UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2019~~2020



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-31719

MOLINA HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)



Delaware		13-4204626
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 Oceangate, Suite 100
Long Beach,	California	90802
(Address of principal executive offices)		(Zip Code)

(~~562~~) (562) 435-3666

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 Par Value	MOH	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

L~~Large~~arge Accelerated Filer ☒ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of October ~~25, 2019,~~23, 2020, was approximately ~~62,700,000.~~59,300,000.

Table of Contents

MOLINA HEALTHCARE, INC. FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, ~~2019~~2020

TABLE OF CONTENTS


ITEM NUMBER		Page

PART I

1.	Financial Statements	3

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

3.	Quantitative and Qualitative Disclosures About Market Risk	42

4.	Controls and Procedures	43

PART II

1.	Legal Proceedings	43

1A.	Risk Factors	43

2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

3.	Defaults Upon Senior Securities	Not Applicable.

4.	Mine Safety Disclosures	Not Applicable.

5.	Other Information	Not Applicable.

6.	Exhibits	45

	Signatures	46

ITEM NUMBER Page

PART I - Financial Information

1.
Financial Statements
3

2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28

3.
Quantitative and Qualitative Disclosures About Market Risk
47

4.
Controls and Procedures
48

Part II - Other Information

1.
Legal Proceedings
48

1A.
Risk Factors
48

2.
Unregistered Sales of Equity Securities and Use of Proceeds
49

3. Defaults Upon Senior Securities Not Applicable.

4. Mine Safety Disclosures Not Applicable.

5. Other Information Not Applicable.

6.
Exhibits
50

Signatures
51

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME


											Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended September 30,				Nine Months Ended September 30,						2020		2019		2020		2019
	2019		2018		2019			2018
	(In millions, except per-share amounts) (Unaudited)										(In millions, except per-share amounts) (Unaudited)
Revenue:										Revenue:
Premium revenue	$	4,084	$	4,337	$	12,085		$	13,174	Premium revenue	$	4,768	$	4,084	$	13,444	$	12,085
Premium tax revenue	119		110		367			320		Premium tax revenue	170		119		477		367
Health insurer fees reimbursed	—		83		—			248		Health insurer fees reimbursed	69		0		206		0
Service revenue	—		130		—			391
Investment income and other revenue	40		37		103			93		Investment income and other revenue	14		40		61		103
Total revenue	4,243		4,697		12,555			14,226		Total revenue	5,021		4,243		14,188		12,555
Operating expenses:										Operating expenses:
Medical care costs	3,523		3,790		10,360			11,362		Medical care costs	4,098		3,523		11,412		10,360
General and administrative expenses	323		311		953			998		General and administrative expenses	368		323		1,030		953
Premium tax expenses	119		110		367			320		Premium tax expenses	170		119		477		367
Health insurer fees	—		87		—			261		Health insurer fees	70		0		209		0
Depreciation and amortization	21		25		68			76		Depreciation and amortization	23		21		64		68
Restructuring costs	—		5		5			38
Cost of service revenue	—		111		—			349
Other										Other	3		0		9		5
Total operating expenses	3,986		4,439		11,753			13,404		Total operating expenses	4,732		3,986		13,201		11,753
Gain on sale of subsidiary	—		37		—			37
Operating income	257		295		802			859		Operating income	289		257		987		802
Other expenses, net:										Other expenses, net:
Interest expense	22		26		67			91		Interest expense	27		22		72		67
Other expenses (income), net	2		10		(15		)	25
Other expense (income), net										Other expense (income), net	0		2		5		(15)
Total other expenses, net	24		36		52			116		Total other expenses, net	27		24		77		52
Income before income tax expense	233		259		750			743		Income before income tax expense	262		233		910		750
Income tax expense	58		62		181			237		Income tax expense	77		58		271		181
Net income	$	175	$	197	$	569		$	506	Net income	$	185	$	175	$	639	$	569

Net income per share:
Basic	$	2.81	$	3.22	$	9.15		$	8.32
Diluted	$	2.75	$	2.90	$	8.80		$	7.60
Net income per share - Basic										Net income per share - Basic	$	3.14	$	2.81	$	10.80	$	9.15
Net income per share - Diluted										Net income per share - Diluted	$	3.10	$	2.75	$	10.65	$	8.80

