously expected.
2016. We performed a quantitative goodwill assessment of our reporting units using the discounted related lower cash flows, method, which resultedto be derived from certain subsidiaries. Such subsidiaries were disposed in no impairment losses in the year ended December 31, 2016.2018.
Intangible Assets, Net
The following table provides the details of identified intangible assets, by major class, for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| Cost | | Accumulated Amortization | | Carrying Amount | | Cost | | Accumulated Amortization | | Carrying Amount |
| (In millions) |
Contract rights and licenses | $ | 179 |
| | $ | 156 |
| | $ | 23 |
| | $ | 201 |
| | $ | 162 |
| | $ | 39 |
|
Provider networks | 20 |
| | 14 |
| | 6 |
| | 20 |
| | 12 |
| | 8 |
|
Total | $ | 199 |
| | $ | 170 |
| | $ | 29 |
| | $ | 221 |
| | $ | 174 |
| | $ | 47 |
|
|
| | | | | | | | | | | |
| Cost | | Accumulated Amortization | | Carrying Amount |
| (In millions) |
Intangible assets: | | | | | |
Contract rights and licenses | $ | 201 |
| | $ | 162 |
| | $ | 39 |
|
Provider networks | 20 |
| | 12 |
| | 8 |
|
Balance at December 31, 2018 | $ | 221 |
| | $ | 174 |
| | $ | 47 |
|
Intangible assets: | | | | | |
Contract rights and licenses | $ | 201 |
| | $ | 141 |
| | $ | 60 |
|
Provider networks | 20 |
| | 11 |
| | 9 |
|
Balance at December 31, 2017 | $ | 221 |
| | $ | 152 |
| | $ | 69 |
|
Based on the balances of our identifiable intangible assets asAs of December 31, 2018,2019, we estimate that our intangible asset amortization will be approximately $18 million in 2019, $14 million in 2020, $5 million in 2021, and $3 million in 2022, 2023 and 2023.2024. For a presentation of our intangible assets by reportable segment, refer to Note 18, “Segments.“Segments.”
2017 Impairment Analysis Results
2018Losses. No impairment charges relating to intangible assets were recorded inFor the year ended December 31, 2018. See Note 15, “Restructuring and Separation Costs,” for a description of certain long-lived assets written off in 2018, in connection with our 2017 Restructuring Plan.
2017 – Health Plans Segment. As a result of the impairment indicatorsreasons described above, for the Florida and New Mexico reporting units of the Health Plans segment in 2017, we performedunit undiscounted cash flowsflow analyses of the reporting units, which resulted in Health Plans segmentproduced intangible asset impairment losses of $25 million and $11 million for the Health Plans segment and Other segment, respectively, in the year ended December 31, 2017.
2017 – Other Segment. As a result of management’s conclusion that Pathways would not provide future benefits relating to the integration of its operations with the Health Plans segment to the extent previously expected, we computed an undiscounted cash flows analysis of reporting units, which resulted in Other segment intangible asset impairment losses of $11 million.
2016. No significant impairment charges relating to long-lived assets, including intangible assets, were recorded in the year ended December 31, 2016.
Molina Healthcare, Inc. 2019 Form 10-K | 71
9. Restricted Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities primarily in certificates of deposit and U.S. Treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. The use of these funds is limited as required by regulation in the various states in which we operate, or as needed in the event of insolvency of capitated providers. Therefore, such investments are reported as “Restricted investments” in the accompanying consolidated balance sheets. We have the ability to hold these restricted investments until maturity, and as a result, we would not expect the value of these investments to decline significantly due to a sudden change in market interest rates. The following table presents the balances of restricted investments:
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
| (In millions) |
Florida | $ | 32 |
| | $ | 31 |
|
New Mexico | 43 |
| | 43 |
|
Ohio | 12 |
| | 12 |
|
Puerto Rico | 10 |
| | 10 |
|
Other | 23 |
| | 23 |
|
Total Health Plans segment | $ | 120 |
| | $ | 119 |
|
The contractual maturities of our held-to-maturity restricted investments, which are carried at amortized cost, which approximates fair value, as of December 31, 2018 are summarized below.
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (In millions) |
Due in one year or less | $ | 105 |
| | $ | 105 |
|
Due after one year through five years | 15 |
| | 15 |
|
| $ | 120 |
| | $ | 120 |
|
10. Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable as of the dates indicated.
|
| | | | | | | | | | | |
| December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Fee-for-service claims incurred but not paid (“IBNP”) | $ | 1,406 |
| | $ | 1,562 |
| | $ | 1,717 |
|
Pharmacy payable | 126 |
| | 115 |
| | 112 |
|
Capitation payable | 55 |
| | 52 |
| | 67 |
|
Other | 267 |
| | 232 |
| | 296 |
|
Total | $ | 1,854 |
| | $ | 1,961 |
| | $ | 2,192 |
|
|
| | | | | | | | | | | |
| December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Fee-for-service claims incurred but not paid (“IBNP”) | $ | 1,562 |
| | $ | 1,717 |
| | $ | 1,352 |
|
Pharmacy payable | 115 |
| | 112 |
| | 112 |
|
Capitation payable | 52 |
| | 67 |
| | 37 |
|
Other | 232 |
| | 296 |
| | 428 |
|
| $ | 1,961 |
| | $ | 2,192 |
| | $ | 1,929 |
|
“Other” medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various government agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of operations. Non-risk provider payables amounted to $132 million, $107 million $122 million and $225$122 million, as of December 31, 2019, 2018, 2017, and 2016,2017, respectively.
The following table presents the components of the change in our medical claims and benefits payable for the periods indicated. The amounts presented for “Components of medical care costs related to: Prior periods” represent the amount by which our original estimate of medical claims and benefits payable at the beginning of the period were (more) less than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Medical claims and benefits payable, beginning balance | $ | 1,961 |
| | $ | 2,192 |
| | $ | 1,929 |
|
Components of medical care costs related to: | | | | | |
Current period | 14,176 |
| | 15,478 |
| | 17,037 |
|
Prior periods (1) | (271 | ) | | (341 | ) | | 36 |
|
Total medical care costs | 13,905 |
| | 15,137 |
| | 17,073 |
|
| | | | | |
Change in non-risk and other provider payables | 24 |
| | 13 |
| | (106 | ) |
| | | | | |
Payments for medical care costs related to: | | | | | |
Current period | 12,554 |
| | 13,671 |
| | 15,130 |
|
Prior periods | 1,482 |
| | 1,710 |
| | 1,574 |
|
Total paid | 14,036 |
| | 15,381 |
| | 16,704 |
|
Medical claims and benefits payable, ending balance | $ | 1,854 |
| | $ | 1,961 |
| | $ | 2,192 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Medical claims and benefits payable, beginning balance | $ | 2,192 |
| | $ | 1,929 |
| | $ | 1,685 |
|
Components of medical care costs related to: | | | | | |
Current period | 15,478 |
| | 17,037 |
| | 14,966 |
|
Prior periods (1) | (341 | ) | | 36 |
| | (192 | ) |
Total medical care costs | 15,137 |
| | 17,073 |
| | 14,774 |
|
| | | | | |
Change in non-risk provider payables | 13 |
| | (106 | ) | | 58 |
|
| | | | | |
Payments for medical care costs related to: | | | | | |
Current period | 13,671 |
| | 15,130 |
| | 13,304 |
|
Prior periods | 1,710 |
| | 1,574 |
| | 1,284 |
|
Total paid | 15,381 |
| | 16,704 |
| | 14,588 |
|
Medical claims and benefits payable, ending balance | $ | 1,961 |
| | $ | 2,192 |
| | $ | 1,929 |
|
________________
| |
(1) | IncludesDecember 31, 2018, includes the 2018 benefit of the 2017 Marketplace CSR reimbursement of $81 million. |
The following tables provide information about incurred and paid claims development as of December 31, 2018,2019, as well as cumulative claims frequency and the total of incurred but not paid claims liabilities. The cumulative claim frequency is measured by claim event, and includes claims covered under capitated arrangements. | | Incurred Claims and Allocated Claims Adjustment Expenses | Incurred Claims and Allocated Claims Adjustment Expenses | | Total IBNP | | Cumulative number of reported claims | Incurred Claims and Allocated Claims Adjustment Expenses | | Total IBNP | | Cumulative number of reported claims |
Benefit Year | | 2016 | | 2017 | | 2018 | | | 2017 | | 2018 | | 2019 | |
| | | | | | | | | | | | | | | | | | | | |
| | (Unaudited) | | (Unaudited) | | | | | | | | (Unaudited) | | (Unaudited) | | | | | | |
| | (In millions) | | (In millions) |
2016 | | $ | 15,064 |
| | $ | 15,093 |
| | $ | 15,057 |
| | $ | 18 |
| | 105 |
| |
2017 | | | | 17,037 |
| | 16,728 |
| | 57 |
| | 119 |
| | $ | 17,037 |
| | $ | 16,728 |
| | $ | 16,704 |
| | $ | 18 |
| | 119 |
|
2018 | | | | | | 15,478 |
| | 1,477 |
| | 105 |
| | | | 15,478 |
| | 15,245 |
| | 25 |
| | 110 |
|
2019 | | | | | | | 14,176 |
| | 1,348 |
| | 93 |
|
| | | | | | $ | 47,263 |
| | $ | 1,552 |
| | | | | | | | $ | 46,125 |
| | $ | 1,391 |
| | |
|
| | | | | | | | | | | | | |
Cumulative Paid Claims and Allocated Claims Adjustment Expenses | |
Benefit Year | | 2017 | | 2018 | | 2019 | |
| | | | | | | |
| | (Unaudited) | | (Unaudited) | | | |
| | (In millions) | |
2017 | | $ | 15,130 |
| | $ | 16,671 |
| | $ | 16,686 |
| |
2018 | | | | 13,752 |
| | 15,220 |
| |
2019 | | | | | | 12,554 |
| |
| | | | | | $ | 44,460 |
| |
|
| | | | | | | | | | | | | |
Cumulative Paid Claims and Allocated Claims Adjustment Expenses | |
Benefit Year | | 2016 | | 2017 | | 2018 | |
| | | | | | | |
| | (Unaudited) | | (Unaudited) | | | |
| | (In millions) | |
2016 | | $ | 13,403 |
| | $ | 14,952 |
| | $ | 15,039 |
| |
2017 | | | | 15,130 |
| | 16,752 |
| |
2018 | | | | | | 13,671 |
| |
| | | | | | $ | 45,462 |
| |
The following table represents a reconciliation of claims development to the aggregate carrying amount of the liability for medical claims and benefits payable.
|
| | | | | | | | | |
| | | | | | 2019 | |
| | | | | | (In millions) | |
Incurred claims and allocated claims adjustment expenses | | $ | 46,125 |
| |
Less: cumulative paid claims and allocated claims adjustment expenses | | (44,460 | ) | |
All outstanding liabilities before 2017 | | 15 |
| |
Non-risk and other provider payables | | 174 |
| |
Medical claims and benefits payable | | $ | 1,854 |
| |
|
| | | | | | | | | |
| | | | | | 2018 | |
| | | | | | (In millions) | |
Incurred claims and allocated claims adjustment expenses | | $ | 47,263 |
| |
Less: cumulative paid clams and allocated claims adjustment expenses | | (45,462 | ) | |
All outstanding liabilities before 2016 | | 10 |
| |
Non-risk provider payables and other | | 150 |
| |
Medical claims and benefits payable | | $ | 1,961 |
| |
Our estimates of medical claims and benefits payable recorded at December 31, 2018, 2017 2016 and 20152016 developed favorably (unfavorably) by approximately $271 million, $341 million and $(36) million in 2019, 2018 and $192 million2017, respectively.
The favorable prior year development recognized in 2019 was primarily due to lower than expected utilization of medical services by our Medicaid members, and improved operating performance. Consequently, the ultimate costs recognized in 2019 were lower than our original estimates in 2018, 2017which was not discernible until additional information was provided, and 2016, respectively.as claims payments were processed.
The favorable prior year development recognized in 2018 includes a benefit of approximately $81 million in reduced medical care costs relating to Marketplace CSR subsidies for 2017 dates of service. The remainder of the favorable prior period development was primarily due to lower than expected utilization of medical services by our Medicaid and Marketplace members and improved operating performance. The differences between our original estimates in 2017 and the ultimate costs in 2018 were not discernable until additional information was provided to us in 2018 and the effect became clearer over time as claim payments were processed.
The unfavorable prior year development in 2017 was primarily due to higher than expected costs for settling certain claims with certain providers in states where we had recently commenced operations, such as in Illinois and Puerto Rico, or had instituted significant changes due to provider contract changes, such as in Florida and New Mexico. The differences between our original estimates in 2016 and the ultimate costs in 2017 were not discernablediscernible until additional information was provided to us in 2017, and the effect became clearer over time as claim payments were processed.
The favorable prior year development we recognized in 2016 was primarily due to reprocessing a significant number
Molina Healthcare, Inc. 2019 Form 10-K | 73
11. Debt
Contractual maturities of claims in 2016 for provider submission of claims that were not compliant with new diagnostic coding requirements instituted in late 2015; several high-dollar claims at our New Mexico health plan that were settled for amounts lower than we initially estimated; recoveries on certain outpatient facility claims at our Washington health plan; and lower than expected claims costs for Medicaid Expansion members that were new to our California health plan in 2015. The differences between our original estimates in 2015 and the ultimate costs in 2016 were not discernable until additional information was provided to us in 2016 and the effect became clearer over timedebt, as claim payments were processed.
11. Debt
As of December 31, 2018, contractual maturities of debt for2019, are illustrated in the years ending December 31 were as follows.following table. All amounts represent the principal amounts of the debt instruments outstanding.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| | | | | | | | | | | | | |
| (In millions) |
5.375% Notes | $ | 700 |
| | $ | — |
| | $ | — |
| | $ | 700 |
| | $ | — |
| | $ | — |
| | $ | — |
|
4.875% Notes | 330 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 330 |
|
Term Loan Facility | 220 |
| | 6 |
| | 16 |
| | 22 |
| | 22 |
| | 154 |
| | — |
|
1.125% Convertible Notes | 12 |
| | 12 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 1,262 |
| | $ | 18 |
| | $ | 16 |
| | $ | 722 |
| | $ | 22 |
| | $ | 154 |
| | $ | 330 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter |
| | | | | | | | | | | | | |
| (In millions) |
5.375% Notes | $ | 700 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 700 |
| | $ | — |
| | $ | — |
|
4.875% Notes | 330 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 330 |
|
1.125% Convertible Notes | 252 |
| | — |
| | 252 |
| | — |
| | — |
| | — |
| | — |
|
| $ | 1,282 |
| | $ | — |
| | $ | 252 |
| | $ | — |
| | $ | 700 |
| | $ | — |
| | $ | 330 |
|
All of our debt is held at the parent which is reported, for segment purposes, in “Other.”the Other segment. The following table summarizes our outstanding debt obligations and their classification in the accompanying consolidated balance sheets:
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (In millions) |
Current portion of long-term debt: | | | |
1.125% Convertible Notes, net of unamortized discount | $ | 12 |
| | $ | 241 |
|
Term Loan Facility | 6 |
| | — |
|
Lease financing obligations | — |
| | 1 |
|
Debt issuance costs | — |
| | (1 | ) |
Total, current portion | $ | 18 |
| | $ | 241 |
|
Non-current portion of long-term debt: | | | |
5.375% Notes | $ | 700 |
| | $ | 700 |
|
4.875% Notes | 330 |
| | 330 |
|
Term Loan Facility | 214 |
| | — |
|
Debt issuance costs | (7 | ) | | (10 | ) |
Total, non-current portion | $ | 1,237 |
| | $ | 1,020 |
|
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
| (In millions) |
Current portion of long-term debt: | | | |
1.125% Convertible Notes, net of unamortized discount | $ | 241 |
| | $ | 499 |
|
1.625% Convertible Notes, net of unamortized discount | — |
| | 157 |
|
Lease financing obligations | 1 |
| | 1 |
|
Debt issuance costs | (1 | ) | | (4 | ) |
| 241 |
| | 653 |
|
Non-current portion of long-term debt: | | | |
5.375% Notes | 700 |
| | 700 |
|
4.875% Notes | 330 |
| | 330 |
|
Credit Facility | — |
| | 300 |
|
Debt issuance costs | (10 | ) | | (12 | ) |
| 1,020 |
| | 1,318 |
|
Lease financing obligations | 197 |
| | 198 |
|
| $ | 1,458 |
| | $ | 2,169 |
|
Interest cost recognized relating to our convertible senior notes, the 1.125% Convertible Notes and the 1.625% Convertible Notes, was as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Contractual interest at coupon rate | $ | 6 |
| | $ | 11 |
| | $ | 11 |
|
Amortization of the discount | 21 |
| | 32 |
| | 30 |
|
| $ | 27 |
| | $ | 43 |
| | $ | 41 |
|
Credit Agreement
In January 2017, weentered into an amendedWe are party to a Credit Agreement, which provides for an unsecured delayed draw term loan facility (the “Term Loan Facility”), and an unsecured $500 million revolving credit facility (the “Credit Facility”). The Credit Facility has a term of five years and all amounts outstanding (other than the Term Loan, as described below) will be due and payable on January 31, 2022. In May 2018, we repaid the $300 million outstanding borrowings under the Credit Facility. As of December 31, 2018, no amounts were outstanding under the Credit Facility, and outstanding letters of credit amounting to $7 million reduced our remaining borrowing capacity under the Credit Facility to $493 million.
Borrowings under our Credit Agreement including both the Credit Facility and the Term Loan, bear interest based, at our election, on a base rate or other defined rate, plus in each case the applicable margin. In addition to interest
payable on the principal amount of indebtedness outstanding from time to time under the Credit Agreement, we are required to pay a quarterly commitment fee.
The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. As of December 31, 2019, we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt. Effective as of the date of the Sixth Amendment to the Credit Agreement described below, there are no guarantors as parties to the Credit Agreement.
Term Loan Facility. In January 2019, we entered into a Sixth Amendment to the Credit Agreement that provided for a delayed draw Term Loan Facility in the aggregate principal amount of $600 million, under which we may request up to ten advances, each in a minimum principal amount of $50 million, until July 31, 2020. The Term Loan Facility will amortize in quarterly installments, commencing on September 30, 2020, equal to the principal amount of the Term Loan Facility outstanding multiplied by rates ranging from 1.25% to 2.50% (depending on the applicable fiscal quarter) for each fiscal quarter. The Term Loan Facility expires on January 31, 2024; any remaining outstanding balance under the Term Loan Facility will be due and payable on that date. As of December 31, 2019, $220 million was outstanding under the Term Loan Facility. Each advance under the Term Loan Facility results in a permanent reduction to its borrowing capacity; therefore, our borrowing capacity under the Term Loan Facility as of December 31, 2019, was $380 million.
Credit Facility. The Credit Facility expires on January 31, 2022; therefore, any amounts outstanding under the Credit Facility will be due and payable on that date. As of December 31, 2019, 0 amounts were outstanding under the Credit Facility, and outstanding letters of credit amounting to $1 million reduced our remaining borrowing capacity under the Credit Facility to $499 million.
5.375% Notes due 2022
We have $700 million aggregate principal amount of senior notes (the “5.375% Notes”) outstanding as of December 31, 2019, which are due November 15, 2022, unless earlier redeemed. Interest at a rate of 5.375% per annum, is payable semiannually in arrears on May 15 and November 15. The 5.375% Notes contain customary non-financial covenants and change of control provisions.