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


											Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended September 30,				Nine Months Ended September 30,						2020		2019		2020		2019
	2019		2018		2019		2018
	(In millions) (Unaudited)										(In millions) (Unaudited)
Net income	$	175	$	197	$	569	$	506		Net income	$	185	$	175	$	639	$	569
Other comprehensive income (loss):
Unrealized investment income (loss)	—		1		17		(5		)
Other comprehensive income:										Other comprehensive income:
Unrealized investment income										Unrealized investment income	6		0		43		17
Less: effect of income taxes	—		—		4		(1		)	Less: effect of income taxes	1		0		10		4
Other comprehensive income (loss), net of tax	—		1		13		(4		)
Other comprehensive income, net of tax										Other comprehensive income, net of tax	5		0		33		13
Comprehensive income	$	175	$	198	$	582	$	502		Comprehensive income	$	190	$	175	$	672	$	582

See accompanying notes.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 3

Table of Contents

CONSOLIDATED BALANCE SHEETS


							September 30, 2020		December 31, 2019
	September 30, 2019		December 31, 2018
	(Dollars in millions, except per-share amounts)						(Dollars in millions, except per-share amounts)
	(Unaudited)						(Unaudited)
ASSETS	ASSETS					ASSETS
Current assets:						Current assets:
Cash and cash equivalents	$	2,679	$	2,826		Cash and cash equivalents	$	3,196	$	2,452
Investments	1,757		1,681			Investments	1,769		1,946
Receivables	1,280		1,330			Receivables	1,775		1,406
Prepaid expenses and other current assets	140		149			Prepaid expenses and other current assets	213		163
Derivative asset	21		476
Total current assets	5,877		6,462			Total current assets	6,953		5,967
Property, equipment, and capitalized software, net	379		241			Property, equipment, and capitalized software, net	395		385
Goodwill and intangible assets, net	176		190			Goodwill and intangible assets, net	265		172
Restricted investments	79		120			Restricted investments	93		79
Deferred income taxes	82		117			Deferred income taxes	74		79
Other assets	108		24			Other assets	101		105
	$	6,701	$	7,154
Total assets						Total assets	$	7,881	$	6,787

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:						Current liabilities:
Medical claims and benefits payable	$	1,975	$	1,961		Medical claims and benefits payable	$	2,289	$	1,854
Amounts due government agencies	612		967			Amounts due government agencies	640		664
Accounts payable and accrued liabilities	478		390
Accounts payable, accrued liabilities and other						Accounts payable, accrued liabilities and other	566		502
Deferred revenue	207		211			Deferred revenue	61		249
Current portion of long-term debt	15		241
Derivative liability	21		476
Total current liabilities	3,308		4,246			Total current liabilities	3,556		3,269
Long-term debt	1,239		1,020			Long-term debt	1,813		1,237
Finance lease liabilities	233		197			Finance lease liabilities	226		231
Other long-term liabilities	90		44			Other long-term liabilities	85		90
Total liabilities	4,870		5,507			Total liabilities	5,680		4,827
Stockholders’ equity:						Stockholders’ equity:
Common stock, $0.001 par value, 150 million shares authorized; outstanding: 63 million shares at September 30, 2019, and 62 million shares at December 31, 2018	—		—
Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and outstanding	—		—
Common stock, $0.001 par value, 150 million shares authorized; outstanding: 59 million shares at September 30, 2020, and 62 million shares at December 31, 2019						Common stock, $0.001 par value, 150 million shares authorized; outstanding: 59 million shares at September 30, 2020, and 62 million shares at December 31, 2019	0		0
Preferred stock, $0.001 par value; 20 million shares authorized, 0 shares issued and outstanding						Preferred stock, $0.001 par value; 20 million shares authorized, 0 shares issued and outstanding	0		0
Additional paid-in capital	160		643			Additional paid-in capital	181		175
Accumulated other comprehensive income (loss)	5		(8		)
Accumulated other comprehensive income						Accumulated other comprehensive income	37		4
Retained earnings	1,666		1,012			Retained earnings	1,983		1,781
Total stockholders’ equity	1,831		1,647			Total stockholders’ equity	2,201		1,960
Total liabilities and stockholders’ equity						Total liabilities and stockholders’ equity	$	7,881	$	6,787
	$	6,701	$	7,154