4.875% Notes due 2025
We had $330 million aggregate principal amount of senior notes (the “4.875% Notes”) outstanding as of December 31, 2019, which are due June 15, 2025, unless earlier redeemed. Interest at a rate of 4.875% per annum, is payable semiannually in arrears on June 15 and December 15. The 4.875% Notes contain customary non-financial covenants and change of control provisions.
1.125% Cash Convertible Senior Notes due 2020
In the years ended December 31, 2019 and 2018, we entered into privately negotiated note purchase agreements and, in 2019, received conversion requests, with certain holders of our outstanding 1.125% cash convertible senior notes due January 15, 2020 (the “1.125% Convertible Notes”). For each transaction, the difference between the principal amount extinguished and the total cash paid primarily represented the settlement of the 1.125% Convertible Notes’ embedded cash conversion option feature at fair value (which is a derivative liability we refer to as the “1.125% Conversion Option”).
During 2019, we paid $794 million to settle $240 million aggregate principal amount, or $232 million aggregate carrying amount, of the 1.125% Convertible Notes. During 2018, we paid $911 million to settle $298 million aggregate principal amount, or $278 million aggregate carrying amount of the 1.125% Convertible Notes. In both years, the cash payments included settlement of the related 1.125% Conversion Option, and the mark-to-market valuation adjustments discussed below.
In the years ended December 31, 2019 and 2018, we recorded a (gain) loss on debt extinguishment of approximately $(15) million and $12 million, respectively, for the 1.125% Convertible Notes transactions (net of accelerated original issuance discount amortization), primarily relating to mark-to-market valuations on the partial terminations of the Call Spread Overlay executed in connection with the related debt repayments. These amounts are reported in “Other (income) expenses, net” in the accompanying consolidated statements of operations. No common shares were issued in connection with the transaction.
In connection with the 1.125% Convertible Notes transactions, we also entered into privately negotiated agreements in 2019, to partially terminate the Call Spread Overlay, defined and further discussed in Notes 12, “Derivatives,” and 14, “Stockholders' Equity.” The net cash proceeds from the Call Spread Overlay partial termination transactions partially offset the cash paid to settle the 1.125% Convertible Notes.
As of December 31, 2019, $12 million aggregate principal amount of the 1.125% Convertible Notes were outstanding. Interest at a rate of 1.125% per annum is payable semiannually in arrears on January 15 and July 15. The 1.125% Convertible Notes are convertible only into cash, and not into shares of our common stock or any other securities. The initial conversion rate is 24.5277 shares of our common stock per $1,000 principal amount, or approximately $40.77 per share of our common stock. Holders may convert their 1.125% Convertible Notes under certain circumstances and upon conversion, in lieu of receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount, equal to the settlement amount, determined in the manner set forth in the indenture. We may not redeem the 1.125% Convertible Notes prior to the maturity date. The 1.125% Convertible Notes matured on January 15, 2020; therefore, they were reported in current portion of long-term debt as of December 31, 2019. (See “Subsequent Event,” below.)
Concurrent with the issuance of the 1.125% Convertible Notes, the 1.125% Conversion Option was separated from the 1.125% Convertible Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of operations until the 1.125% Conversion Option settled. This initial liability simultaneously reduced the carrying value of the 1.125% Convertible Notes’ principal amount (effectively an original issuance discount), which was amortized to the principal amount through the recognition of non-cash interest expense over the expected life of the debt. The effective interest rate of 6% approximates the interest rate we would have incurred had we issued nonconvertible debt with otherwise similar terms. As of December 31, 2019, the
1.125% Convertible Notes had a remaining amortization period of less than one month, and their ‘if-converted’ value exceeded their principal amount by approximately $26 million and $581 million as of December 31, 2019, and 2018, respectively.
Interest cost recognized relating to our convertible senior notes for the periods presented was as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Contractual interest at coupon rate | $ | 1 |
| | $ | 6 |
| | $ | 11 |
|
Amortization of the discount | 5 |
| | 21 |
| | 32 |
|
Total | $ | 6 |
| | $ | 27 |
| | $ | 43 |
|
Subsequent Event
OnIn January 31, 2019,2020, we entered into a Sixth Amendmentpaid $39 million to settle the Credit Agreement that provides for the following:
A delayed draw term loan facility in an aggregate principal amount of $600 million (the “Term Loan”), under which we may request up to ten advances, each in a minimum principal amount of $50 million, until 18 months after January 31, 2019 (“Delayed Draw Commitment Period”). The Term Loan will amortize in quarterly installments, commencing on the last day of the first fiscal quarter after the Delayed Draw Commitment Period, equal to the principal amount of the Term Loan outstanding on the last day of the Delayed Draw Commitment Period multiplied by an amortization payment percentage ranging from 1.25% to 2.50% (depending on the applicable fiscal quarter) for each fiscal quarter. We will pay a delayed draw ticking fee in an amount equal to 37.5 basis points (0.375%) per annum of the undrawn amount of the Term Loancommencing on January 31, 2019, and continuing until the last day of the Delayed Draw Commitment Period, payable quarterly. All amounts outstanding under the Term Loan will be due and payable on January 31, 2024;
Addition of definitions for various terms that apply to the Term Loan; and
Various other amendments relating to the administration of the Credit Agreement.
In addition, effective as of January 31, 2019, Molina Pathways, LLC was automatically and unconditionally released as a guarantor under the Credit Agreement. As a result, as of January 31, 2019, no guarantors were parties to the Credit Agreement.
The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. As of December 31, 2018, we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt.
5.375% Notes due 2022
We have $700 million aggregate principal amount of senior notes (the “5.375% Notes”) outstanding as of December 31, 2018, which are due November 15, 2022, unless earlier redeemed. Interest on the 5.375% Notes is payable semiannually in arrears on May 15 and November 15. As noted above, effective January 31, 2019, none of our subsidiaries is a guarantor of the 5.375% Notes.
The 5.375% Notes are senior unsecured obligations of Molina and rank equally in right of payment with all existing and future senior debt, and senior to all existing and future subordinated debt of Molina. The 5.375% Notes contain customary non-financial covenants and change in control provisions.
4.875% Notes due 2025
We have $330 million aggregate principal amount of senior notes (the “4.875% Notes”) outstanding as of December 31, 2018, which are due June 15, 2025, unless earlier redeemed. Interest on the 4.875% Notes is payable semiannually in arrears on June 15 and December 15. As noted above, effective January 31, 2019, none of our subsidiaries is a guarantor of the 4.875% Notes.
The 4.875% Notes are senior unsecured obligations of Molina, respectively, and rank equally in right of payment with all existing and future senior debt, and senior to all existing and future subordinated debt of Molina. The 4.875% Notes contain customary non-financial covenants and change of control provisions.
1.125% Cash Convertible Senior Notes due 2020
In the second, third and fourth quarters of 2018, we entered into privately negotiated note purchase agreements with certain holders of our outstanding 1.125% cash convertible senior notes due January 15, 2020 (the “1.125% Convertible Notes”). In each case, the difference between the principalNotes, which amount extinguished and our cash payments primarily represented theincluded settlement of the 1.125% Convertible Notes’ embedded cash conversion option feature at fair value (which is a derivative liability we refer to as the 1.125% Conversion Option). Activity during the year was as follows:Option.
In the fourth quarter of 2018, we repaid $62 million aggregate principal amount of the 1.125% Convertible Notes, plus accrued interest, for a total cash payment of $202 million.
In the third quarter of 2018, we repaid $140 million aggregate principal amount of the 1.125% Convertible Notes, plus accrued interest, for a total cash payment of $483 million.
In the second quarter of 2018, we repaid $96 million aggregate principal amount of the 1.125% Convertible Notes, plus accrued interest, for a total cash payment of $228 million.
In the year ended December 31, 2018, we have recorded an aggregate net loss on debt extinguishment of $12 million for the 1.125% Convertible Notes purchases, primarily relating to the acceleration of the debt discount. This loss is reported in “Other expenses (income), net” in the accompanying consolidated statements of operations. No common shares were issued in connection with these transactions.
In connection with each of the 1.125% Convertible Notes purchases, we also entered into privately negotiated termination agreements with each of the counterparties in 2018, to partially terminate the Call Spread Overlay, defined and further discussed in Notes 12, “Derivatives,” and 14, “Stockholders' Equity.” The net cash proceeds from the Call Spread Overlay partial termination transactions partially offset the cash paid to settle the 1.125% Convertible Notes.
Following the transactions described above, we have $252 million aggregate principal amount of 1.125% Convertible Notes outstanding at December 31, 2018. Interest is payable semiannually in arrears on January 15 and July 15. The 1.125% Convertible Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 1.125% Convertible Notes; equal in right of payment to any of our unsecured indebtedness that is not subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our subsidiaries.
The 1.125% Convertible Notes are convertible only into cash, and not into shares of our common stock or any other securities. The initial conversion rate for the 1.125% Convertible Notes is 24.5277 shares of our common stock per $1,000 principal amount, or approximately $40.77 per share of our common stock. Upon conversion, in lieu of receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount of 1.125% Convertible Notes, equal to the settlement amount, determined in the manner set forth in the indenture. We may not redeem the 1.125% Convertible Notes prior to the maturity date. Holders may convert their 1.125% Convertible Notes only under the following circumstances:
During any calendar quarter commencing after the calendar quarter ending on June 30, 2013 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
During the five business day period immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of 1.125% Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
Upon the occurrence of specified corporate events; or
At any time on or after July 15, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date.
The 1.125% Convertible Notes are convertible by the holders within one year of December 31, 2018, until they mature; therefore, they are reported in current portion of long-term debt.
Concurrent with the issuance of the 1.125% Convertible Notes, the 1.125% Conversion Option was separated from the 1.125% Convertible Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of operations until the 1.125% Conversion Option settles or expires. This initial liability simultaneously reduced the carrying value of the 1.125% Convertible Notes’ principal amount (effectively an original issuance discount), which is amortized to the principal amount through the recognition of non-cash interest expense over the expected life of the debt. The effective interest rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued is approximately 6%. As of December 31, 2018, the 1.125% Convertible Notes have a remaining amortization period of one year, and their ‘if-converted’ value exceeded their principal amount by approximately $581 million and $406 million as of December 31, 2018 and 2017, respectively.
1.625% Convertible Senior Notes due 2044
Conversion. On July 11, 2018, we announced notice of our election to redeem the remaining $64 million aggregate principal amount of the 1.625% convertible senior notes due 2044 (the “1.625% Convertible Notes”) on August 20, 2018 (the “Redemption Date”), pursuant to the terms of the indenture. Also pursuant to the indenture, the 1.625% Convertible Notes were convertible until August 17, 2018, at a conversion rate of 17.2157 shares of our common stock per $1,000 principal amount equal to the settlement amount (as defined in the related indenture), or approximately $58.09 per share of our common stock. At December 31, 2017, the equity component of the 1.625% Convertible Notes, including the impact of deferred taxes, was $12 million.
Through August 17, 2018, we received conversion notices from substantially all of the remaining holders of the 1.625% Convertible Notes outstanding. Under the conversions, we paid cash for the remaining $64 million aggregate principal amount and delivered 0.6 million shares of our common stock to the converting holders on the settlement dates in September 2018.
Exchange. In March 2018, we entered into separate, privately negotiated, synthetic exchange agreements with certain holders of our outstanding 1.625% Convertible Notes, under which we exchanged $97 million aggregate principal amount and accrued interest for 1.8 million shares of our common stock. We recorded a loss on debt extinguishment, including transaction fees, of $10 million, primarily relating to the inducement premium paid to the bondholders, which is recorded in “Other expenses (income), net” in the accompanying consolidated statements of operations. We did not receive any proceeds from the transaction.
In December 2017, we entered into separate, privately negotiated, synthetic exchange agreements with certain holders of our outstanding 1.625% Convertible Notes, under which we exchanged $141 million aggregate principal amount and accrued interest for 2.6 million shares of our common stock. We recorded a loss on debt extinguishment, including transaction fees, of $14 million, primarily relating to the inducement premium paid to the bondholders, which is recorded in “Other expenses (income), net” in the accompanying consolidated statements of operations. We did not receive any proceeds from the transaction.
Cross-Default Provisions
The indentures governing the 4.875% Notes the 5.375% Notes and the 1.125% Convertible5.375% Notes contain cross-default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture.
Bridge Credit Agreement
In January 2018, we entered into a bridge credit agreement with several banks, which was subsequently terminated in August 2018.Lease Financing Obligations12. Derivatives
Molina Center and Ohio Exchange. In 2013, we entered into a sale-leaseback transaction for the Molina Center and our Ohio health plan office building located in Columbus, Ohio, also known as the Ohio Exchange. Based on certain lease terms, we retained continuing involvement with these leased properties. Rent increases 3% per year through the initial term, which expires in 2038. The lease provides for six five-year renewal options, with renewal rent to be the higher of the 3% annual escalator or the then-fair market value.
6th and Pine. Also in 2013, we entered into a construction and lease transaction for two office buildings in Long Beach, California (“6th and Pine”). Due to our participation in the construction project, we retained continuing involvement in the properties. Rent increases 3.4% per year through the initial term, which expires in 2029. The lease provides for two five-year renewal options, with renewal rent to be determined based on the then-fair market value.
Because of our continuing involvement in the leasing transactions, as noted above, the sale of these properties did not qualify for sales recognition and we remain the owner of the properties under these leases for accounting purposes as of December 31, 2018. The assets are therefore included in our consolidated balance sheets, and are depreciated over their remaining useful lives. The lease financing obligations are amortized over the initial lease terms, such that there will be no gain or loss recorded if the leases are not extended beyond their expiration dates. Payments under the leases adjust the lease financing obligations, and the imputed interest is recorded to interest expense in our consolidated statements of operations. Aggregate interest expense under these leases amounted to $17 million in each of the years ended December 31, 2018, 2017 and 2016. For information regarding the future minimum lease obligations, refer to Note 17, “Commitments and Contingencies” and Note 2, “Significant Accounting Policies,” Recent Accounting Pronouncements Not Yet Adopted, Leases.
12. Derivatives
The following table summarizes the fair values and the presentation of our derivative financial instruments (defined and discussed individually below) in the consolidated balance sheets: |
| | | | | | | | | |
| | | December 31, |
| Balance Sheet Location | | 2019 | | 2018 |
| | | (In millions) |
Derivative asset: | | | | | |
1.125% Call Option | Current assets: Derivative asset | | $ | 29 |
| | $ | 476 |
|
Derivative liability: | | | | | |
1.125% Conversion Option | Current liabilities: Derivative liability | | $ | 29 |
| | $ | 476 |
|
|
| | | | | | | | | |
| | | December 31, |
| Balance Sheet Location | | 2018 | | 2017 |
| | | (In millions) |
Derivative asset: | | | | | |
1.125% Call Option | Current assets: Derivative asset | | $ | 476 |
| | $ | 522 |
|
| | | | | |
Derivative liability: | | | | | |
1.125% Conversion Option | Current liabilities: Derivative liability | | $ | 476 |
| | $ | 522 |
|
Our derivative financial instruments do not qualify for hedge treatment; therefore, the change in fair value of these instruments is recognized immediately in our consolidated statements of operations, and reported in “Other (income) expenses, (income), net.” Gains and losses for our derivative financial instruments are presented individually in the accompanying consolidated statements of cash flows, “Supplemental cash flow information.”
1.125% Convertible Notes Call Spread Overlay.Overlay
Concurrent with the issuance of the 1.125% Convertible Notes in 2013, we entered into privately negotiated hedge transactions (collectively, the “1.125% Call Option”) and warrant transactions (collectively, the “1.125% Warrants”), with certain of the initial purchasers of the 1.125% Convertible Notes (the “Counterparties”). We refer to these transactions collectively as the Call Spread Overlay. Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Convertible Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the 1.125% Convertible Notes), these transactions are intended to offset cash payments in excess of the principal amount of the 1.125% Convertible Notes due upon any conversion of such notes.
In the second, third and fourth quarters of 2018,year ended December 31, 2019, in connection with the 1.125% Convertible Notes purchases (described in Note 11, “Debt”“Debt”), we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes purchased.
In the fourth quarter of 2018, this resulted in our receipt of $146year ended December 31, 2019, we received $578 million for the
settlement of the 1.125% Call Option (which is a derivative asset), and the payment of $130paid $514 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $16$64 million from the Counterparties.
In the third quarter of 2018, this resulted in our receipt of $343 million for the settlement of the 1.125% Call Option and the payment of $306 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $37 million from the Counterparties.
In the second quarter of 2018, this resulted in our receipt of $134 million for the settlement of the 1.125% Call Option, and the payment of $113 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $21 million from the Counterparties.
1.125% Call Option.The 1.125% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note 4, “Fair“Fair Value Measurements.Measurements.”
1.125% Conversion Option. Option
The embedded cash conversion option within the 1.125% Convertible Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of operations until the cash conversion option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Conversion Option, refer to Note 4, “Fair“Fair Value Measurements.Measurements.”
As of December 31, 2018,2019, the 1.125% Call Option and the 1.125% Conversion Option were classified as a current asset and current liability, respectively, because the 1.125% Convertible Notes may be converted within twelve months of December 31, 2018, asmatured on January 15, 2020.
Subsequent Event
As described in Note 11, “Debt.“Debt,” we repaid the aggregate principal amount of the 1.125% Convertible Notes, including settlement of the related 1.125% Conversion Option. In addition, in January 2020 we received $27 million for the settlement of the 1.125% Call Option.
13. Income Taxes
Income tax expense (benefit) is determined using an estimated annual effective tax rate, which generally differs from the U.S. federal statutory rate primarily because of state taxes, nondeductible expenses such as the HIF, goodwill impairment, certain compensation, and other general and administrative expenses. The effective tax rate was not impacted by the HIF in 2017, given the 2017 HIF moratorium. The effective tax rate may be subject to fluctuations during the year, particularly as a resultconsisted of the level of pretax earnings, and also as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers.following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Current: | | | | | |
Federal | $ | 204 |
| | $ | 272 |
| | $ | (9 | ) |
State | 12 |
| | 18 |
| | 3 |
|
Foreign | 9 |
| | 8 |
| | — |
|
Total current | 225 |
| | 298 |
| | (6 | ) |
Deferred: | | | | | |
Federal | 5 |
| | (3 | ) | | (85 | ) |
State | 6 |
| | (3 | ) | | (9 | ) |
Foreign | (1 | ) | | — |
| | — |
|
Total deferred | 10 |
| | (6 | ) | | (94 | ) |
Income tax expense (benefit) | $ | 235 |
| | $ | 292 |
| | $ | (100 | ) |
The TCJA,Tax Cuts and Jobs Act of 2017 (“TCJA”), in part, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. TCJA’s change in the federal rate required that we revalue deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. We applied the guidance in SEC Staff Accounting Bulletin No. 118 when accounting for the enactment-date effects of the TCJA in 2017 and throughout 2018.
As of December 31, 2017, we recorded a provisional amount of $54 million for the revaluation of deferred tax assets and liabilities because we had not yet completed our accounting for all of the enactment-date income tax effects of the TJCA under ASC 740, Income Taxes. Upon further analysis of certain aspects of the TCJA and refinement of our calculations in the year ended December 31, 2018, we reduced this provisional amount by $4 million, which is included as a component of income tax expense in the accompanying consolidated statement of operations. As of December 31, 2018, the accounting for all of the enactment-date income tax effects of the TCJA iswas complete.