See accompanying notes.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 4

Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
	Outstanding	Amount

	(In millions)
	(Unaudited)
Balance at December 31, 2019	62	$	0	$	175	$	4	$	1,781	$	1,960
Net income	—	—		—		—		178		178
Common stock purchases	(3)	—		(9)		—		(437)		(446)
Termination of warrants	—	—		(30)		—		—		(30)
Other comprehensive loss, net	—	—		—		(19)		—		(19)
Share-based compensation	—	—		4		—		—		4
Balance at March 31, 2020	59	0		140		(15)		1,522		1,647
Net income	—	—		—		—		276		276
Other comprehensive income, net	—	—		—		47		—		47
Share-based compensation	—	—		26		—		—		26
Balance at June 30, 2020	59	0		166		32		1,798		1,996
Net income	—	—		—		—		185		185
Other comprehensive income, net	—	—		—		5		—		5
Share-based compensation	—	—		15		—		—		15
Balance at September 30, 2020	59	$	0	$	181	$	37	$	1,983	$	2,201

Common Stock
Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings
Total
Outstanding Amount
(In millions)
(Unaudited)
Balance at December 31, 2018 62
$ —
$ 643
$ (8 ) $ 1,012
$ 1,647
Net income —
—
—
—
198
198
Adoption of new accounting standard —
—
—
—
85
85
Partial termination of 1.125% Warrants —
—
(103 ) —
—
(103 )
Other comprehensive income, net —
—
—
5
—
5
Share-based compensation 1
—
3
—
—
3
Balance at March 31, 2019 63
—
543
(3 ) 1,295
1,835
Net income —
—
—
—
196
196
Partial termination of 1.125% Warrants —
—
(321 ) —
—
(321 )
Other comprehensive income, net —
—
—
8
—
8
Share-based compensation —
—
18
—
—
18
Balance at June 30, 2019 63
—
240
5
1,491
1,736
Net income —
—
—
—
175
175
Partial termination of 1.125% Warrants —
—
(90 ) —
—
(90 )
Share-based compensation —
—
10
—
—
10
Balance at September 30, 2019 63
$ —
$ 160
$ 5
$ 1,666
$ 1,831

Common Stock
Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Loss

Retained
Earnings
Total
Outstanding Amount
(In millions)
(Unaudited)
Balance at December 31, 2017 60
$ —
$ 1,044
$ (5 ) $ 298
$ 1,337
Net income —
—
—
—
107
107
Adoption of new accounting standards —
—
—
(1 ) 7
6
Exchange of 1.625% Convertible Notes 2
—
108
—
—
108
Other comprehensive loss, net —
—
—
(6 ) —
(6 )
Share-based compensation —
—
1
—
—
1
Balance at March 31, 2018 62
—
1,153
(12 ) 412
1,553
Net income —
—
—
—
202
202
Partial termination of 1.125% Warrants —
—
(113 ) —
—
(113 )
Other comprehensive income, net —
—
—
1
—
1
Share-based compensation —
—
15
—
—
15
Balance at June 30, 2018 62
—
1,055
(11 ) 614
1,658
Net income —
—
—
—
197
197
Partial termination of 1.125% Warrants —
—
(306 ) —
—
(306 )
Conversion of 1.625% Convertible Notes —
—
4
—
—
4
Other comprehensive income, net —
—
—
1
—
1
Share-based compensation —
—
7
—
—
7
Balance at September 30, 2018 62
$ —
$ 760
$ (10 ) $ 811
$ 1,561