Income tax expense (benefit) consisted of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Current: | | | | | |
Federal | $ | 272 |
| | $ | (9 | ) | | $ | 134 |
|
State | 18 |
| | 3 |
| | 3 |
|
Foreign | 8 |
| | — |
| | (6 | ) |
Total current | 298 |
| | (6 | ) | | 131 |
|
Deferred: | | | | | |
Federal | (3 | ) | | (85 | ) | | 19 |
|
State | (3 | ) | | (9 | ) | | 2 |
|
Foreign | — |
| | — |
| | 1 |
|
Total deferred | (6 | ) | | (94 | ) | | 22 |
|
Income tax expense (benefit) | $ | 292 |
| | $ | (100 | ) | | $ | 153 |
|
A reconciliation of the U.S. federal statutory income tax rate to the combined effective income tax rate is as follows: |
| | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Statutory federal tax (benefit) rate | 21.0 | % | | 21.0 | % | | (35.0 | )% |
State income provision (benefit), net of federal | 1.4 |
| | 1.2 |
| | (0.7 | ) |
Nondeductible health insurer fee (“HIF”) | — |
| | 7.3 |
| | — |
|
Nondeductible compensation | 1.2 |
| | 0.7 |
| | 2.8 |
|
Nondeductible goodwill impairment | — |
| | — |
| | 6.6 |
|
Worthless stock deduction | — |
| | (1.0 | ) | | — |
|
Revaluation of net deferred tax assets | — |
| | (0.4 | ) | | 8.8 |
|
Other | 0.6 |
| | 0.4 |
| | 1.1 |
|
Effective tax expense (benefit) rate | 24.2 | % | | 29.2 | % | | (16.4 | )% |
|
| | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
Statutory federal tax (benefit) rate | 21.0 | % | | (35.0 | )% | | 35.0 | % |
State income provision (benefit), net of federal | 1.2 |
| | (0.7 | ) | | 1.6 |
|
Nondeductible health insurer fee (“HIF”) | 7.3 |
| | — |
| | 37.0 |
|
Nondeductible compensation | 0.7 |
| | 2.8 |
| | 3.1 |
|
Nondeductible goodwill impairment | — |
| | 6.6 |
| | — |
|
Worthless stock deduction | (1.0 | ) | | — |
| | — |
|
Revaluation of net deferred tax assets | (0.4 | ) | | 8.8 |
| | — |
|
Change in purchase agreement that increased tax basis in assets | — |
| | — |
| | (2.2 | ) |
Other | 0.4 |
| | 1.1 |
| | 0.3 |
|
Effective tax (benefit) rate | 29.2 | % | | (16.4 | )% | | 74.8 | % |
The effective tax rate was not impacted by the HIF in 2019 and 2017, given the HIF moratorium in each of those years. Our effective tax rate is based on expected income (loss), statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant managementManagement estimates and judgments are required in determining our effective tax rate. We are routinely under audit by federal, state, or local authorities regarding the timing and amount of deductions, nexus of income among various tax jurisdictions, and compliance with federal, state, foreign, and local tax laws.
Deferred tax assets and liabilities are classified as non-current. Significant components of our deferred tax assets and liabilities as of December 31, 20182019 and 20172018 were as follows: |
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (In millions) |
Accrued expenses and reserve liabilities | $ | 35 |
| | $ | 39 |
|
Other accrued medical costs | 11 |
| | 12 |
|
Net operating losses | 13 |
| | 16 |
|
Fixed assets and intangibles | 26 |
| | 30 |
|
Unearned premiums | 11 |
| | 9 |
|
Lease financing obligation | 5 |
| | 30 |
|
Tax credit carryover | 11 |
| | 12 |
|
Other | — |
| | 3 |
|
Valuation allowance | (24 | ) | | (28 | ) |
Total deferred income tax assets, net of valuation allowance | 88 |
| | 123 |
|
Prepaid expenses | (6 | ) | | (6 | ) |
Other | (3 | ) | | — |
|
Total deferred income tax liabilities | (9 | ) | | (6 | ) |
Net deferred income tax asset | $ | 79 |
| | $ | 117 |
|
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
| (In millions) |
Accrued expenses | $ | 32 |
| | $ | 15 |
|
Reserve liabilities | 7 |
| | 11 |
|
Other accrued medical costs | 12 |
| | 16 |
|
Net operating losses | 16 |
| | 27 |
|
Fixed assets and intangibles | 30 |
| | 23 |
|
Unearned premiums | 9 |
| | 19 |
|
Lease financing obligation | 30 |
| | 30 |
|
Tax credit carryover | 12 |
| | 15 |
|
Other | 3 |
| | 3 |
|
Valuation allowance | (28 | ) | | (41 | ) |
Total deferred income tax assets, net of valuation allowance | 123 |
| | 118 |
|
Prepaid expenses | (6 | ) | | (6 | ) |
Basis in debt | — |
| | (9 | ) |
Total deferred income tax liabilities | (6 | ) | | (15 | ) |
Net deferred income tax asset | $ | 117 |
| | $ | 103 |
|
At December 31, 2018,2019, we had state net operating loss carryforwards of $332$310 million, which begin expiring in 2027.2028.
At December 31, 2018,2019, we had California research and development and enterprise zone tax credit carryovers of $14$8 million, which will begin to expire in 2024.2024, and foreign tax credit carryovers of $5 million, which expire in 2030.
We evaluate the need for a valuation allowance taking into consideration the ability to carry back and carry forward tax credits and losses, available tax planning strategies and future income, including reversal of temporary differences. We have determined that as of December 31, 2018, $282019, $24 million of deferred tax assets did not satisfy the recognition criteria. Therefore, we decreased our valuation allowance by $13$4 million, from $41$28 million at December 31, 2017,2018, to $28$24 million as of December 31, 2018.2019.
We recognize tax benefits only if the tax position is more likely than not to be sustained. We are subject to income taxes in the United States, Puerto Rico, and numerous state jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will
be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
The roll forward of our unrecognized tax benefits is as follows: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Gross unrecognized tax benefits at beginning of period | $ | (20 | ) | | $ | (13 | ) | | $ | (11 | ) |
Increases in tax positions for current year |
|
| | (9 | ) | | (1 | ) |
Increases in tax positions for prior years | — |
| | — |
| | (4 | ) |
Decreases in tax positions for prior years | — |
| | — |
| | 3 |
|
Lapse in statute of limitations |
|
| | 2 |
| | — |
|
Gross unrecognized tax benefits at end of period | $ | (20 | ) | | $ | (20 | ) | | $ | (13 | ) |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Gross unrecognized tax benefits at beginning of period | $ | (13 | ) | | $ | (11 | ) | | $ | (9 | ) |
Increases in tax positions for current year | (9 | ) | | (1 | ) | | (1 | ) |
Increases in tax positions for prior years | — |
| | (4 | ) | | (1 | ) |
Decreases in tax positions for prior years | — |
| | 3 |
| | — |
|
Lapse in statute of limitations | 2 |
| | — |
| | — |
|
Gross unrecognized tax benefits at end of period | $ | (20 | ) | | $ | (13 | ) | | $ | (11 | ) |
The total amount of unrecognized tax benefits at December 31, 2019, 2018 2017 and 20162017 that, if recognized, would affect the effective tax rates is $18 million, $12$18 million, and $9$12 million, respectively. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $3$5 million due to the expirationresolution of statutes of limitation.a state refund claim. The state refund claim will not result in a cash payment for income taxes if our claim is denied.
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. Amounts accrued for the payment of interest and penalties as of December 31, 2019, 2018 2017 and 20162017 were insignificant.
We may be subject to federalare under examination by the IRS for calendar years 2015 through 2017.2017 and may be subject to examination for calendar year 2018. With a few exceptions, which are immaterial in the aggregate, we no longer are subject to state, local, and Puerto Rico tax examinations for years before 2014. We are not aware of any material adjustments that may be proposed.2015.
14. Stockholders' Equity
1.625% Convertible NotesStock Purchase Program
Conversion. As describedIn early December 2019, our board of directors authorized the purchase of up to $500 million, in Note 11, “Debt,”the aggregate, of our common stock. This program is funded by existing cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management, based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. Under this program, pursuant to a Rule 10b5-1 trading plan, we issued 0.6 millionpurchased approximately 400,000 shares of our common stock for $54 million in connection with the conversionDecember 2019 (average cost of the 1.625% Convertible Notes$135.30 per share), including approximately 55,000 shares purchased for $7 million in the third quarterlate December 2019, and settled in early January 2020.
Subsequent Event
In January 2020 through February 7, 2020, we purchased 1,533,000 shares for $203 million (average cost of 2018.
Exchange. As described in Note 11, “Debt,” we issued 1.8 million shares and 2.6 million shares of our common stock in connection with the exchange of the 1.625% Convertible Notes in March 2018 and December 2017, respectively.$132.69 per share).
1.125% Warrants
In connection with the Call Spread Overlay transaction described in Note 12, “Derivatives,“Derivatives,” in 2013, we issued 13.5 million warrantsof the 1.125% Warrants with a strike price of $53.8475 per share. Under certain circumstances, beginning in April 2020, if the price of our common stock exceedswere to exceed the strike price of the 1.125% Warrants, we willwould be obligated to issue shares of our common stock subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the applicable strike price of the 1.125% Warrants. Refer to Note 3, “Net“Net Income (Loss) Per Share,” for dilution
information for the periods presented. We will not receive any additional proceeds if the 1.125% Warrants are exercised. Following the transactions described below, 6.2 millionapproximately 310,000 of the 1.125% Warrants remain outstanding.were outstanding at December 31, 2019.
As described in Note 12, “Derivatives,“Derivatives,” in the second, third and fourth quarters of 2018,year ended December 31, 2019, we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the respective portion of the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes repaid. In each case, additional paid-in capital was reduced for the same amount paid to the Counterparties for the termination of the 1.125% Warrants.
purchased. In the fourth quarter of 2018,year ended December 31, 2019, we paid $130$514 million to the Counterparties for the termination of 1.55.9 million of the 1.125% Warrants outstanding.
In the third quarteroutstanding which resulted in a reduction of 2018, we paid $306 million to the Counterpartiesadditional paid-in-capital for the termination of 3.4 million of the 1.125% Warrants outstanding.same amount.
In the second quarter of 2018, we paid $113 million to the Counterparties for the termination of 2.4 million of the 1.125% Warrants outstanding.
Share-Based Compensation
At December 31, 2018, we had employee equity incentives outstanding under our 2011 Equity Incentive Plan (“2011 Plan”). The 2011 Plan provides forTotal share-based compensation expense is presented in the award of restricted stock (“RSAs”), performance stock (“PSAs”), performance stock units (“PSUs”), stock options and stock bonusesfollowing table. Except as described in the note to the company’s officers, employees, directors, consultants, advisers, and other service providers. The 2011 Plan provides for the issuance of up to 4.5 million shares of common stock.
In connection with the 2011 Plan and employee stock purchase plan, approximately 365,000 shares and 857,000 shares of common stock were purchased or vested, net of shares used to settle employees’ income tax obligations, during the years ended December 31, 2018, and 2017, respectively.
Except as noted below,table, we record share-based compensation as “General and administrative expenses” in the accompanying consolidated statements of operations. Total share-based compensation expense
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
| Pretax Charges | | Net-of-Tax Amount | | Pretax Charges | | Net-of-Tax Amount | | Pretax Charges (1) | | Net-of-Tax Amount |
RSAs, PSAs and PSUs (defined below) | $ | 29 |
| | $ | 28 |
| | $ | 17 |
| | $ | 17 |
| | $ | 39 |
| | $ | 35 |
|
Employee stock purchase plan and stock options | 10 |
| | 9 |
| | 10 |
| | 9 |
| | 7 |
| | 5 |
|
Total | $ | 39 |
| | $ | 37 |
| | $ | 27 |
| | $ | 26 |
| | $ | 46 |
| | $ | 40 |
|
_______________________
| |
(1) | Includes $23 million relating to acceleration of share-based compensation for former executives in the year ended December 31, 2017. This amount is reported in “Restructuring costs” in the accompanying consolidated statements of operations. |
Equity Incentive Plans
In the second quarter of 2019, our stockholders approved the Molina Healthcare, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). The 2019 EIP provides for awards, in the form of restricted and performance stock awards (“RSAs” and “PSAs”), performance units (“PSUs”), stock options, and other stock– or cash–based awards, to eligible persons who perform services for us. The 2019 EIP will remain in effect until its termination by the board of directors; provided, however, that all awards will be granted no later than May 8, 2029. Concurrent with the adoption of the 2019 EIP, the Molina Healthcare, Inc. 2011 Equity Incentive Plan was as follows:amended, restated and merged into the 2019 EIP. A maximum of 2.9 million shares of our common stock may be issued under the 2019 EIP.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
| Pretax Charges | | Net-of-Tax Amount | | Pretax Charges | | Net-of-Tax Amount | | Pretax Charges | | Net-of-Tax Amount |
RSAs, PSAs and PSUs | $ | 17 |
| | $ | 17 |
| | $ | 39 |
| | $ | 35 |
| | $ | 20 |
| | $ | 17 |
|
Employee stock purchase plan and stock options | 10 |
| | 9 |
| | 7 |
| | 5 |
| | 6 |
| | 5 |
|
| $ | 27 |
| | $ | 26 |
| | $ | 46 |
| | $ | 40 |
| | $ | 26 |
| | $ | 22 |
|
Stock-based awards. RSAs, PSAs and PSUs are granted with a fair value equal to the market price of our common stock on the date of grant, and generally vest in equal annual installments over periods up to four years from the date of grant. Certain PSUs may vest in their entirety at the end of three-year performance periods, if their performance conditions are met. We generally recognize expense for RSAs, PSAs and PSUs on a straight-line basis.
Activity for suchstock-based awards in the year ended December 31, 20182019 is summarized below:
|
| | | | | | | | | | | | | | | |
| RSAs | | PSAs | | PSUs | | Total Shares | | Weighted Average Grant Date Fair Value |
Unvested balance as of December 31, 2018 | 399,795 |
| | 3,132 |
| | 201,383 |
| | 604,310 |
| | $ | 71.50 |
|
Granted | 243,353 |
| | — |
| | 146,425 |
| | 389,778 |
| | 136.23 |
|
Vested | (139,828 | ) | | (3,132 | ) | | (10,528 | ) | | (153,488 | ) | | 73.98 |
|
Forfeited | (55,640 | ) | | — |
| | (13,202 | ) | | (68,842 | ) | | 90.45 |
|
Unvested balance as of December 31, 2019 | 447,680 |
| | — |
| | 324,078 |
| | 771,758 |
| | $ | 102.01 |
|
|
| | | | | | | | | | | | | | | |
| RSAs | | PSAs | | PSUs | | Total Shares | | Weighted Average Grant Date Fair Value |
Unvested balance as of December 31, 2017 | 401,804 |
| | 84,762 |
| | 91,828 |
| | 578,394 |
| | $ | 58.35 |
|
Granted | 363,740 |
| | — |
| | 214,952 |
| | 578,692 |
| | 75.38 |
|
Vested | (192,609 | ) | | (32,929 | ) | | — |
| | (225,538 | ) | | 59.08 |
|
Forfeited | (173,140 | ) | | (48,701 | ) | | (105,397 | ) | | (327,238 | ) | | 63.69 |
|
Unvested balance as of December 31, 2018 | 399,795 |
| | 3,132 |
| | 201,383 |
| | 604,310 |
| | $ | 71.50 |
|
As of December 31, 2018, there was $35 million of2019, total unrecognized compensation expense related to unvested RSAs PSAs and PSUs was $49 million, which we expect to recognize over a remaining weighted-average period of 2.6 years, 0.22.2 years, and 2.01.6 years, respectively. This unrecognized compensation cost assumedassumes an estimated forfeiture rate of 16.1%15.9% for non-executive employees as of December 31, 2018,2019, based on actual forfeitures over the last 4 years.
The total grant date fair value of awards granted and vested is presented in the following table:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Granted: | | | | | |
RSAs | $ | 33 |
| | $ | 28 |
| | $ | 20 |
|
PSUs | 20 |
| | 16 |
| | 16 |
|
Total granted | $ | 53 |
| | $ | 44 |
| | $ | 36 |
|
Vested: | | | | | |
RSAs | $ | 19 |
| | $ | 15 |
| | $ | 23 |
|
PSAs | — |
| | 3 |
| | 15 |
|
PSUs | 2 |
| | — |
| | 9 |
|
Total vested | $ | 21 |
| | $ | 18 |
| | $ | 47 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Granted: | | | | | |
RSAs | $ | 28 |
| | $ | 20 |
| | $ | 19 |
|
PSAs | — |
| | — |
| | 15 |
|
PSUs | 16 |
| | 16 |
| | — |
|
| $ | 44 |
| | $ | 36 |
| | $ | 34 |
|
Vested: | | | | | |
RSAs | $ | 15 |
| | $ | 23 |
| | $ | 22 |
|
PSAs | 3 |
| | 15 |
| | — |
|
PSUs | — |
| | 9 |
| | — |
|
| $ | 18 |
| | $ | 47 |
| | $ | 22 |
|
During the year ended December 31, 2017, the vesting of 133,957 RSAs, 153,574 PSAs and 139,272 PSUs was accelerated in connection with the termination of our former Chief Executive Officer and former Chief Financial Officer in May 2017. The incremental charge relating to this acceleration, or $23 million, is reported in “Restructuring and separation costs” in the accompanying consolidated statements of operations. This amount is included in the 2017 “Pretax Charges” in the table above.
Stock Options.Stock option awards generally have an exercise price equal to the fair market value of our common stock on the date of grant, vest in equal annual installments over periods up to four years from the date of grant, and have a maximum term of ten years from the date of grant. Stock option activity for the year ended December 31, 20182019 is summarized below: |
| | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual term |
| | | | | (In millions) | | (Years) |
Stock options outstanding as of December 31, 2018 | 405,000 |
| | $ | 64.79 |
| | | | |
Granted | — |
| | — |
| | | | |
Exercised | — |
| | — |
| | | | |
Stock options outstanding as of December 31, 2019 | 405,000 |
| | 64.79 |
| | $ | 29 |
| | 7.4 |
Stock options exercisable and expected to vest as of December 31, 2019 | 405,000 |
| | 64.79 |
| | $ | 29 |
| | 7.4 |
Exercisable as of December 31, 2019 | 280,000 |
| | 63.65 |
| | $ | 20 |
| | 7.3 |
|
| | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual term |
| | | | | (In millions) | | (Years) |
Stock options outstanding as of December 31, 2017 | 405,000 |
| | $ | 64.79 |
| | | | |
Granted | — |
| | — |
| | | | |
Exercised | — |
| | — |
| | | | |
Stock options outstanding as of December 31, 2018 | 405,000 |
| | 64.79 |
| | $ | 21 |
| | 8.5 |
Stock options exercisable and expected to vest as of December 31, 2018 | 405,000 |
| | 64.79 |
| | $ | 21 |
| | 8.5 |
Exercisable as of December 31, 2018 | 155,000 |
| | 60.69 |
| | $ | 9 |
| | 8.0 |
The weighted-average grant date fair value per share of stock options awarded in 2017 was $41.43. We estimate the fair value of each stock option award on the grant date using the Black-Scholes option pricing model. To determine the fair value of the stock options awarded in 2017 we applied a risk-free interest rate of 2.3%, expected volatility of 38.4%, dividend yield of 0% and expected life of 8.4 years. No stock options were granted in 20182019 and 2016.2018.
Also asAs of December 31, 2018, there was $9 million of2019, total unrecognized compensation expense related to unvested stock options was $4 million, which we expect to recognize over a weighted-average period of 1.80.8 years. The total intrinsic value of options exercised during the yearsyear ended December 31, 2017 and 2016 was $2 million, and $1 million, respectively.million. No stock options were exercised in 2019 and 2018. The following is a summary of information about stock options outstanding and exercisable at December 31, 2018:2019: |
| | | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
| Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted-Average Exercise Price | | Number Exercisable | | Weighted-Average Exercise Price |
Range of Exercise Prices | | | | | | | | | |
$33.02 | 30,000 |
| | 3.2 | | $ | 33.02 |
| | 30,000 |
| | $ | 33.02 |
|
$67.33 | 375,000 |
| | 7.8 | | 67.33 |
| | 250,000 |
| | 67.33 |
|
Total | 405,000 |
| | | | | | 280,000 |
| | |
|
| | | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
| Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted-Average Exercise Price | | Number Exercisable | | Weighted-Average Exercise Price |
Range of Exercise Prices | | | | | | | | | |
$33.02 | 30,000 |
| | 4.2 | | $ | 33.02 |
| | 30,000 |
| | $ | 33.02 |
|
$67.33 | 375,000 |
| | 8.9 | | 67.33 |
| | 125,000 |
| | 67.33 |
|
| 405,000 |
| | | | | | 155,000 |
| | |
Employee Stock Purchase Plan. Plans (“ESPPs”)
In the second quarter of 2019, our stockholders approved the Molina Healthcare, Inc. 2019 Employee Stock Purchase Plan (the “2019 ESPP”), which superseded the Molina Healthcare, Inc. 2011 Employee Stock Purchase Plan (the “2011 ESPP”). A maximum of 3.0 million shares of our common stock may be issued under the 2019 ESPP, the terms of which are substantially similar to the 2011 ESPP. The 2019 ESPP will continue until the earliest of: termination of the 2019 ESPP by the board of directors (which may occur at any time); issuance of all of the shares reserved for issuance under the 2019 ESPP; or May 8, 2029.
Under our employee stock purchase plan (“ESPP”),ESPPs, eligible employees may purchase common shares at 85% of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. Each participant is limited to a maximum purchase of $25,000 (as measured by the fair value of the stock acquired) per year through payroll deductions. We estimate the fair value of the stock issued using the Black-Scholes option pricing model. For the years ended December 31, 2019, 2018, 2017, and 2016,2017, the inputs to this model were as follows: risk-free interest rates of approximately 0.4%0.6% to 1.9%2.3%; expected volatilities ranging from approximately 31% to 44%45%, dividend yields of 0%, and an average expected life of 0.5 years. We issued approximately 142,000, 216,000 351,000 and 410,000351,000 shares of our common stock under the ESPPESPPs during the years ended December 31, 2019, 2018, and 2017, respectively.
In connection with our employee stock plans, approximately 242,000 shares and 2016, respectively. The 2011 ESPP provides for the issuance of up to three million365,000 shares of common stock.stock were purchased or vested, net of shares used to settle employees’ income tax obligations, during the years ended December 31, 2019, and 2018, respectively.
15. Restructuring and Separation Costs
Restructuring and separation costs are reported by the same name in the accompanying consolidated statements of operations.
IT Restructuring Plan
Following the 2017 Restructuring Plan noted below, our new executive team has focused on aManagement’s margin recovery plan that includes identificationidentified and implementation ofimplemented various profit improvement initiatives. To that end, we beganThis included the implementation of a plan to restructure our information technology department (the “IT Restructuring Plan”) in 2018, which is reported in the third quarter of 2018. On February 4,Other segment. In connection with this plan, in early 2019, we entered into a master services agreementagreements with Infosys Limited pursuant to which Infosys will managean outsourcing vendor who manages certain of our information technology infrastructure services including, among other things, our information technology operations, end-user services, and data centers.services.
Expected Costs
In addition to $9 million incurred in the last halfAs of 2018, we expect to incur approximately $11 million forDecember 31, 2019, the IT Restructuring Plan in 2019. We expect suchwas substantially complete. Under this plan, we incurred cumulative restructuring costs to consist primarilyof $12 million, including $7 million of one-time termination benefits and $5 million of other restructuring costs (primarily consulting fees). The final amount of costs incurred is lower than the $20 million we originally estimated and reported in our Annual Report on Form 10-K for the Other segment. We expectyear ended December 31, 2018. Because more of our IT employees transitioned to our outsourcing vendor than originally contemplated, such employees were no longer included in the IT Restructuring Plan, to be completed by the endresulting in lower one-time termination costs.
As of 2019.
Costs Incurred
We have incurred expensesDecember 31, 2018, $6 million was accrued under the IT Restructuring Plan, as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, 2018 |
| One-Time Termination Benefits | | Other Restructuring Costs | Total |
| | Consulting Fees | |
| (In millions) |
Other | $ | 7 |
| | $ | 2 |
| | $ | 9 |
|
Reconciliation of Liability
For those restructuring costsprimarily for one-time termination benefits that require cash settlement (such assettlement. In the year ended December 31, 2019, we incurred $3 million of other restructuring costs, paid $5 million to settle one-time termination benefits, and consulting fees),paid $3 million to settle other restructuring costs. As of December 31, 2019, $1 million was accrued under the following table presents a roll-forward of the accrued liability, which is reported in “Accounts payable andIT Restructuring Plan.
accrued liabilities” in the accompanying consolidated balance sheets. |
| | | | | | | | | | | |
| One-Time Termination Benefits | | Other Restructuring Costs | | Total |
| (In millions) |
Accrued as of December 31, 2017 | $ | — |
| | $ | — |
| | $ | — |
|
Charges | 7 |
| | 2 |
| | 9 |
|
Cash payments | (2 | ) | | (1 | ) | | (3 | ) |
Accrued as of December 31, 2018 | $ | 5 |
| | $ | 1 |
| | $ | 6 |
|
2017 Restructuring Plan
Following a management-initiated, broad operational assessment in early 2017, our boardAs of directors approved, and we committed to, a comprehensiveDecember 31, 2018, $18 million was accrued for the restructuring and profitability improvement plan approved by the board of directors in June 2017 (the “2017 Restructuring Plan”). Key activities under this plan to date have included:
Streamlining of our organizational structure to eliminate redundant layers of management, consolidate regional support services, and other staff reductions to improve efficiency and the speed and quality of decision making;
Re-design of core operating processes such as provider payment, utilization management, quality monitoring and improvement, and information technology, to achieve more effective and cost-efficient outcomes;
Remediation of high-cost provider contracts and enhancement of high quality, cost-effective networks;
Restructuring, including selective exits, of direct delivery operations; and
Partnering with the lowest-cost, most effective vendors.
Costs Incurred
In our 2017 Annual Report on Form 10-K, we reported that we had incurred approximately $234 million of costs associated with the 2017 Restructuring Plan in 2017. In the year ended December 31, 2018,2019, we incurred an additional $37$3 million in suchof restructuring costs primarily resulting from a write-off of costs associated with a terminated utilization and care management project that was inconsistent with the goals of the 2017 Restructuring Plan. We alsofor adjustments to previously recorded nominal amounts for one-time termination benefits, and true-ups of certain lease contract termination costs, recorded in 2017.and paid $9 million to settle one-time termination and lease contract termination costs. As of December 31, 2018, we had incurred $2712019, $12 million in totalwas accrued for lease contract termination costs under the 2017 Restructuring Plan. We completed all activities under the 2017 Restructuring Plan in 2018, with the exception of the cash settlement of lease termination liabilities. We expect to continue to settle thosethese liabilities through 2025, unless the leases are terminated sooner.
The following table presents the major types of such costs by segment. Current and long-lived assets include current and non-current capitalized project costs, and capitalized software determined to be unrecoverable.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| Separation Costs - Former Executives | | One-Time Termination Benefits | | Other Restructuring Costs | | Total |
| | | Write-offs of Current and Long-lived Assets | | Consulting Fees | | Contract Termination Costs | |
| (In millions) |
Health Plans | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 12 |
| | $ | 11 |
|
Other | — |
| | 5 |
| | 20 |
| | 1 |
| | — |
| | 26 |
|
| $ | — |
| | $ | 5 |
| | $ | 19 |
| | $ | 1 |
| | $ | 12 |
| | $ | 37 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2017 |
| Separation Costs - Former Executives | | One-Time Termination Benefits | | Other Restructuring Costs | | Total |
| | | Write-offs of Long-lived Assets | | Consulting Fees | | Contract Termination Costs | |
| (In millions) |
Health Plans | $ | — |
| | $ | 33 |
| | $ | 16 |
| | $ | — |
| | $ | 24 |
| | $ | 73 |
|
Other | 36 |
| | 34 |
| | 45 |
| | 44 |
| | 2 |
| | 161 |
|
| $ | 36 |
| | $ | 67 |
| | $ | 61 |
| | $ | 44 |
| | $ | 26 |
| | $ | 234 |
|
As of December 31, 2018, we had incurred cumulative restructuring costs under the 2017 Restructuring Plan as follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
| Separation Costs - Former Executives | | One-Time Termination Benefits | | Other Restructuring Costs | | Total |
| | | Write-offs of Current and Long-lived Assets | | Consulting Fees | | Contract Termination Costs | |
| (In millions) |
Health Plans | $ | — |
| | $ | 33 |
| | $ | 15 |
| | $ | — |
| | $ | 36 |
| | $ | 84 |
|
Other | 36 |
| | 39 |
| | 65 |
| | 45 |
| | 2 |
| | 187 |
|
| $ | 36 |
| | $ | 72 |
| | $ | 80 |
| | $ | 45 |
| | $ | 38 |
| | $ | 271 |
|
Reconciliation of Liability
For those restructuring and separation costs that require cash settlement (primarily separation costs not including equity incentives, termination benefits, consulting fees and contract termination costs), the following table presents a roll-forward of the accrued liability, which is reported primarily in “Accounts payable and accrued liabilities” in the accompanying consolidated balance sheets. Certain contract termination cost accruals are non-current, recorded in “Other long-term liabilities.”
|
| | | | | | | | | | | | | | | |
| Separation Costs - Former Executives | | One-Time Termination Benefits | | Other Restructuring Costs | | Total |
| (In millions) |
Accrued as of December 31, 2017 | $ | 2 |
| | $ | 11 |
| | $ | 35 |
| | $ | 48 |
|
Adjustments | — |
| | (1 | ) | | 11 |
| | 10 |
|
Charges | — |
| | 6 |
| | 2 |
| | 8 |
|
Cash payments | (2 | ) | | (15 | ) | | (31 | ) | | (48 | ) |
Accrued as of December 31, 2018 | $ | — |
| | $ | 1 |
| | $ | 17 |
| | $ | 18 |
|
16. Employee BenefitsBenefit Plans
We sponsor defined contribution 401(k) plans that cover substantially all employees of our company and its subsidiaries. Eligible employees are permitted to contribute up to the maximum amount allowed by law. We generally match up to the first 4% of compensation contributed by employees. Expense recognized in connection with our contributions to the 401(k) plans amounted to $28 million, $36 million, $43 million, and $36$43 million in the years ended December 31, 2019, 2018, and 2017, and 2016, respectively.
We also have a non-qualified deferred compensation plan for certain key employees. Under this plan, eligible participants may defer up to 100% of their base salary and 100% of their bonus to provide tax-deferred growth for retirement.growth. The funds deferred are invested in corporate-owned life insurance, under a rabbi trust.
17. Commitments and Contingencies
Regulatory Capital Requirements and Dividend Restrictions
Our health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. The National Association of Insurance Commissioners (“NAIC”), has adopted rules which, if implemented by the states, set minimum capitalization requirements for insurance companies, HMOs, and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital (“RBC”) rules which may vary from state to state. All of the states in which our health plans operate, except California, Florida and New York, have adopted these rules. Such requirements, if adopted by California, Florida and New York, may increase the minimum capital required for those states. Regulators in some states may also enforce capital requirements that require the retention of net worth in excess of amounts formally required by statute or regulation. As of December 31, 2018,2019, our health plans had aggregate statutory capital and surplus of approximately $2,388$1,852 million compared with the required minimum aggregate statutory capital and surplus of approximately $1,040$1,110 million. All of our health plans were in compliance with the minimum capital requirements at December 31, 2018.2019. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.
Such statutes, regulations and informal capital requirements also restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based on current statutes and regulations, the net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was approximately $1,811 million at December 31, 2019, and $2,262 million at December 31, 2018, and $1,691 million at December 31, 2017.2018. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such cash, cash equivalents and investments amounted to $170$997 million and $696$170 million as of December 31, 20182019 and 2017,2018, respectively.
Legal Proceedings
The health carehealthcare industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and regulations include significant fines and penalties, exclusion from participating in publicly funded programs, and the repayment of previously billed and collected revenues.
We are involved in legal actions in the ordinary course of business someincluding, but not limited to, various employment claims, vendor disputes and provider claims. Some of whichthese legal actions seek monetary damages, including claims for punitive damages, which aremay not be covered by insurance. We review legal matters and update our estimates of reasonably possible losses and related disclosures, as necessary. We have accrued liabilities for certainlegal matters for which we deem the loss to be both probable and reasonably estimable. Although we believe that our estimates of such losses are reasonable, theseThese liability estimates could change as a result of further developments of thesethe matters. The outcome of legal actions is inherently uncertain and such pending matters for which accruals have not been established have not progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to estimate a range of possible loss, if any. While it is not possible to accurately predict or determine the eventual outcomes of these items, anuncertain. An adverse determination in one or more of these pending matters could have a materialan adverse effect on our consolidated financial position, results of operations, or cash flows.
Steamfitters Local 449 Pension Plan v. Molina Healthcare, Inc., et al. On October 5, 2018, the Steamfitters Local 449 Pension Plan filed its first amended class action securities complaint in the Central District Court of California against the Company and its former executive officers, J. Mario Molina, John C. Molina, Terry P. Bayer, and Rick Hopfer, Case 2:18-cv-03579. The amended complaint purports to seek recovery on behalf of all persons or entities who purchased Molina common stock between October 31, 2014, and August 2, 2017, for alleged violations under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The plaintiff alleges the defendants misled investors regarding the scalability of the Company’s administrative infrastructure during the identified class period. On December 13, 2018, the Court granted the Company’s motion to dismiss in its entirety and closed the case. On January 9, 2019, plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. Plaintiff’s opening brief is due April 10, 2019, the Company’s response is due May 10, 2019, and Plaintiff’s reply is due May 31, 2019. Oral argument will likely occur within 9-12 months after the briefing is completed. The Company believes it has meritorious defenses to the alleged claims and intends to defend the matter vigorously. At this time, we are not able to estimate a possible loss or range of loss that
may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations, or cash flows.
States’ Budgets
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid, Medicare, and CHIP programs. The states in which we operate our health plans regularly face significant budgetary pressures.
Lease Obligations
We lease administrative facilities and certain equipment under non-cancelable operating leases expiring at various dates through 2026. Facility lease terms generally range from five to 10 years with one to two renewal options for extended terms. In most cases, we are required to make additional payments under facility operating leases for taxes, insurance and other operating expenses incurred during the lease period. Certain of our leases contain rent escalation clauses or lease incentives, including rent abatements and tenant improvement allowances. Rent escalation clauses and lease incentives are taken into account in determining total rent expense to be recognized during the lease term.
Future minimum lease payments by year and in the aggregate under operating leases and lease financing obligations consist of the following amounts: |
| | | | | | | | | | | |
| Lease Financing Obligations | | Operating Leases | | Total |
| (In millions) |
2019 | $ | 19 |
| | $ | 46 |
| | $ | 65 |
|
2020 | 19 |
| | 34 |
| | 53 |
|
2021 | 20 |
| | 24 |
| | 44 |
|
2022 | 21 |
| | 16 |
| | 37 |
|
2023 | 21 |
| | 12 |
| | 33 |
|
Thereafter | 311 |
| | 15 |
| | 326 |
|
| $ | 411 |
| | $ | 147 |
| | $ | 558 |
|
Rental expense related to operating leases amounted to $62 million, $75 million, and $64 million for the years ended December 31, 2018, 2017, and 2016, respectively. The amounts reported in “Lease Financing Obligations” above represent our contractual lease commitments for the properties described in Note 11, “Debt” under the subheading “Lease Financing Obligations.”
Professional Liability Insurance
We carry medical professional liability insurance for health care services rendered in the primary care institutions that we manage. In addition, we also carry errors and omissions insurance for all Molina entities.
Provider Claims
Many of our medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such differing interpretations have led certain medical providers to pursue us for additional compensation. The claims made by providers in such circumstances often involve issues of contract compliance, interpretation, payment methodology, and intent. These claims often extend to services provided by the providers over a number of years.
Various providers have contacted us seeking additional compensation for claims that we believe to have been settled. These matters, when finally concluded and determined, will not, in our opinion, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
18. Segments
We currently have two2 reportable segments: ourthe Health Plans segment and ourthe Other segment. WeOur reportable segments are consistent with how we currently manage the vast majoritybusiness and view the markets we serve. Our Other
segment, which was insignificant to our consolidated results of our operations through our Health Plans segment. Our Other segmentin 2018 and 2019, includes the historical results of the PathwaysMMIS and behavioral health subsidiary, whichsubsidiaries we sold in the fourth quarter oflate 2018, andas well as certain corporate amounts not allocated to the Health Plans segment. Effective in the fourth quarter of 2018, we reclassified the
historical results relating to our Molina Medicaid Solutions (“MMS”) segment, which we sold in the third quarter of 2018, to the Other segment. Previously, results for MMS were reported in a stand-alone segment.
Refer to Note 1, “Organization and Basis of Presentation,” for further details on the sales of Pathways and MMS.
We regularly evaluate the appropriateness of our reportable segments, particularly in light of organizational changes, acquisition and divestiture activity, and changing laws and regulations. Therefore, these reportable segments may change in the future.
Description of Earnings Measures for Reportable Segments
Margin is the appropriate earnings measure for our reportable segments, based on how our chief operating decision maker currently reviews results, assesses performance, and allocates resources.