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
	Outstanding	Amount

	(In millions)
	(Unaudited)
Balance at December 31, 2018	62	$	0	$	643	$	(8)	$	1,012	$	1,647
Net income	—	—		—		—		198		198
Adoption of new accounting standard	—	—		—		—		85		85
Partial termination of warrants	—	—		(103)		—		—		(103)
Other comprehensive income, net	—	—		—		5		—		5
Share-based compensation	1	—		3		—		—		3
Balance at March 31, 2019	63	0		543		(3)		1,295		1,835
Net income	—	—		—		—		196		196
Partial termination of warrants	—	—		(321)		—		—		(321)
Other comprehensive income, net	—	—		—		8		—		8
Share-based compensation	—	—		18		—		—		18
Balance at June 30, 2019	63	0		240		5		1,491		1,736
Net income	—	—		—		—		175		175
Partial termination of warrants	—	—		(90)		—		—		(90)
Share-based compensation	—	—		10		—		—		10
Balance at September 30, 2019	63	$	0	$	160	$	5	$	1,666	$	1,831

See accompanying notes.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 5

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
	2020		2019

	(In millions) (Unaudited)
Operating activities:
Net income	$	639	$	569
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	64		68
Deferred income taxes	(3)		7
Share-based compensation	43		29

Loss (gain) on debt repayment	5		(15)


Other, net	2		0
Changes in operating assets and liabilities:
Receivables	(369)		50
Prepaid expenses and other current assets	(98)		(6)
Medical claims and benefits payable	431		14
Amounts due government agencies	(24)		(355)
Accounts payable, accrued liabilities and other	55		37
Deferred revenue	(188)		(4)
Income taxes	34		4
Net cash provided by operating activities	591		398
Investing activities:
Purchases of investments	(670)		(1,938)
Proceeds from sales and maturities of investments	891		1,890
Net cash paid in business combinations	(62)		0
Purchases of property, equipment and capitalized software	(64)		(30)
Other, net	3		(2)
Net cash provided by (used in) investing activities	98		(80)
Financing activities:
Proceeds from senior notes offering, net of issuance costs	789		0
Repayment of term loan facility	(600)		0
Common stock purchases	(453)		0
Proceeds from borrowings under term loan facility	380		220
Cash paid for partial termination of warrants	(30)		(514)
Cash paid for partial settlement of conversion option	(27)		(578)
Cash received for partial settlement of call option	27		578
Repayment of principal amount of convertible senior notes	(12)		(240)
Other, net	(5)		24
Net cash provided by (used in) financing activities	69		(510)
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents	758		(192)
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period	2,508		2,926
Cash, cash equivalents, and restricted cash and cash equivalents at end of period	$	3,266	$	2,734

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 6

Table of Contents

Nine Months Ended September 30,
2019 2018
(In millions)
(Unaudited)
Operating activities:
Net income $ 569
$ 506
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 68
104
Deferred income taxes 7
(32 )
Share-based compensation 29
20
Amortization of convertible senior notes and finance lease liabilities 5
18
(Gain) loss on debt extinguishment (15 ) 25
Non-cash restructuring costs —
17
Gain on sale of subsidiary —
(37 )
Other, net (5 ) 6
Changes in operating assets and liabilities:
Receivables 50
(507 )
Prepaid expenses and other current assets (6 ) (117 )
Medical claims and benefits payable 14
(144 )
Amounts due government agencies (355 ) (511 )
Accounts payable and accrued liabilities 37
398
Deferred revenue (4 ) (55 )
Income taxes 4
118
Net cash provided by (used in) operating activities 398
(191 )
Investing activities:
Purchases of investments (1,938 ) (1,202 )
Proceeds from sales and maturities of investments 1,890
2,070
Purchases of property, equipment and capitalized software (30 ) (24 )
Other, net (2 ) (23 )
Net cash (used in) provided by investing activities (80 ) 821
Financing activities:
Repayment of principal amount of 1.125% Convertible Notes (240 ) (236 )
Cash paid for partial settlement of 1.125% Conversion Option (578 ) (477 )
Cash received for partial termination of 1.125% Call Option 578
477
Cash paid for partial termination of 1.125% Warrants (514 ) (419 )
Proceeds from borrowings under Term Loan Facility 220
—
Repayment of Credit Facility —
(300 )
Repayment of 1.625% Convertible Notes —
(64 )
Other, net 24
7
Net cash used in financing activities (510 ) (1,012 )
Net decrease in cash, cash equivalents, and restricted cash and cash equivalents (192 ) (382 )
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period 2,926
3,290
Cash, cash equivalents, and restricted cash and cash equivalents at end of period $ 2,734
$ 2,908