Margin forThe key metrics used to assess the performance of our Health Plans segment is referred to as “Medicalare premium revenue, medical margin” which represents the amount earned by the segments after medical costs are deducted from premium revenue. The medical care ratio and MCR. MCR represents the amount of medical care costs as a percentage of premium revenue, and is one of the key metrics used to assess the performance of the segments.revenue. Therefore, the underlying margin, or the amount earned by the Health Plans segment after medical margincosts are deducted from premium revenue, is the most important measure of earnings reviewed by the chief operating decision maker.management. Margin for our Health Plans segment is referred to as “Medical Margin.”
| | | | Health Plans | | Other | | Consolidated | | Health Plans | | Other | | Consolidated |
| | (In millions) | | (In millions) |
2019 | | | | | | | |
Total revenue | | | $ | 16,815 |
| | $ | 14 |
| | 16,829 |
|
Margin | | | 2,303 |
| | — |
| | 2,303 |
|
Goodwill, and intangible assets, net | | | 172 |
| | — |
| | 172 |
|
Total assets | | | 5,265 |
| | 1,522 |
| | 6,787 |
|
2018 | | | | | | | | | | | | |
Total revenue | | $ | 18,471 |
| | $ | 419 |
| | 18,890 |
| | $ | 18,471 |
| | $ | 419 |
| | $ | 18,890 |
|
Margin | | 2,475 |
| | 43 |
| | 2,518 |
| | 2,475 |
| | 43 |
| | 2,518 |
|
Goodwill, and intangible assets, net | | 190 |
| | — |
| | 190 |
| | 190 |
| | — |
| | 190 |
|
Total assets | | 6,165 |
| | 989 |
| | 7,154 |
| | 6,165 |
| | 989 |
| | 7,154 |
|
2017 | | | | | | | | | | | | |
Total revenue | | $ | 19,352 |
| | $ | 531 |
| | $ | 19,883 |
| | $ | 19,352 |
| | $ | 531 |
| | $ | 19,883 |
|
Margin | | 1,781 |
| | 29 |
| | 1,810 |
| | 1,781 |
| | 29 |
| | 1,810 |
|
Goodwill, and intangible assets, net | | 212 |
| | 43 |
| | 255 |
| | 212 |
| | 43 |
| | 255 |
|
Total assets | | 6,347 |
| | 2,124 |
| | 8,471 |
| | 6,347 |
| | 2,124 |
| | 8,471 |
|
2016 | | | | | | | |
Total revenue | | $ | 17,234 |
| | $ | 548 |
| | $ | 17,782 |
| |
Margin | | 1,671 |
| | 54 |
| | 1,725 |
| |
Goodwill, and intangible assets, net | | 513 |
| | 247 |
| | 760 |
| |
Total assets | | 5,897 |
| | 1,552 |
| | 7,449 |
| |
The following table reconciles margin by segment to consolidated income (loss) before income tax expense (benefit): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Margin: | | | | | |
Health Plans | $ | 2,303 |
| | $ | 2,475 |
| | $ | 1,781 |
|
Other | — |
| | 43 |
| | 29 |
|
Total margin | 2,303 |
| | 2,518 |
| | 1,810 |
|
Add: other operating revenues (1) | 621 |
| | 871 |
| | 508 |
|
Less: other operating expenses (2) | (1,880 | ) | | (2,243 | ) | | (2,873 | ) |
Less: loss on sales of subsidiaries, net of gain | — |
| | (15 | ) | | — |
|
Operating income (loss) | 1,044 |
| | 1,131 |
| | (555 | ) |
Less: other expenses, net | 72 |
| | 132 |
| | 57 |
|
Income (loss) before income tax expense (benefit) | $ | 972 |
| | $ | 999 |
| | $ | (612 | ) |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Margin: | | | | | |
Health Plans | $ | 2,475 |
| | $ | 1,781 |
| | $ | 1,671 |
|
Other | 43 |
| | 29 |
| | 54 |
|
Total margin | 2,518 |
| | 1,810 |
| | 1,725 |
|
Add: other operating revenues (1) | 871 |
| | 508 |
| | 798 |
|
Less: other operating expenses (2) | (2,243 | ) | | (2,873 | ) | | (2,217 | ) |
Less: loss on sales of subsidiaries, net of gain | (15 | ) | | — |
| | — |
|
Operating income (loss) | 1,131 |
| | (555 | ) | | 306 |
|
Less: other expenses, net | 132 |
| | 57 |
| | 101 |
|
Income (loss) before income tax expense (benefit) | $ | 999 |
| | $ | (612 | ) | | $ | 205 |
|
______________________
| |
(1) | Other operating revenues include premium tax revenue, health insurer fees reimbursed, investment income and other revenue. |
| |
(2) | Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fees, depreciation and amortization, impairment losses, and restructuring and separation costs. |
Molina Healthcare, Inc. 2019 Form 10-K | 84
19. Quarterly Results of Operations (Unaudited)
The following table summarizes quarterly unaudited results of operations for the years ended December 31, 2018 and 2017.periods presented. |
| | | | | | | | | | | | | | | |
| For The Quarter Ended |
| March 31, 2018 | | June 30, 2018 | | Sept. 30, 2018 | | December 31, 2018 |
| (In millions, except per-share data) |
Total revenue | $ | 4,646 |
| | $ | 4,883 |
| | $ | 4,697 |
| | $ | 4,664 |
|
Margin | 615 |
| | 673 |
| | 566 |
| | 664 |
|
Gain (loss) on sales of subsidiaries | — |
| | — |
| | 37 |
| | (52 | ) |
Restructuring and separation costs | 25 |
| | 8 |
| | 5 |
| | 8 |
|
Net income | 107 |
| | 202 |
| | 197 |
| | 201 |
|
| | | | | | | |
Net income per share (1): | | | | | | | |
Basic | $ | 1.79 |
| | $ | 3.29 |
| | $ | 3.22 |
| | $ | 3.24 |
|
Diluted | $ | 1.64 |
| | $ | 3.02 |
| | $ | 2.90 |
| | $ | 3.01 |
|
|
| | | | | | | | | | | | | | | |
| For The Quarter Ended |
| March 31, 2019 | | June 30, 2019 | | Sept. 30, 2019 | | December 31, 2019 |
| (In millions, except per-share data) |
Total revenue | $ | 4,119 |
| | $ | 4,193 |
| | $ | 4,243 |
| | $ | 4,274 |
|
Margin | 581 |
| | 583 |
| | 561 |
| | 578 |
|
Net income | 198 |
| | 196 |
| | 175 |
| | 168 |
|
| | | | | | | |
Net income per share - Basic (1) | $ | 3.19 |
| | $ | 3.15 |
| | $ | 2.81 |
| | $ | 2.70 |
|
Net income per share - Diluted (1) | $ | 2.99 |
| | $ | 3.06 |
| | $ | 2.75 |
| | $ | 2.67 |
|
|
| | | | | | | | | | | | | | | |
| For The Quarter Ended |
| March 31, 2018 | | June 30, 2018 | | Sept. 30, 2018 | | December 31, 2018 |
| (In millions, except per-share data) |
Total revenue | $ | 4,646 |
| | $ | 4,883 |
| | $ | 4,697 |
| | $ | 4,664 |
|
Margin | 615 |
| | 673 |
| | 566 |
| | 664 |
|
Gain (loss) on sales of subsidiaries | — |
| | — |
| | 37 |
| | (52 | ) |
Net income | 107 |
| | 202 |
| | 197 |
| | 201 |
|
| | | | | | | |
Net income per share - Basic (1) | $ | 1.79 |
| | $ | 3.29 |
| | $ | 3.22 |
| | $ | 3.24 |
|
Net income per share - Diluted (1) | $ | 1.64 |
| | $ | 3.02 |
| | $ | 2.90 |
| | $ | 3.01 |
|
________________________ |
| | | | | | | | | | | | | | | |
| For The Quarter Ended |
| March 31, 2017 | | June 30, 2017 | | Sept. 30, 2017 | | December 31, 2017 |
| (In millions, except per-share data) |
Total revenue | $ | 4,904 |
| | $ | 4,999 |
| | $ | 5,031 |
| | $ | 4,949 |
|
Margin | 546 |
| | 254 |
| | 564 |
| | 446 |
|
Impairment losses | — |
| | 72 |
| | 129 |
| | 269 |
|
Restructuring and separation costs | — |
| | 43 |
| | 118 |
| | 73 |
|
Net income (loss) | 77 |
| | (230 | ) | | (97 | ) | | (262 | ) |
| | | | | | | |
Net income (loss) per share (1): | | | | | | | |
Basic | $ | 1.38 |
| | $ | (4.10 | ) | | $ | (1.70 | ) | | $ | (4.59 | ) |
Diluted | $ | 1.37 |
| | $ | (4.10 | ) | | $ | (1.70 | ) | | $ | (4.59 | ) |
| |
(1) | The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method and is based on the weighted-average common share equivalents outstanding during each quarter. Accordingly, the sum of the quarterly net income (loss) per share amounts may not agree to the total for the year. Certain potentially dilutive common shares issuable are not included in the computation of diluted net income (loss) per share because to do so would be anti-dilutive. |
Molina Healthcare, Inc. 2019 Form 10-K | 85
20. Condensed Financial Information of Registrant
The condensed balance sheets as of December 31, 20182019 and 2017,2018, and the related condensed statements of operations, comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 20182019 for our parent company Molina Healthcare, Inc. (the “Registrant”), are presented below.
Condensed Balance Sheets
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
| (In millions, except per-share data) |
ASSETS |
Current assets: | |
| | |
Cash and cash equivalents | $ | 836 |
| | $ | 70 |
|
Investments | 161 |
| | 100 |
|
Receivables | 2 |
| | 2 |
|
Due from affiliates | 49 |
| | 90 |
|
Prepaid expenses and other current assets | 46 |
| | 47 |
|
Derivative asset | 29 |
| | 476 |
|
Total current assets | 1,123 |
| | 785 |
|
Property, equipment, and capitalized software, net | 327 |
| | 176 |
|
Goodwill and intangible assets, net | 13 |
| | 13 |
|
Investments in subsidiaries | 2,225 |
| | 2,768 |
|
Deferred income taxes | 10 |
| | 39 |
|
Advances to related parties and other assets | 76 |
| | 40 |
|
Total assets | $ | 3,774 |
| | $ | 3,821 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | |
Medical claims and benefits payable | $ | — |
| | $ | 4 |
|
Accounts payable and accrued liabilities | 260 |
| | 223 |
|
Current portion of long-term debt | 18 |
| | 241 |
|
Derivative liability | 29 |
| | 476 |
|
Total current liabilities | 307 |
| | 944 |
|
Long-term debt | 1,237 |
| | 1,020 |
|
Finance lease liabilities | 231 |
| | 197 |
|
Other long-term liabilities | 39 |
| | 13 |
|
Total liabilities | 1,814 |
| | 2,174 |
|
Stockholders’ equity: | | | |
Common stock, $0.001 par value; 150 million shares authorized; outstanding: 62 million shares at each of December 31, 2019, and December 31, 2018 | — |
| | — |
|
Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and outstanding | — |
| | — |
|
Additional paid-in capital | 175 |
| | 643 |
|
Accumulated other comprehensive income (loss) | 4 |
| | (8 | ) |
Retained earnings | 1,781 |
| | 1,012 |
|
Total stockholders’ equity | 1,960 |
| | 1,647 |
|
Total liabilities and stockholders’ equity | $ | 3,774 |
| | $ | 3,821 |
|
|
| | | | | | | |
| December 31, |
| 2018 | | 2017 |
| (In millions, except share data) |
ASSETS |
Current assets: | |
| | |
Cash and cash equivalents | $ | 70 |
| | $ | 504 |
|
Investments | 100 |
| | 192 |
|
Restricted investments | — |
| | 169 |
|
Receivables | 2 |
| | 2 |
|
Due from affiliates | 90 |
| | 148 |
|
Prepaid expenses and other current assets | 47 |
| | 103 |
|
Derivative asset | 476 |
| | 522 |
|
Total current assets | 785 |
| | 1,640 |
|
Property, equipment, and capitalized software, net | 176 |
| | 223 |
|
Goodwill and intangible assets, net | 13 |
| | 15 |
|
Investments in subsidiaries | 2,768 |
| | 2,306 |
|
Deferred income taxes | 39 |
| | 17 |
|
Advances to related parties and other assets | 40 |
| | 32 |
|
| $ | 3,821 |
| | $ | 4,233 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | |
Medical claims and benefits payable | $ | 4 |
| | $ | 3 |
|
Accounts payable and accrued liabilities | 223 |
| | 178 |
|
Current portion of long-term debt | 241 |
| | 653 |
|
Derivative liability | 476 |
| | 522 |
|
Total current liabilities | 944 |
| | 1,356 |
|
Long-term debt | 1,020 |
| | 1,318 |
|
Lease financing obligations | 197 |
| | 198 |
|
Other long-term liabilities | 13 |
| | 24 |
|
Total liabilities | 2,174 |
| | 2,896 |
|
Stockholders’ equity: | | | |
Common stock, $0.001 par value; 150 million shares authorized; outstanding: | | |
|
|
62 million shares at December 31, 2018 and 60 million shares at December 31, 2017 | — |
| | — |
|
Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and outstanding | — |
| | — |
|
Additional paid-in capital | 643 |
| | 1,044 |
|
Accumulated other comprehensive loss | (8 | ) | | (5 | ) |
Retained earnings | 1,012 |
| | 298 |
|
Total stockholders’ equity | 1,647 |
| | 1,337 |
|
| $ | 3,821 |
| | $ | 4,233 |
|
See accompanying notes.
Condensed Statements of Operations
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Revenue: | | | | | |
Administrative services fees | $ | 1,038 |
| | $ | 1,138 |
| | $ | 1,317 |
|
Investment income and other revenue | 18 |
| | 17 |
| | 16 |
|
Total revenue | 1,056 |
| | 1,155 |
| | 1,333 |
|
Expenses: | | | | | |
|
General and administrative expenses | 937 |
| | 1,007 |
| | 1,082 |
|
Depreciation and amortization | 63 |
| | 69 |
| | 93 |
|
Other operating expenses | — |
| | 8 |
| | 16 |
|
Restructuring costs | 4 |
| | 35 |
| | 153 |
|
Impairment losses | — |
| | — |
| | 39 |
|
Total operating expenses | 1,004 |
| | 1,119 |
| | 1,383 |
|
Gain on sale of subsidiary | — |
| | 37 |
| | — |
|
Operating income (loss) | 52 |
| | 73 |
| | (50 | ) |
Interest expense | 87 |
| | 114 |
| | 117 |
|
Other (income) expense, net | (15 | ) | | 17 |
| | (61 | ) |
Loss before income tax (benefit) expense and equity in net earnings (losses) of subsidiaries | (20 | ) | | (58 | ) | | (106 | ) |
Income tax expense (benefit) | 9 |
| | (14 | ) | | 8 |
|
Net loss before equity in net earnings (losses) of subsidiaries | (29 | ) | | (44 | ) | | (114 | ) |
Equity in net earnings (losses) of subsidiaries | 766 |
| | 751 |
| | (398 | ) |
Net income (loss) | $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Revenue: | | | | | |
Management fees | $ | 1,138 |
| | $ | 1,317 |
| | $ | 1,062 |
|
Investment income and other revenue | 17 |
| | 16 |
| | 16 |
|
Total revenue | 1,155 |
| | 1,333 |
| | 1,078 |
|
Expenses: | | | | | |
|
Medical care costs | 8 |
| | 16 |
| | 73 |
|
General and administrative expenses | 1,007 |
| | 1,082 |
| | 899 |
|
Depreciation and amortization | 69 |
| | 93 |
| | 95 |
|
Restructuring and separation costs | 35 |
| | 153 |
| | — |
|
Impairment losses | — |
| | 39 |
| | — |
|
Total operating expenses | 1,119 |
| | 1,383 |
| | 1,067 |
|
Gain on sale of subsidiary | 37 |
| | — |
| | — |
|
Operating income (loss) | 73 |
| | (50 | ) | | 11 |
|
Interest expense | 114 |
| | 117 |
| | 101 |
|
Other expense (income) | 17 |
| | (61 | ) | | — |
|
Loss before income tax (benefit) expense and equity in net earnings (losses) of subsidiaries | (58 | ) | | (106 | ) | | (90 | ) |
Income tax (benefit) expense | (14 | ) | | 8 |
| | (24 | ) |
Net loss before equity in net earnings (losses) of subsidiaries | (44 | ) | | (114 | ) | | (66 | ) |
Equity in net earnings (losses) of subsidiaries | 751 |
| | (398 | ) | | 118 |
|
Net income (loss) | $ | 707 |
| | $ | (512 | ) | | $ | 52 |
|
Condensed Statements of Comprehensive Income (Loss)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Net income (loss) | $ | 737 |
| | $ | 707 |
| | $ | (512 | ) |
Other comprehensive income (loss): | | | | | |
Unrealized investment income (loss) | 16 |
| | (3 | ) | | (5 | ) |
Less: effect of income taxes | 4 |
| | (1 | ) | | (2 | ) |
Other comprehensive income (loss), net of tax | 12 |
| | (2 | ) | | (3 | ) |
Comprehensive income (loss) | $ | 749 |
| | $ | 705 |
| | $ | (515 | ) |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Net income (loss) | $ | 707 |
| | $ | (512 | ) | | $ | 52 |
|
Other comprehensive (loss) income: | | | | | |
Unrealized investment (loss) gain | (3 | ) | | (5 | ) | | 3 |
|
Less: effect of income taxes | (1 | ) | | (2 | ) | | 1 |
|
Other comprehensive (loss) income, net of tax | (2 | ) | | (3 | ) | | 2 |
|
Comprehensive income (loss) | $ | 705 |
| | $ | (515 | ) | | $ | 54 |
|
See accompanying notes.
Condensed Statements of Cash Flows
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| (In millions) |
Operating activities: | | | | | |
Net cash provided by operating activities | $ | 64 |
| | $ | 118 |
| | $ | 166 |
|
Investing activities: | | | | | |
|
Capital contributions to subsidiaries | (43 | ) | | (145 | ) | | (370 | ) |
Dividends received from subsidiaries | 1,373 |
| | 298 |
| | 286 |
|
Purchases of investments | (152 | ) | | (136 | ) | | (331 | ) |
Proceeds from sales and maturities of investments | 93 |
| | 388 |
| | 156 |
|
Purchases of property, equipment and capitalized software | (56 | ) | | (22 | ) | | (67 | ) |
Net cash received from sale of subsidiaries | — |
| | 242 |
| | — |
|
Change in amounts due to/from affiliates | 38 |
| | 6 |
| | (49 | ) |
Other, net | 1 |
| | — |
| | — |
|
Net cash provided by (used in) investing activities | 1,254 |
| | 631 |
| | (375 | ) |
Financing activities: | | | | | |
|
Repayment of principal amount of convertible notes | (240 | ) | | (362 | ) | | — |
|
Cash paid for partial settlement of conversion option | (578 | ) | | (623 | ) | | — |
|
Cash received for partial settlement of call option | 578 |
| | 623 |
| | — |
|
Cash paid for partial termination of warrants | (514 | ) | | (549 | ) | | — |
|
Proceeds from borrowings under term loan facility | 220 |
| | — |
| | — |
|
Common stock purchases | (47 | ) | | — |
| | — |
|
Repayment of credit facility | — |
| | (300 | ) | | — |
|
Proceeds from senior notes offerings, net of issuance costs | — |
| | — |
| | 325 |
|
Proceeds from borrowings under credit facility | — |
| | — |
| | 300 |
|
Other, net | 29 |
| | 19 |
| | 11 |
|
Net cash (used in) provided by financing activities | (552 | ) | | (1,192 | ) | | 636 |
|
Net (decrease) increase in cash and cash equivalents | 766 |
| | (443 | ) | | 427 |
|
Cash and cash equivalents at beginning of period | 70 |
| | 513 |
| | 86 |
|
Cash and cash equivalents at end of period | $ | 836 |
| | $ | 70 |
| | $ | 513 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| (In millions) |
Operating activities: | | | | | |
Net cash provided by operating activities | $ | 118 |
| | $ | 166 |
| | $ | 55 |
|
Investing activities: | | | | | |
|
Capital contributions to subsidiaries | (145 | ) | | (370 | ) | | (386 | ) |
Dividends received from subsidiaries | 298 |
| | 286 |
| | 101 |
|
Purchases of investments | (136 | ) | | (331 | ) | | (115 | ) |
Proceeds from sales and maturities of investments | 388 |
| | 156 |
| | 188 |
|
Purchases of property, equipment and capitalized software | (22 | ) | | (67 | ) | | (125 | ) |
Net cash received from sale of subsidiaries | 242 |
| | — |
| | — |
|
Change in amounts due to/from affiliates | 6 |
| | (49 | ) | | (18 | ) |
Other, net | — |
| | — |
| | 6 |
|
Net cash provided by (used in) investing activities | 631 |
| | (375 | ) | | (349 | ) |
Financing activities: | | | | | |
|
Repayment of credit facility | (300 | ) | | — |
| | — |
|
Repayment of principal amount of 1.125% Convertible Notes | (298 | ) | | — |
| | — |
|
Cash paid for partial settlement of 1.125% Conversion Option | (623 | ) | | — |
| | — |
|
Cash received for partial settlement of 1.125% Call Option | 623 |
| | — |
| | — |
|
Cash paid for partial termination of 1.125% Warrants | (549 | ) | | — |
| | — |
|
Repayment of principal amount of 1.625% Convertible Notes | (64 | ) | | — |
| | — |
|
Proceeds from senior notes offerings, net of issuance costs | — |
| | 325 |
| | — |
|
Proceeds from borrowings under credit facility | — |
| | 300 |
| | — |
|
Other, net | 19 |
| | 11 |
| | 20 |
|
Net cash (used in) provided by financing activities | (1,192 | ) | | 636 |
| | 20 |
|
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents | (443 | ) | | 427 |
| | (274 | ) |
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period | 513 |
| | 86 |
| | 360 |
|
Cash, cash equivalents, and restricted cash and cash equivalents at end of period | $ | 70 |
| | $ | 513 |
| | $ | 86 |
|
See accompanying notes.
Notes to Condensed Financial Information of Registrant
Note A - Basis of Presentation
The Registrant was incorporated in 2002. Prior to that date, Molina Healthcare of California (formerly known as Molina Medical Centers) operated as a California health plan and as the parent company for three other state health plans. In June 2003, the employees and operations of the corporate entity were transferred from Molina Healthcare of California to the Registrant.
The Registrant’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. The accompanying condensed financial information of the Registrant should be read in conjunction with the consolidated financial statements and accompanying notes.
Note B - Transactions with Subsidiaries
The Registrant provides certain centralized medical and administrative services to our subsidiaries pursuant to administrative services agreements that include, but are not limited to, information technology, product development and administration, underwriting, claims processing, customer service, certain care management services, human
resources, legal, marketing, purchasing, risk management, actuarial, underwriting, finance, accounting, legal and public
relations. Fees are based on the fair market value of services rendered and are recorded as operating revenue. Payment is subordinated to the subsidiaries’ ability to comply with minimum capital and other restrictive financial requirements of the states in which they operate. Charges in 2019, 2018, 2017, and 20162017 for these services amounted to $1,038 million, $1,137 million, $1,317 million, and $1,062$1,317 million, respectively, and are included in operating revenue.
The Registrant and its subsidiaries are included in the consolidated federal and state income tax returns filed by the Registrant. Income taxes are allocated to each subsidiary in accordance with an intercompany tax allocation agreement. The agreement allocates income taxes in an amount generally equivalent to the amount which would be expensed by the subsidiary if it filed a separate tax return. Net operating loss benefits are paid to the subsidiary by the Registrant to the extent such losses are utilized in the consolidated tax returns.
Note C - Dividends and Capital Contributions
When the Registrant receives dividends from its subsidiaries, such amounts are recorded as a reduction to the investments in the respective subsidiaries.
For all periods presented, the Registrant made capital contributions to certain subsidiaries primarily to comply with minimum net worth requirements and to fund business combinations. Such amounts have been recorded as an increase in investment in the respective subsidiaries.
21. Supplemental Condensed Consolidating Financial Information
On November 10, 2015, the Parent issued $700 million aggregate principal amount of the 5.375% Notes in a private placement to institutional investors. The 5.375% Notes were registered with the SEC in September 2016. Pursuant to the terms of the indenture governing the 5.375% Notes (the “Indenture”), the 5.375% Notes are required to be guaranteed by each of the Parent’s existing and future direct and indirect domestic restricted subsidiaries that guarantee the Parent’s Credit Agreement. At the time of issuance, there were two subsidiaries of the Parent that guaranteed the Notes: MMS and Molina Medical Management, Inc. (“MMM”).
On November 1, 2015, the Parent acquired all of the outstanding ownership interests of Pathways Health and Community Support LLC (“Pathways”). As a result of that acquisition, and pursuant to the terms of the Indenture, effective February 16, 2016, Pathways and 15 of its subsidiaries were added as guarantors of the 5.375% Notes. Subsequently, effective January 3, 2017, MMM and 14 Pathways subsidiaries were released as guarantors of the 5.375% Notes, leaving MMS, Pathways, and Molina Pathways, LLC as the only subsidiary guarantors. MMS and Pathways were released as guarantors effective September 30, 2018, and October 19, 2018, respectively, in connection with their divestitures. Accordingly, as of December 31, 2018, Molina Pathways, LLC was the sole wholly owned subsidiary guarantor of the 5.375% Notes, on a full and unconditional basis. As discussed in Note 11, “Debt,” effective as of January 31, 2019, Molina Pathways, LLC was released as a guarantor of the 5.375% Notes.
For all periods presented, the following condensed consolidating financial statements present Molina Healthcare, Inc. (as “Parent Issuer”), Molina Pathways, LLC (as “Other Guarantor”), the subsidiary non-guarantors (as “Non-Guarantors”) and “Eliminations,” according to the guarantor structure as assessed as of and for the year ended December 31, 2018.2019 Form 10-K | 89
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| (In millions) |
Revenue: | | | | | | | | | |
Total revenue | $ | 1,155 |
| | $ | 3 |
| | $ | 18,884 |
| | $ | (1,152 | ) | | $ | 18,890 |
|
Expenses: | | | | | | | | | |
Medical care costs | 8 |
| | — |
| | 15,129 |
| | — |
| | 15,137 |
|
Cost of service revenue | — |
| | — |
| | 364 |
| | — |
| | 364 |
|
General and administrative expenses | 1,007 |
| | 4 |
| | 1,474 |
| | (1,152 | ) | | 1,333 |
|
Premium tax expenses | — |
| | — |
| | 417 |
| | — |
| | 417 |
|
Health insurer fees | — |
| | — |
| | 348 |
| | — |
| | 348 |
|
Depreciation and amortization | 69 |
| | — |
| | 30 |
| | — |
| | 99 |
|
Restructuring and separation costs | 35 |
| | — |
| | 11 |
| | — |
| | 46 |
|
Total operating expenses | 1,119 |
| | 4 |
| | 17,773 |
| | (1,152 | ) | | 17,744 |
|
Gain (loss) on sales of subsidiaries | 37 |
|
| (52 | ) |
| — |
|
| — |
|
| (15 | ) |
Operating income (loss) | 73 |
| | (53 | ) | | 1,111 |
| | — |
| | 1,131 |
|
Interest expense | 114 |
| | — |
| | 1 |
| | — |
| | 115 |
|
Other expense | 17 |
| | — |
| | — |
| | — |
| | 17 |
|
(Loss) income before income tax (benefit) expense | (58 | ) | | (53 | ) | | 1,110 |
| | — |
| | 999 |
|
Income tax (benefit) expense | (14 | ) | | (11 | ) | | 317 |
| | — |
| | 292 |
|
Net (loss) income before equity in net earnings (losses) of subsidiaries | (44 | ) | | (42 | ) | | 793 |
| | — |
| | 707 |
|
Equity in net earnings (losses) of subsidiaries | 751 |
| | (5 | ) | | — |
| | (746 | ) | | — |
|
Net income (loss) | $ | 707 |
| | $ | (47 | ) | | $ | 793 |
| | $ | (746 | ) | | $ | 707 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2017 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| (In millions) |
Revenue: | | | | | | | | | |
Total revenue | $ | 1,333 |
| | $ | 2 |
| | $ | 19,904 |
| | $ | (1,356 | ) | | $ | 19,883 |
|
Expenses: | | | | | | | | | |
Medical care costs | 16 |
| | — |
| | 17,058 |
| | (1 | ) | | 17,073 |
|
Cost of service revenue | — |
| | — |
| | 492 |
| | — |
| | 492 |
|
General and administrative expenses | 1,082 |
| | 2 |
| | 1,865 |
| | (1,355 | ) | | 1,594 |
|
Premium tax expenses | — |
| | — |
| | 438 |
| | — |
| | 438 |
|
Depreciation and amortization | 93 |
| | — |
| | 44 |
| | — |
| | 137 |
|
Restructuring and separation costs | 153 |
|
| — |
|
| 81 |
|
| — |
|
| 234 |
|
Impairment losses | 39 |
|
| — |
|
| 431 |
|
| — |
|
| 470 |
|
Total operating expenses | 1,383 |
| | 2 |
| | 20,409 |
| | (1,356 | ) | | 20,438 |
|
Operating loss | (50 | ) | | — |
| | (505 | ) | | — |
| | (555 | ) |
Total other expenses, net | 56 |
| | — |
| | 1 |
| | — |
| | 57 |
|
Loss before income taxes | (106 | ) | | — |
| | (506 | ) | | — |
| | (612 | ) |
Income tax expense (benefit) | 8 |
| | — |
| | (108 | ) | | — |
| | (100 | ) |
Net loss before equity in net (losses) earnings of subsidiaries | (114 | ) | | — |
| | (398 | ) | | — |
| | (512 | ) |
Equity in net (losses) earnings of subsidiaries | (398 | ) | | (164 | ) | | 8 |
| | 554 |
| | — |
|
Net loss | $ | (512 | ) | | $ | (164 | ) | | $ | (390 | ) | | $ | 554 |
| | $ | (512 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2016 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| (In millions) |
Revenue: | | | | | | | | | |
Total revenue | $ | 1,078 |
| | $ | — |
| | $ | 17,786 |
| | $ | (1,082 | ) | | $ | 17,782 |
|
Expenses: | | | | | | | | | |
Medical care costs | 73 |
| | — |
| | 14,702 |
| | (1 | ) | | 14,774 |
|
Cost of service revenue | — |
| | — |
| | 485 |
| | — |
| | 485 |
|
General and administrative expenses | 899 |
| | 2 |
| | 1,573 |
| | (1,081 | ) | | 1,393 |
|
Premium tax expenses | — |
| | — |
| | 468 |
| | — |
| | 468 |
|
Health insurer fees | — |
| | — |
| | 217 |
| | — |
| | 217 |
|
Depreciation and amortization | 95 |
| | — |
| | 44 |
| | — |
| | 139 |
|
Total operating expenses | 1,067 |
| | 2 |
| | 17,489 |
| | (1,082 | ) | | 17,476 |
|
Operating income (loss) | 11 |
| | (2 | ) | | 297 |
| | — |
| | 306 |
|
Total other expenses, net | 101 |
| | — |
| | — |
| | — |
| | 101 |
|
(Loss) income before income taxes | (90 | ) | | (2 | ) | | 297 |
| | — |
| | 205 |
|
Income tax (benefit) expense | (24 | ) | | (1 | ) | | 178 |
| | — |
| | 153 |
|
Net (loss) income before equity in earnings of subsidiaries | (66 | ) | | (1 | ) | | 119 |
| | — |
| | 52 |
|
Equity in net earnings of subsidiaries | 118 |
| | 2 |
| | — |
| | (120 | ) | | — |
|
Net income | $ | 52 |
| | $ | 1 |
| | $ | 119 |
| | $ | (120 | ) | | $ | 52 |
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | |
| (In millions) |
Net income (loss) | $ | 707 |
| | $ | (47 | ) | | $ | 793 |
| | $ | (746 | ) | | $ | 707 |
|
Other comprehensive loss, net of tax | (2 | ) | | — |
| | (2 | ) | | 2 |
| | (2 | ) |
Comprehensive income (loss) | $ | 705 |
| | $ | (47 | ) | | $ | 791 |
| | $ | (744 | ) | | $ | 705 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2017 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | |
| (In millions) |
Net loss | $ | (512 | ) | | $ | (164 | ) | | $ | (390 | ) | | $ | 554 |
| | $ | (512 | ) |
Other comprehensive loss, net of tax | (3 | ) | | — |
| | (2 | ) | | 2 |
| | (3 | ) |
Comprehensive loss | $ | (515 | ) | | $ | (164 | ) | | $ | (392 | ) | | $ | 556 |
| | $ | (515 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2016 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| | | | | | | | | |
| (In millions) |
Net income | $ | 52 |
| | $ | 1 |
| | $ | 119 |
| | $ | (120 | ) | | $ | 52 |
|
Other comprehensive income, net of tax | 2 |
| | — |
| | 1 |
| | (1 | ) | | 2 |
|
Comprehensive income | $ | 54 |
| | $ | 1 |
| | $ | 120 |
| | $ | (121 | ) | | $ | 54 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| (In millions) |
ASSETS |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 70 |
| | $ | 2 |
| | $ | 2,754 |
| | $ | — |
| | $ | 2,826 |
|
Investments | 100 |
| | — |
| | 1,581 |
| | — |
| | 1,681 |
|
Receivables | 2 |
| | — |
| | 1,328 |
| | — |
| | 1,330 |
|
Due from (to) affiliates | 90 |
| | 7 |
| | (97 | ) | | — |
| | — |
|
Prepaid expenses and other current assets | 47 |
| | 29 |
| | 73 |
| | — |
| | 149 |
|
Derivative asset | 476 |
| | — |
| | — |
| | — |
| | 476 |
|
Total current assets | 785 |
| | 38 |
| | 5,639 |
| | — |
| | 6,462 |
|
Property, equipment, and capitalized software, net | 176 |
| | — |
| | 65 |
| | — |
| | 241 |
|
Goodwill and intangible assets, net | 13 |
| | — |
| | 177 |
| | — |
| | 190 |
|
Restricted investments | — |
| | — |
| | 120 |
| | — |
| | 120 |
|
Investment in subsidiaries, net | 2,768 |
| | (5 | ) | | — |
| | (2,763 | ) | | — |
|
Deferred income taxes | 39 |
| | — |
| | 78 |
| | — |
| | 117 |
|
Other assets | 40 |
| | — |
| | 5 |
| | (21 | ) | | 24 |
|
| $ | 3,821 |
| | $ | 33 |
| | $ | 6,084 |
| | $ | (2,784 | ) | | $ | 7,154 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | | | | | | | |
Medical claims and benefits payable | $ | 4 |
| | $ | — |
| | $ | 1,957 |
| | $ | — |
| | $ | 1,961 |
|
Amounts due government agencies | — |
| | — |
| | 967 |
| | — |
| | 967 |
|
Accounts payable and accrued liabilities | 223 |
| | — |
| | 167 |
| | — |
| | 390 |
|
Deferred revenue | — |
| | — |
| | 211 |
| | — |
| | 211 |
|
Current portion of long-term debt | 241 |
| | — |
| | — |
| | — |
| | 241 |
|
Derivative liability | 476 |
| | — |
| | — |
| | — |
| | 476 |
|
Total current liabilities | 944 |
| | — |
| | 3,302 |
| | — |
| | 4,246 |
|
Long-term debt and lease financing obligations | 1,217 |
| | — |
| | 20 |
| | (20 | ) | | 1,217 |
|
Other long-term liabilities | 13 |
| | — |
| | 32 |
| | (1 | ) | | 44 |
|
Total liabilities | 2,174 |
| | — |
| | 3,354 |
| | (21 | ) | | 5,507 |
|
Total stockholders’ equity | 1,647 |
| | 33 |
| | 2,730 |
| | (2,763 | ) | | 1,647 |
|
| $ | 3,821 |
| | $ | 33 |
| | $ | 6,084 |
| | $ | (2,784 | ) | | $ | 7,154 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| (In millions) |
ASSETS |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 504 |
| | $ | — |
| | $ | 2,682 |
| | $ | — |
| | $ | 3,186 |
|
Investments | 192 |
| | — |
| | 2,332 |
| | — |
| | 2,524 |
|
Restricted investments | 169 |
|
| — |
|
| — |
|
| — |
|
| 169 |
|
Receivables | 2 |
| | — |
| | 869 |
| | — |
| | 871 |
|
Due from (to) affiliates | 148 |
| | 2 |
| | (150 | ) | | — |
| | — |
|
Prepaid expenses and other current assets | 103 |
| | 2 |
| | 150 |
| | (16 | ) | | 239 |
|
Derivative asset | 522 |
| | — |
| | — |
| | — |
| | 522 |
|
Total current assets | 1,640 |
| | 4 |
| | 5,883 |
| | (16 | ) | | 7,511 |
|
Property, equipment, and capitalized software, net | 223 |
| | — |
| | 119 |
| | — |
| | 342 |
|
Goodwill and intangible assets, net | 15 |
| | — |
| | 240 |
| | — |
| | 255 |
|
Restricted investments | — |
| | — |
| | 119 |
| | — |
| | 119 |
|
Investment in subsidiaries, net | 2,306 |
| | 75 |
| | — |
| | (2,381 | ) | | — |
|
Deferred income taxes | 17 |
| | — |
| | 101 |
| | (15 | ) | | 103 |
|
Other assets | 32 |
| | — |
| | 110 |
| | (1 | ) | | 141 |
|
| $ | 4,233 |
| | $ | 79 |
| | $ | 6,572 |
| | $ | (2,413 | ) | | $ | 8,471 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | | | | | | | |
Medical claims and benefits payable | $ | 3 |
| | $ | — |
| | $ | 2,189 |
| | $ | — |
| | $ | 2,192 |
|
Amounts due government agencies | — |
| | — |
| | 1,542 |
| | — |
| | 1,542 |
|
Accounts payable and accrued liabilities | 178 |
| | 1 |
| | 188 |
| | (1 | ) | | 366 |
|
Deferred revenue | — |
| | — |
| | 282 |
| | — |
| | 282 |
|
Current portion of long-term debt | 653 |
| | — |
| | 16 |
| | (16 | ) | | 653 |
|
Derivative liability | 522 |
| | — |
| | — |
| | — |
| | 522 |
|
Total current liabilities | 1,356 |
| | 1 |
| | 4,217 |
| | (17 | ) | | 5,557 |
|
Long-term debt and lease financing obligations | 1,516 |
| | — |
| | — |
| | — |
| | 1,516 |
|
Deferred income taxes | — |
| | — |
| | 15 |
| | (15 | ) | | — |
|
Other long-term liabilities | 24 |
| | — |
| | 37 |
| | — |
| | 61 |
|
Total liabilities | 2,896 |
| | 1 |
| | 4,269 |
| | (32 | ) | | 7,134 |
|
Total stockholders’ equity | 1,337 |
| | 78 |
| | 2,303 |
| | (2,381 | ) | | 1,337 |
|
| $ | 4,233 |
| | $ | 79 |
| | $ | 6,572 |
| | $ | (2,413 | ) | | $ | 8,471 |
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| (In millions) |
Operating activities: | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | 118 |
| | (2 | ) | | (430 | ) | | — |
| | $ | (314 | ) |
Investing activities: | | | | | | | | | |
Purchases of investments | (136 | ) | | — |
| | (1,308 | ) | | — |
| | (1,444 | ) |
Proceeds from sales and maturities of investments | 388 |
| | — |
| | 2,057 |
| | — |
| | 2,445 |
|
Purchases of property, equipment and capitalized software | (22 | ) | | — |
| | (8 | ) | | — |
| | (30 | ) |
Net cash received from sales of subsidiaries | 242 |
| | — |
| | (52 | ) | | — |
| | 190 |
|
Capital contributions to subsidiaries | (145 | ) | | — |
| | 145 |
| | — |
| | — |
|
Dividends received from subsidiaries | 298 |
| | — |
| | (298 | ) | | — |
| | — |
|
Change in amounts due to/from affiliates | 6 |
| | 4 |
| | (10 | ) | | — |
| | — |
|
Other, net | — |
| | — |
| | (18 | ) | | — |
| | (18 | ) |
Net cash provided by investing activities | 631 |
| | 4 |
| | 508 |
| | — |
| | 1,143 |
|
Financing activities: | | | | | | | | | |
Repayment of credit facility | (300 | ) | | — |
| | — |
| | — |
| | (300 | ) |
Repayment of principal amount of 1.125% Convertible Notes | (298 | ) | | — |
| | — |
| | — |
| | (298 | ) |
Cash paid for partial settlement of 1.125% Conversion Option | (623 | ) | | — |
| | — |
| | — |
| | (623 | ) |
Cash received for partial settlement of 1.125% Call Option | 623 |
| | — |
| | — |
| | — |
| | 623 |
|
Cash paid for partial termination of 1.125% Warrants | (549 | ) | | — |
| | — |
| | — |
| | (549 | ) |
Repayment of principal amount of 1.625% Convertible Notes | (64 | ) | | — |
| | — |
| | — |
| | (64 | ) |
Other, net | 19 |
| | — |
| | (1 | ) | | — |
| | 18 |
|
Net cash used in financing activities | (1,192 | ) | | — |
| | (1 | ) | | — |
| | (1,193 | ) |
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents | (443 | ) | | 2 |
| | 77 |
| | — |
| | (364 | ) |
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period | 513 |
| | — |
| | 2,777 |
| | — |
| | 3,290 |
|
Cash, cash equivalents, and restricted cash and cash equivalents at end of period | $ | 70 |
| | $ | 2 |
| | $ | 2,854 |
| | $ | — |
| | $ | 2,926 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2017 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| (In millions) |
Operating activities: | | | | | | | | | |
Net cash provided by operating activities | $ | 166 |
| | — |
| | 638 |
| | — |
| | $ | 804 |
|
Investing activities: | | | | | | | | | |
Purchases of investments | (331 | ) | | — |
| | (2,366 | ) | | — |
| | (2,697 | ) |
Proceeds from sales and maturities of investments | 156 |
| | — |
| | 1,603 |
| | — |
| | 1,759 |
|
Purchases of property, equipment and capitalized software | (67 | ) | | — |
| | (19 | ) | | — |
| | (86 | ) |
Capital contributions to subsidiaries | (370 | ) | | 2 |
| | 368 |
| | — |
| | — |
|
Dividends received from subsidiaries | 286 |
| | — |
| | (286 | ) | | — |
| | — |
|
Change in amounts due to/from affiliates | (49 | ) | | (2 | ) | | 51 |
| | — |
| | — |
|
Other, net | — |
| | — |
| | (38 | ) | | — |
| | (38 | ) |
Net cash used in investing activities | (375 | ) | | — |
| | (687 | ) | | — |
| | (1,062 | ) |
Financing activities: | | | | | | | | | |
Proceeds from senior notes offerings, net of issuance costs | 325 |
| | — |
| | — |
| | — |
| | 325 |
|
Proceeds from borrowings under credit facility | 300 |
| | — |
| | — |
| | — |
| | 300 |
|
Other, net | 11 |
| | — |
| | — |
| | — |
| | 11 |
|
Net cash provided by financing activities | 636 |
| | — |
| | — |
| | — |
| | 636 |
|
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | 427 |
| | — |
| | (49 | ) | | — |
| | 378 |
|
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period | 86 |
| | — |
| | 2,826 |
| | — |
| | 2,912 |
|
Cash, cash equivalents, and restricted cash and cash equivalents at end of period | $ | 513 |
| | $ | — |
| | $ | 2,777 |
| | $ | — |
| | $ | 3,290 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2016 |
| Parent Issuer | | Other Guarantor | | Non-Guarantors | | Eliminations | | Consolidated |
| (In millions) |
Operating activities: | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | 55 |
| | (1 | ) | | 619 |
| | — |
| | $ | 673 |
|
Investing activities: | | | | | | | | | |
Purchases of investments | (115 | ) | | — |
| | (1,814 | ) | | — |
| | (1,929 | ) |
Proceeds from sales and maturities of investments | 188 |
| | — |
| | 1,778 |
| | — |
| | 1,966 |
|
Purchases of property, equipment and capitalized software | (125 | ) | | — |
| | (51 | ) | | — |
| | (176 | ) |
Net cash paid in business combinations | — |
| | — |
| | (48 | ) | | — |
| | (48 | ) |
Capital contributions to subsidiaries | (386 | ) | | 7 |
| | 379 |
| | — |
| | — |
|
Dividends received from subsidiaries | 101 |
| | — |
| | (101 | ) | | — |
| | — |
|
Change in amounts due to/from affiliates | (18 | ) | | (6 | ) | | 24 |
| | — |
| | — |
|
Other, net | 6 |
| | — |
| | (25 | ) | | — |
| | (19 | ) |
Net cash (used in) provided by investing activities | (349 | ) | | 1 |
| | 142 |
| | — |
| | (206 | ) |
Financing activities: | | | | | | | | | |
Other, net | 20 |
| | — |
| | (1 | ) | | — |
| | 19 |
|
Net cash provided by (used in) financing activities | 20 |
| | — |
| | (1 | ) | | — |
| | 19 |
|
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | (274 | ) | | — |
| | 760 |
| | — |
| | 486 |
|
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period | 360 |
| | — |
| | 2,066 |
| | — |
| | 2,426 |
|
Cash, cash equivalents, and restricted cash and cash equivalents at end of period | $ | 86 |
| | $ | — |
| | $ | 2,826 |
| | $ | — |
| | $ | 2,912 |
|
CONTROLS AND PROCEDURES
MANAGEMENT’S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of any possible controls and procedures.