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

Nine Months Ended September 30,
2019 2018
(In millions)
(Unaudited)
Supplemental cash flow information:

Schedule of non-cash investing and financing activities:
Common stock used for share-based compensation $ (7 ) $ (6 )

Details of sale of subsidiary:
Decrease in carrying amount of assets $ —
$ (243 )
Decrease in carrying amount of liabilities —
59
Transaction costs —
(12 )
Receivable from buyer - recorded in prepaid expenses and other current assets —
233
Gain on sale of subsidiary $ —
$ 37

Details of change in fair value of derivatives, net:
Gain on 1.125% Call Option $ 124
$ 321
Loss on 1.125% Conversion Option (124 ) (321 )
Change in fair value of derivatives, net $ —
$ —

1.625% Convertible Notes exchange transaction:
Common stock issued in exchange for 1.625% Convertible Notes $ —
$ 131
Component allocated to additional paid-in capital, net of income taxes —
(23 )
Net increase to additional paid-in capital $ —
$ 108


	Nine Months Ended September 30,
	2020		2019

	(In millions) (Unaudited)
Supplemental cash flow information:

Schedule of non-cash investing and financing activities:
Common stock used for share-based compensation	$	(8)	$	(7)

Details of business combinations:
Fair value of assets acquired	$	(106)	$	0
Fair value of contingent consideration liabilities	40		0
Fair value of liabilities assumed	4		0
Net cash paid in business combinations	$	(62)	$	0

Details of change in fair value of derivatives, net:
(Loss) gain on call option	$	(2)	$	124
Gain (loss) on conversion option	2		(124)
Change in fair value of derivatives, net	$	0	$	0

See accompanying notes.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 7

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~September~~SEPTEMBER 30, ~~2019~~2020

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: ~~our~~the Health Plans segment and ~~our~~the Other segment. WeOur reportable segments are consistent with how we currently manage the ~~vast majority~~business and view the markets we serve.

As of our operations through our Health Plans segment. The Other segment includes the historical results of the Medicaid management information systems (“MMIS”) and behavioral health subsidiaries we sold in late 2018, as well as certain corporate amounts not allocated toSeptember 30, 2020, the Health Plans ~~segment.~~

~~The Health Plans~~ segment ~~consists~~consisted of health plans operating in 1415 states and the Commonwealth of Puerto ~~Rico. As of September 30, 2019, these health plans~~Rico, and served approximately ~~3.3~~4.0 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government ~~subsidies for premiums.~~premium subsidies. The health plans are generally operated by our respective wholly owned subsidiaries in those states ~~each of which is~~and licensed as a health maintenance ~~organization~~organizations (“HMO”).

Our ~~health plans’~~ state Medicaid contracts ~~generally~~typically have terms of three to five ~~years. These contracts typically~~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 (“RFPs”) 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.

~~Subsequent Events~~

~~Texas~~Recent Developments - Health ~~Plan.~~ On October 29, 2019, the Texas Health and Human Services Commission (HHSC) notified our Texas health plan, Molina Healthcare of Texas, Inc., that HHSC intends to award contracts to Molina Healthcare of Texas, Inc. for the STAR+PLUS program in the Hidalgo and North East service areas. The awards will be for an initial contract term of 3 years, and anticipated to have an operational effective date of September 1, 2020. STAR+PLUS is a Texas Medicaid Managed Care program integrating the delivery of Acute Care services and Long-Term Services and Supports (LTSS) for people who are age 65 or older, blind, or disabled. Currently, our Texas health plan services the Bexar, Dallas, El Paso, Harris, Hidalgo, and Jefferson service areas, with total membership of approximately 86,000 enrollees. Under the existing STAR+PLUS contract, the premium revenue for this program amounted to approximately $1.2 billion for the nine months ended September 30, 2019. Plans Segment

New ~~York Health Plan~~York. ~~. On October 10, 2019,~~In September 2020, we entered into a definitive agreement to acquire substantially all of the assets of Affinity Health Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the second quarter of 2021.