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-K pursuant to Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2018,2019, at the reasonable assurance level. In addition, management concluded that our consolidated financial statements included in this Annual Report on Form 10-K are fairly stated in all material respects in accordance with U.S. generally accepted accounting principles (“GAAP”) for each of the periods presented herein.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management concluded that we maintained effective internal control over financial reporting as of December 31, 2018,2019, based on criteria described in Internal Control-Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Ernst & Young, LLP, the independent registered public accounting firm who audited our Consolidated Financial Statements included in this Form 10-K, has issued a report on our internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2018,2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Molina Healthcare, Inc. 2019 Form 10-K | 90
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Molina Healthcare, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Molina Healthcare, Inc.’s internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria)“COSO criteria”). In our opinion, Molina Healthcare, Inc. (the Company)“Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the consolidated balance sheets of Molina Healthcare, Inc.the Company as of December 31, 20182019 and 20172018 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018,2019, and the related notes and our report dated February 19, 2019,14, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 19,14, 2020
Molina Healthcare, Inc. 2019 Form 10-K | 91
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Molina Healthcare, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Molina Healthcare, Inc. (the Company)“Company”) as of December 31, 20182019 and 2017, and2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2018,2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the Company'sCompany’s internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control — IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 19, 2019,14, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of incurred but not paid fee-for-service claims
| |
Description of the Matter | As of December 31, 2019, the Company’s liability for fee-for-service claims incurred but not paid (“IBNP”) comprised $1,406 million of the $1,854 million of Medical Claims and Benefits Payable. As discussed in Note 10 to the consolidated financial statements, the Company’s IBNP liability is determined using actuarial methods that include a number of factors and assumptions, including completion factors, which seek to measure the cumulative percentage of claims expense that will have been paid for a given month of service as of the reporting date, based on historical payment patterns, and assumed health care cost trend factors, which represent an estimate of claims expense based on recent claims expense levels and healthcare cost levels. There is a significant uncertainty inherent in determining management’s best estimate of completion and trend factors, w |
hich are used to calculate actuarial estimates of incurred but not paid claims.
Auditing management’s best estimate of the IBNP liability was complex and required the involvement of our actuarial specialists due to the highly judgmental nature of completion and trend factor assumptions used in the valuation process. These assumptions have a significant effect on the valuation of the IBNP liability.
| |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the process for estimating the IBNP liability. This included testing management review controls over completion and trend factor assumptions, and management’s review and approval of actuarial methods used to calculate IBNP liability, including the data inputs and outputs of those models. |
To test IBNP liability, our audit procedures included, among others, testing the completeness and accuracy of data used in the calculation by testing reconciliations of underlying claims and membership data recorded in source systems to the actuarial reserving calculations, and comparing a sample of claims to source documentation. With the assistance of EY actuarial specialists, we evaluated the Company’s selection and weighting of actuarial methods by comparing the weightings used in the current estimate to those used in prior periods and those used in the industry for the specific types of insurance. To evaluate significant assumptions used by management in the actuarial methods, we compared assumptions to current and historical claims trends, to those used historically and to current industry benchmarks. We also compared management’s recorded IBNP liability to a range of reasonable IBNP estimates calculated independently by our EY actuarial specialists. Additionally, we performed a review of the prior period estimates using subsequent claims development, and we reviewed and evaluated management’s disclosures surrounding fee-for-service claims IBNP.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2000.
Los Angeles, California
February 19,14, 2020
Molina Healthcare, Inc. 2019 Form 10-K | 93
OTHER INFORMATION
Principal Accounting Officer Designation
Maurice S. Hebert was designated as our Principal Accounting Officer for purposes of the Securities Exchange Act of 1934, as amended, effective as of February 19, 2019. There is no family relationship between or among Mr. Hebert and any director, executive officer, or person nominated or chosen by the Company to become an executive officer of the Company, and there are no transactions that would be required to be reported pursuant to Item 404(a) of Regulation S-K. For further information, see “Directors, Executive Officers, and Corporate Governance” below.
Amendments to Certificate of Incorporation and Bylaws
On February 18, 2019, in response to feedback from our institutional stockholders, our Board of Directors approved amendments to the Company's Certificate of Incorporation, as amended, in order to declassify our Board of Directors over a three-year period. The amendments will be submitted for adoption by our stockholders at our 2019 annual meeting of stockholders.
In connection with the amendments, our Board of Directors approved an amendment and restatement of the Company’s Bylaws that affected a number of changes. The amendment and restatement deleted Section 3.3(c) of the Bylaws, which provided that any director may be removed at any time only for cause by an affirmative vote of the holders of two-thirds of the shares then entitled to vote in the election of directors. Delaware corporate law provides that, unless otherwise provided in the certificate of incorporation, members of a board that is classified may be removed only for cause. Accordingly, as long as our Board of Directors remains classified, members of the Board will be removable for cause by the holders of a majority of our outstanding shares entitled to vote at an election of directors. If the proposed amendments to the Certificate of Incorporation are adopted by our stockholders, when the Board has ceased to be classified after the three year phase-in period, members of the Board will be removable with or without cause by the holders of a majority of our outstanding shares entitled to vote at an election of directors.
The amendment and restatement also amended the following provisions of the Bylaws:
Section 2.4, which relates to making available a list of stockholders in connection with stockholder meetings, in order to conform to applicable provisions of the Delaware General Corporation Law; and
Section 5.1, in order to delete the requirement that the executive officers of the company include a Chief Operating Officer.
The Sixth Amended and Restated Bylaws of the company, which reflect the above amendments, became effective upon approval by our Board of Directors. A copy of the Sixth Amended and Restated Bylaws of the Company is included as Exhibit 3.3 hereto and is incorporated herein by reference.
Amended and Restated Change in Control Severance Plan
On February 18, 2019, our Board of Directors approved an amendment and restatement of the Company’s Change in Control Severance Plan (the “Original Plan”), as set forth in the Molina Healthcare, Inc. Amended and Restated Change in Control Severance Plan (the “Amended and Restated Plan”).
The Amended and Restated Plan provides that all employees with positions of vice president and above, including our named executive officers, are eligible to receive certain separation benefits in the event of a qualifying termination of employment within two years following a change in control of the Company. The Amended and Restated Plan left unchanged the provisions of the Original Plan providing that senior vice presidents and above would be entitled to receive two times (2x) their base salary, vice presidents would be entitled to receive one times (1x) their base salary, and all participants would be entitled to receive a prorated target bonus for the year of termination and accelerated vesting of all of their time-based equity awards.
The Amended and Restated Plan amends the accelerated vesting provision with respect to performance-based equity compensation that participants were eligible to receive under the Original Plan. Pursuant to the Original Plan, participants would have been entitled to full vesting of all performance-based equity compensation. The Amended and Restated Plan provides that the participant’s performance-based equity compensation shall become vested based upon the greater of: (1) target performance, based on the assumption that such target performance had been achieved, or (2) the projected final achievement of the performance metric through the measurement period, provided that where applicable, such projected final achievement shall be based on straight-line extrapolation of actual achievement (as of the termination date) through the end of the respective performance metric period; except
to the extent vesting is determined by reference to any completed fiscal year, then actual performance for such completed fiscal year shall be used.
In addition, the Amended and Restated Plan amends the post-termination continued healthcare and life insurance benefit that participants were eligible to receive under the Original Plan. The Original Plan provided that, in the event of a qualifying termination, participants would be entitled to continued health care, dental, and life insurance benefits under the Company’s applicable benefits programs for 24 months following the date of termination, and would be eligible for COBRA continuation coverage following such period. The Amended and Restated Plan provides that if the participant elects continued healthcare coverage under COBRA, the Company will, for a period of up to 18 months following the participant’s termination of employment, subsidize a portion of the participant’s COBRA premiums in an amount equal to the difference between the full cost for such COBRA coverage and the amount that the participant would be required to pay for such coverage as an active employee. The Amended and Restated Plan does not provide a continued life insurance benefit.
The Amended and Restated Plan makes certain additional changes to the Original Plan, including the addition of a clawback provision that would allow the Company to recoup severance benefits paid or provided to a participant who violates the nondisparagement, confidentiality, or nonsolicitation provisions set forth therein.
The named executive officers are entitled to receive such separation benefits under the Amended and Restated Plan only to the extent that such separation benefits would be in addition to or in excess of the benefits provided under their employment/change of control agreements.
The foregoing summary of the Amended and Restated Plan does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Amended and Restated Plan. A copy of the Amended and Restated Plan is included as Exhibit 10.1 hereto and is incorporated herein by reference.
None.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following sets forth certain information regarding our executive officers, including the business experience of each executive officer during the past five years:
|
| | |
Name | Age | Position |
Joseph M. Zubretsky | 62 | President and Chief Executive Officer |
Thomas L. Tran | 62 | Chief Financial Officer |
Jeff D. Barlow | 56 | Chief Legal Officer and Corporate Secretary |
James E. Woys | 60 | Executive Vice President, Health Plan Services |
Mark L. Keim | 53 | Executive Vice President, Strategic Planning, Corporate Development & Transformation |
Pamela S. Sedmak | 57 | Executive Vice President, Health Plan Operations |
Maurice S. Hebert | 56 | Chief Accounting Officer |
Mr. Zubretsky has served as President and Chief Executive Officer since November 6, 2017. He served as the President and Chief Executive Officer of The Hanover Insurance Group, Inc. from June 2016 to October 2017. Prior to that, Mr. Zubretsky served almost nine years at Aetna, Inc., where he most recently served as Chief Executive Officer of Healthagen Holdings, a group of healthcare services and information technology companies at Aetna, from January 2015 to October 2015. Prior to that, he served as a Senior Executive Vice President leading Aetna’s National Businesses from 2013 to 2014, and served as Aetna’s Chief Financial Officer from 2007 to 2013. None of the entities where Mr. Zubretsky was previously employed is a parent, subsidiary, or other affiliate of the Company.
Mr. Tran has served as Chief Financial Officer since June 2018. He served as the Chief Financial Officer and Chief Operating Officer of Sentry Data Systems from 2014 to 2018. Prior to that, Mr. Tran served as Chief Financial Officer of WellCare Health Plans from 2008 to 2014. None of the entities where Mr. Tran was previously employed is a parent, subsidiary, or other affiliate of the Company.
Mr. Barlow has served as Chief Legal Officer and Corporate Secretary since 2010.
Mr. Woys has served as Executive Vice President, Health Plan Services since May 2018. Mr. Woys spent 30 years at Health Net where he most recently served as the Executive Vice President and Chief Financial and Operating
Officer. None of the entities where Mr. Woys was previously employed is a parent, subsidiary, or other affiliate of the Company.
Mr. Keim has served as Executive Vice President, Strategic Planning, Corporate Development and Transformation since January 2018. Most recently, he served as executive vice president of corporate development and strategy for The Hanover Insurance Group. Prior to The Hanover Insurance Group, Mr. Keim spent six years with Aetna where he led major strategic initiatives. Before Aetna, he was senior vice president of strategy and business development at GE Capital. None of the entities where Mr. Keim was previously employed is a parent, subsidiary, or other affiliate of the Company.
Ms. Sedmak has served as Executive Vice President, Health Plan Operations since February 2018. Ms. Sedmak brings more than 25 years of Medicaid managed care leadership experience in operations, strategy, and finance. Most recently, she was a senior adviser at McKinsey & Company, serving clients in the health care services and global corporate finance practice areas. Prior to McKinsey, she served as president and CEO for Aetna Medicaid/Dual Eligibles. Before Aetna, Ms. Sedmak held C-level leadership positions at Blue Cross and Blue Shield of Minnesota, CareSource and General Electric. None of the entities where Ms. Sedmak was previously employed is a parent, subsidiary, or other affiliate of the Company.
Mr. Hebert has served as Chief Accounting Officer since September 2018. He joins the Company from Tufts Health Plan, where he served as Senior Vice President of Finance from 2016 to 2018. Prior to that, Mr. Hebert served as Chief Accounting Officer at WellCare Health Plans from 2010 to 2016. None of the entities where Mr. Hebert was previously employed is a parent, subsidiary, or other affiliate of the Company.
Each executive officer serves at the pleasure of the board of directors.
The remaining information called forInformation required by Item 10 of Form 10-KPart III will be included in our Proxy Statement relating to our 2020 Annual Meeting of Stockholders, and is incorporated herein by reference to “Electionreference. This information is included in the following sections of the Proxy Statement:
PROPOSAL 1 - Election of Directors
Information About Director Nominees
Information About Directors Continuing in Office
Additional Information About Directors
Corporate Governance and Board of Directors Matters
Information About the Executive Officers of the Company
Section 16(a) Beneficial Ownership Reporting Compliance
Information relating to our Code of Business Conduct and Ethics and compliance with Section 16(a) of the 1934 Act is set forth in our Proxy Statement relating to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference. To the extent permissible under NYSE rules, we intend to disclose amendments to our Code of Business Conduct and Ethics, as well as waivers of the provisions thereof, on our investor relations website under the heading “Investor Information—Corporate Governance” at molinahealthcare.com.
EXECUTIVE COMPENSATION
Information required by Item 11 of Part III will be included in our Proxy Statement relating to our 2020 Annual Meeting of Stockholders in the section entitled “Executive Compensation,” and is incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Information required by Item 12 of Part III will be included in our Proxy Statement relating to our 2020 Annual Meeting of Stockholders in the section entitled “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by Item 13 of Part III will be included in our Proxy Statement relating to our 2020 Annual Meeting of Stockholders in the sections entitled “Related Party Transactions,” and “Corporate Governance and Board of Directors Matters,Matters—Director Independence,” and “Section 16(a) Beneficial Ownership Reporting Compliance”is incorporated herein by reference.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 of Part III will be included in our definitive proxy statement forProxy Statement relating to our 20192020 Annual Meeting of Stockholders.Stockholders in the section entitled “Fees Paid to Independent Registered Public Accounting Firm,” and is incorporated herein by reference.
Molina Healthcare, Inc. 2019 Form 10-K | 94
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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(a) | The consolidated financial statements and exhibits listed below are filed as part of this Form 10-K. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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(1) | The consolidated financial statements are included in Financialthis report in the section entitled “Financial Statements and Supplementary Data, above, are filed as part of this annual report.Data.” |
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(2) | Financial Statement SchedulesSchedules: |
NoneSchedules for which provision is made in the applicable accounting regulations of the schedules apply,SEC are not required under the related instructions, are inapplicable, or the required information required is included in the Notes to the Consolidated Financial Statements.consolidated financial statements, and therefore have been omitted.
EXHIBITS
Reference is made to the accompanying Index“Index to Exhibits.”
Molina Healthcare, Inc. 2019 Form 10-K | 95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the undersigned registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 19th14th day of February, 2019.2020.
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| MOLINA HEALTHCARE, INC. |
| | | |
| By: | | /s/ Joseph M. Zubretsky |
| | | Joseph M. Zubretsky |
| | | Chief Executive Officer (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.as indicated, as of February 14, 2020.
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| | | | |
Signature | | Title | | Date |
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/s/ Joseph M. Zubretsky | | Chief Executive Officer, President and Director | | February 19, 2019 |
Joseph M. Zubretsky | | (Principal Executive Officer) | | |
| | | | |
/s/ Thomas L. Tran | | Chief Financial Officer and Treasurer | | February 19, 2019 |
Thomas L. Tran | | (Principal Financial Officer) | | |
| | | | |
/s/ Maurice S. Hebert | | Chief Accounting Officer | | February 19, 2019 |
Maurice S. Hebert | | (Principal Accounting Officer) | | |
| | | | |
/s/ Garrey E. Carruthers | | Director | | February 19, 2019 |
Garrey E. Carruthers, Ph.D. | | | | |
| | | | |
/s/ Daniel Cooperman | | Director | | February 19, 2019 |
Daniel Cooperman | | | | |
| | | | |
/s/ Charles Z. FedakBarbara L. Brasier | | Director | | February 19, 2019 |
Charles Z. Fedak | | Barbara L. Brasier | | |
| | | | |
/s/ Steven J. Orlando | | Director | | February 19, 2019 |
Steven J. Orlando | | | | |
| | | | |
/s/ Ronna E. Romney | | Director | | February 19, 2019 |
Ronna E. Romney | | | | |
| | | | |
/s/ Richard M. Schapiro | | Director | | February 19, 2019 |
Richard M. Schapiro | | | | |
| | | | |
/s/ Dale B. Wolf | | Chairman of the Board | | February 19, 2019 |
Dale B. Wolf | | | | |
| | | | |
/s/ Richard C. Zoretic | | Director | | February 19, 2019 |
Richard C. Zoretic | | | | |
| | | | |
Molina Healthcare, Inc. 2019 Form 10-K | 96
INDEX TO EXHIBITS
The following exhibits, which are furnished with this Annual Report on Form 10-K (this “Form 10-K”) or incorporated herein by reference, are filed as part of this annual report.
The agreements included or incorporated by reference as exhibits to this Form 10-K may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of “materiality” that are different from “materiality” under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement. The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Form 10-K not misleading.
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Number | | Description | | Method of Filing |
| | Membership Interest Purchase Agreement, dated as of September 3, 2015, by and among The Providence Service Corporation, Ross Innovative Employment Solutions Corp., and Molina Healthcare, Inc. | | Filed as Exhibit 2.1 to registrant’s Form 8-K filed September 8, 2015. |
| | Amendment to Membership Interest Purchase Agreement, dated as of October 30, 2015, by and among The Providence Service Corporation, Ross Innovative Employment Solutions Corp., and Molina Pathways, LLC, as assignee of all rights and obligations of Molina Healthcare, Inc. | | Filed as Exhibit 2.2 to registrant’s Form 10-K filed February 26, 2016.
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| | Membership Interest Purchase Agreement, dated as of October 19, 2018, by and among Pyramid Health Holdings, LLC, Molina Pathways, LLC, and Molina Healthcare, Inc.** | | Filed as Exhibit 2.1 to registrant’s Form 10-Q filed November 1, 2018.
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| | Purchase and Sale Agreement, dated as of June 26, 2018, by and between Molina Healthcare, Inc. and DXC Technology Company** | | Filed as Exhibit 2.1 to registrant’s Form 8-K filed June 27, 2018.2018
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| | Certificate of Incorporation | | Filed as Exhibit 3.2 to registrant’s Registration Statement on Form S-1 filed December 30, 2002.2002 |
| | Certificate of Amendment to Certificate of Incorporation | | Filed as Appendix A to registrant’s Definitive Proxy Statement on Form DEF 14A filed March 25, 2013.2013 |
| | Certificate of Amendment to Certificate of Incorporation | | Filed as Appendix A to registrant’s Definitive Proxy Statement on Form DEF 14A filed March 25, 2019 |
| | Sixth Amended and Restated Bylaws of Molina Healthcare, Inc. | | Filed herewith.as Exhibit 3.3 to registrant’s Form 10-K filed February 19, 2019 |
| | Indenture, dated as of February 15, 2013, by and between Molina Healthcare, Inc. and U.S. Bank, National Association | | Filed as Exhibit 4.1 to registrant’s Form 8-K filed February 15, 2013. |
| | Form of 1.125% Cash Convertible Senior Note due 2020 | | Included in Exhibit 4.1 to registrant’s Form 8-K filed February 15, 2013. |
| | Indenture, dated as of September 5, 2014, by and between Molina Healthcare, Inc. and U.S. Bank National Association | | Filed as Exhibit 4.1 to registrant’s Form 8-K filed September 8, 2014. |
| | Form of 1.625% Convertible Senior Note due 2044 | | Included in Exhibit 4.1 to registrant’s Form 8-K filed September 8, 2014. |
| | First Supplemental Indenture, dated as of September 16, 2014, by and between Molina Healthcare, Inc. and the U.S. Bank National Association | | Filed as Exhibit 4.1 to registrant’s Form 8-K filed
September 17, 2014.
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| | Form of 1.625% Convertible Senior Note due 2044 | | Included in Exhibit 4.1 to registrant’s Form 8-K filed September 17, 2014. |
| | Indenture dated November 10, 2015, by and among Molina Healthcare, Inc., the guarantor parties thereto and U.S. Bank National Association, as Trustee | | Filed as Exhibit 4.1 to registrant’s Form 8-K filed November 10, 2015.2015 |
| | Form of 5.375% Senior Notes due 2022 | | Filed as Exhibit 4.1 to registrant’s Form 8-K filed November 10, 2015.2015 |
| | Form of Guarantee pursuant to Indenture, dated as of November 10, 2015, by and among Molina Healthcare, Inc., the guarantors party thereto and U.S. Bank National Association, as Trustee | | Filed as Exhibit 4.1 to registrant’s Form 8-K filed November 10, 2015. |
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| | | | |
Number | | Description | | Method of Filing2015 |
| | First Supplemental Indenture, dated as of February 16, 2016, by and among Molina Healthcare, Inc., the guarantors party thereto and U.S. Bank National Association, as trusteeTrustee | | Filed as Exhibit 4.1 to registrant’s Form 8-K filed February 18, 2016.2016 |
| | Indenture, dated June 6, 2017, by and among Molina Healthcare, Inc., the Guarantors party thereto and U.S. Bank National Association, as Trustee.Trustee | | Filed as Exhibit 1.1 to registrant’s Form 8-K filed June 6, 2017.2017 |
| | Form of 4.875% Senior Notes (included in Exhibit 4.1 to registrant’s Form 8-K filed June 6, 2017). | | Filed as Exhibit 1.1 to registrant’s Form 8-K filed June 6, 2017.2017 |
| | Form of Guarantees (included in Exhibit 4.1 to registrant’s Form 8-K filed June 6, 2017). | | Filed as Exhibit 1.1 to registrant’s Form 8-K filed June 6, 2017. |
| | Molina Healthcare, Inc. Amended and Restated Change in Control Severance Plan | | Filed herewith. |
| | 2011 Equity Incentive Plan | | Filed as Exhibit 10.8 to registrant’s Form 10-K filed February 26, 2014. |
| | 2011 Employee Stock Purchase Plan | | Filed as Exhibit 10.6 to registrant’s Form 10-K filed February 26, 2015. |
| | 2011 Equity Incentive Plan - Form of Stock Option Agreement (Director) | | Filed as Exhibit 10.2 to registrant’s Form 10-Q filed May 4, 2017. |
| | 2011 Equity Incentive Plan - Form of Restricted Stock Award Agreement (Employee) | | Filed as Exhibit 10.3 to registrant’s Form 10-Q filed May 4, 2017. |
| | 2011 Equity Incentive Plan - Form of Performance Unit Award Agreement 1 (Executive Officer) | | Filed as Exhibit 10.4 to registrant’s Form 10-Q filed May 4, 2017. |
| | 2011 Equity Incentive Plan - Form of Performance Unit Award Agreement 2 (Executive Officer) | | Filed as Exhibit 10.5 to registrant’s Form 10-Q filed May 4, 2017. |
| | Employment Agreement with Jeff Barlow dated June 14, 2013 | | Filed as Exhibit 10.3 to registrant’s Form 8-K filed June 14, 2013. |
| | Change in Control Agreement with Jeff D. Barlow, dated as of September 18, 2012 | | Filed as Exhibit 10.16 to registrant’s Form 10-K filed February 28, 2013. |
| | Form of Indemnification Agreement | | Filed as Exhibit 10.14 to registrant’s Form 10-K filed March 14, 2007. |
| | Employment Agreement, dated October 9, 2017 by and between Molina Healthcare, Inc. and Joseph M. Zubretsky. | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed October 10, 2017. |
| | Base Call Option Transaction Confirmation, dated as of February 11, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed February 15, 2013. |
| | Base Call Option Transaction Confirmation, dated as of February 11, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. | | Filed as Exhibit 10.2 to registrant’s Form 8-K filed February 15, 2013. |
| | Base Warrants Confirmation, dated as of February 11, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch | | Filed as Exhibit 10.3 to registrant’s Form 8-K filed February 15, 2013.2013 |
| | Base Warrants Confirmation, dated as of February 11, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. | | Filed as Exhibit 10.4 to registrant’s Form 8-K filed February 15, 2013.2013 |
| | Amendment to Base Call Option Transaction Confirmation, dated as of February 13, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch | | Filed as Exhibit 10.5 to registrant’s Form 8-K filed February 15, 2013. |
| | Amendment to Base Call Option Transaction Confirmation, dated as of February 13, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. | | Filed as Exhibit 10.6 to registrant’s Form 8-K filed February 15, 2013. |
| | Additional Base Warrants Confirmation, dated as of February 13, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch | | Filed as Exhibit 10.7 to registrant’s Form 8-K filed February 15, 2013.2013 |
| | Additional Base Warrants Confirmation, dated as of February 13, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. | | Filed as Exhibit 10.8 to registrant’s Form 8-K filed February 15, 2013.2013 |
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Number | | Description | | Method of Filing |
| | Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch | | Filed as Exhibit 10.1 to registrant’s Form 10-Q filed May 3, 2013.2013 |
| | Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. | | Filed as Exhibit 10.2 to registrant’s Form 10-Q filed May 3, 2013. |
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| | | | |
Number | | Description | | Method of Filing2013 |
| | Additional Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch | | Filed as Exhibit 10.3 to registrant’s Form 10-Q filed May 3, 2013.2013 |
| | Additional Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. | | Filed as Exhibit 10.4 to registrant’s Form 10-Q filed May 3, 2013.2013 |
| | Settlement Agreement entered into on October 30, 2013, by and between the Department of Health Care Services and Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc. | | Filed as Exhibit 10.1 to registrant’s Form 10-Q filed October 30, 2013. |
| | Guarantor Joinder Agreement, dated February 16, 2016, by and among the guarantors party thereto and SunTrust Bank, as Administrative Agent | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed February 18, 2016. |
| | Purchase Agreement, dated May 22, 2017, by and among the Company, the guarantors party thereto and SunTrust Robinson Humphrey, Inc., as representative of the several initial purchasers named in Schedule A thereto. | | Filed as Exhibit 1.1 to registrant’s Form 8-K filed May 23, 2017. |
| | Commitment Letter, dated December 4, 2017, by and among Molina Healthcare, Inc., SunTrust Bank and SunTrust Robinson Humphrey, Inc. | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed December 7, 2017. |
| | Amended and Restated Commitment Letter, dated as of January 2, 2018, by and among Molina Healthcare, Inc., SunTrust Bank, SunTrust Robinson Humphrey, Inc., Barclays Bank PLC, MUFG, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley Senior Funding, Inc. | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed January 2, 2018. |
| | Bridge Credit Agreement, dated as of January 2, 2018, by and among Molina Healthcare, Inc., as the Borrower, Molina Information Systems, LLC, Molina Pathways LLC and Pathways Health and Community Support LLC, as the Guarantors, SunTrust Bank, Barclays Bank PLC, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Bank of America, N.A., and Morgan Stanley Senior Funding, Inc., as Lenders, and SunTrust Bank, as Administrative Agent. | | Filed as Exhibit 10.2 to registrant’s Form 8-K filed January 2, 2018. |
| | Capitated Medical Group/IPA Provider Services Agreement, effective May 1, 2013, by and between Molina Healthcare of California and Pacific Healthcare IPA | | Filed as Exhibit 10.42 to registrant’s Form 10-K filed February 26, 2016. |
| | Regulatory Amendment for the Capitated Financial Alignment Demonstration Product to Molina Healthcare of California Group/IPA Provider Services Agreement(s), effective September 26, 2014, by and between Molina Healthcare of California and Pacific Healthcare IPA Associates, Inc. | | Filed as Exhibit 10.43 to registrant’s Form 10-K filed February 26, 2016. |
| | Capitated Financial Alignment Demonstration Amendment to Molina Healthcare of California Group/IPA Provider Services Agreement, effective as of July 1, 2014, by and between Molina Healthcare of California and Pacific Healthcare IPA Associates, Inc. | | Filed as Exhibit 10.44 to registrant’s Form 10-K filed February 26, 2016. |
| | Offer Letter, dated May 4, 2018, by and between Molina Healthcare, Inc. and Thomas L. Tran. | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed May 24, 2018. |
| | Sixth Amendment to Credit Agreement, dated as of January 31, 2019, by and among Molina Healthcare, Inc., the Guarantors party thereto, the Lenders party thereto and SunTrust Bank, in its capacity as Administrative Agent, including the amended and restated Credit Agreement attached as Exhibit A thereto, the amended and restated Schedule I to the Credit Agreement attached as Exhibit B thereto and the amended and restated Exhibit 2.5 to the Credit Agreement attached as Exhibit C thereto.thereto | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed January 31, 2019. 2019 |
| | Molina Healthcare, Inc. 2011 Employee Stock Purchase Plan | | Filed as Exhibit 10.6 to registrant’s Form 10-K filed February 26, 2015 |
| | Molina Healthcare, Inc. 2011 Equity Incentive Plan | | Filed as Exhibit 10.8 to registrant’s Form 10-K filed February 26, 2014 |
| | 2011 Equity Incentive Plan - Form of Stock Option Agreement (Director) | | Filed as Exhibit 10.2 to registrant’s Form 10-Q filed May 4, 2017 |
| | 2011 Equity Incentive Plan - Form of Restricted Stock Award Agreement (Employee) | | Filed as Exhibit 10.3 to registrant’s Form 10-Q filed May 4, 2017 |
| | 2011 Equity Incentive Plan - Form of Performance Unit Award Agreement 1 (Executive Officer) | | Filed as Exhibit 10.4 to registrant’s Form 10-Q filed May 4, 2017 |
| | 2011 Equity Incentive Plan - Form of Performance Unit Award Agreement 2 (Executive Officer) | | Filed as Exhibit 10.5 to registrant’s Form 10-Q filed May 4, 2017 |
| | 2019 Employee Stock Purchase Plan | | Filed as Appendix B to registrant’s Definitive Proxy Statement on Form DEF 14A filed March 25, 2019 |
| | Molina Healthcare, Inc. 2019 Equity Incentive Plan | | Filed as Appendix B to registrant’s Definitive Proxy Statement on Form DEF 14A filed March 25, 2019 |
| | 2019 Equity Incentive Plan - Form of Restricted Stock Award Agreement (Employee/Officer with No Employment Agreement) | | Filed as Exhibit 10.1 to registrant’s Form 10-Q filed July 31, 2019 |
| | 2019 Equity Incentive Plan - Form of Performance Stock Unit Award Agreement (Employee/Officer with No Employment Agreement) | | Filed as Exhibit 10.2 to registrant’s Form 10-Q filed July 31, 2019 |
| | 2019 Equity Incentive Plan - Form of Restricted Stock Award Agreement (Officer with Employment Agreement) | | Filed as Exhibit 10.3 to registrant’s Form 10-Q filed July 31, 2019 |
| | 2019 Equity Incentive Plan - Form of Performance Stock Unit Award Agreement (Officer with Employment Agreement) | | Filed as Exhibit 10.4 to registrant’s Form 10-Q filed July 31, 2019 |
| | Molina Healthcare, Inc. Amended and Restated Change in Control Severance Plan | | Filed as Exhibit 10.1 to registrant’s Form 10-K filed February 19, 2019 |
| | Form of Indemnification Agreement | | Filed as Exhibit 10.14 to registrant’s Form 10-K filed March 14, 2007 |
| | Molina Healthcare, Inc. Amended and Restated Deferred Compensation Plan (2018) | | Filed as Exhibit 10.2 to registrant’s Form 10-Q filed August 1, 2018.2018 |
| | Master Services Agreement for Information Technology Services, dated February 4, 2019, by and betweenAmendment No. One to the Molina Healthcare, Inc. Amended and Infosys Limited.Restated Deferred Compensation Plan (2018) | | Filed herewith.herewith |
| | List of subsidiariesEmployment Agreement with Jeff Barlow dated June 14, 2013 | | Filed herewith.as Exhibit 10.3 to registrant’s Form 8-K filed June 14, 2013 |
| | ConsentChange in Control Agreement with Jeff D. Barlow, dated as of Independent Registered Public Accounting FirmSeptember 18, 2012 | | Filed herewith.as Exhibit 10.16 to registrant’s Form 10-K filed February 28, 2013 |
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| | | | |
Number | | Description | | Method of Filing |
| | Employment Agreement, dated October 9, 2017, by and between Molina Healthcare, Inc. and Joseph M. Zubretsky | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed October 10, 2017 |
| | Offer Letter, dated May 4, 2018, by and between Molina Healthcare, Inc. and Thomas L. Tran | | Filed as Exhibit 10.1 to registrant’s Form 8-K filed May 24, 2018 |
| | Master Services Agreement for Information Technology Services, dated February 4, 2019, by and between Molina Healthcare, Inc. and Infosys Limited | | Filed as Exhibit 10.36 to registrant’s Form 10-K filed February 19, 2019
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| | First Amendment, dated August 1, 2019, to the Master Services Agreement for Information Technology Services, dated February 4, 2019, by and between Molina Healthcare, Inc. and Infosys Limited | | Filed as Exhibit 10.1 to registrant’s Form 10-Q filed October 30, 2019 |
| | List of subsidiaries | | Filed herewith |
| | Consent of Independent Registered Public Accounting Firm | | Filed herewith |
| | Section 302 Certification of Chief Executive Officer | | Filed herewith.herewith |
| | Section 302 Certification of Chief Financial Officer | | Filed herewith.herewith |
| | Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith.herewith |
| | Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith.herewith |
101.INS | | XBRL Taxonomy Instance Document | | Filed herewith.herewith |
101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith.herewith |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith.herewith |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith.herewith |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith.herewith |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith.herewith |
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* | Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of Form 10-K. |
**
| Certain schedules and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request. |
+ | Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission under Rule 24b-2. The omitted confidential material has been filed separately. The location of the redacted confidential information is indicated in the exhibit as “[redacted]”. |
Molina Healthcare, Inc. 20182019 Form 10-K | 13199