In July 2020, we completed the acquisition of certain assets of YourCare Health Plan, Inc. ~~Upon~~See Note 4, “Business Combinations,” for further information.

Kentucky. In September 2020, we completed the ~~closing~~acquisition of ~~this transaction,~~certain assets of Passport Health Plan, Inc. See Note 4, “Business Combinations,” for further information.

In May 2020, our Kentucky health plan had been selected as an awardee pursuant to the statewide Medicaid managed care RFP issued by the Kentucky Cabinet for Health and Family Services, Department for Medicaid Services. On October 23, 2020, pursuant to a protest filing appeal with regard to the RFP awards, a court ordered the addition of a sixth health plan to the Kentucky Medicaid program for 2021. That ruling did not rescind the Medicaid contract award to our Kentucky health plan for 2021, nor did it have any impact on the earlier novation of the Passport Medicaid contract to us. The new Medicaid contract is currently expected to ~~occur in early~~begin on January 1, 2021.

Acquisition of Magellan Complete Care (“MCC”). In April 2020, we ~~will serve approximately 46,000 Medicaid members in 7 counties in Western New York.~~entered into a definitive agreement to acquire the MCC line of business of Magellan Health, Inc. The purchase price for the transaction is approximately $820 million, net of ~~approximately $40 million will be funded~~certain tax benefits, which we intend to fund with ~~available~~ cash ~~and the closing~~on hand. The transaction is subject to federal and state regulatory approvals, and other customary closing ~~conditions.~~conditions, and is expected to close around the end of 2020. In connection with this transaction, Magellan Health, Inc. has agreed to provide certain transition services following the closing.

Texas. In March 2020, the Texas Health and Human Services Commission (“HHSC”) notified our Texas health plan that HHSC had upheld our protest and had canceled all previously awarded contracts associated with the re-procurement awards announced in October 2019 for the ABD program (known in Texas as “STAR+PLUS”). In addition, HHSC canceled the pending re-procurement associated with the TANF and CHIP programs (known in Texas as “STAR/CHIP”). HHSC further indicated that it was deliberating next steps with respect to both re-procurements.

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Illinois. In March 2020, we terminated our agreement to acquire all of the capital stock of NextLevel Health Partners, Inc. due to the seller’s stated unwillingness to close pursuant to the terms of the acquisition agreement.

Consolidation and Interim Financial Information

The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented have been included; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated. The consolidated results of operations for the nine months ended September 30, ~~2019,~~2020, are not necessarily indicative of the results for the entire year ending December 31, ~~2019.~~2020.

The unaudited consolidated interim financial statements have been prepared under the assumption that users of the interim financial data have either read or have access to our audited consolidated financial statements for the fiscal year ended December 31, ~~2018.~~2019. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in our December 31, ~~2018,~~2019, audited consolidated financial statements have been omitted.

These unaudited consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended December 31, ~~2018.~~2019.

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’~~Plans segment contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;

•Health ~~plans’~~Plans segment quality incentives that allow us to recognize incremental revenue if certain quality standards are met;

•Settlements under ~~risk~~risk- or ~~savings sharing~~savings-sharing programs;

•Purchase price allocations relating to business combinations, including the determination of contingent consideration;

•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 ~~litigation outcomes;~~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~~reconciles 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 ~~non-current~~ “Restricted investments” in the accompanying consolidated balance sheets.


	September 30,
	2020		2019

	(In millions)
Cash and cash equivalents	$	3,196	$	2,679
Restricted cash and cash equivalents	70		55
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the consolidated statements of cash flows	$	3,266	$	2,734

September 30,
2019 2018
(In millions)
Cash and cash equivalents $ 2,679
$ 2,814
Restricted cash and cash equivalents 55
94
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows $ 2,734
$ 2,908

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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 (loss), net of applicable income taxes. Held-to-maturity (“HTM”) 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 arising from credit-related factors with respect to AFS and HTM securities are included in the determination of net income. The cost of securities sold is determined using the specific-identification method.

Our investment policy requires that all 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 credit-related impairment. For comprehensive discussions of the fair value and classification of our investments, see Note 5, “Fair Value Measurements,” and Note 6, “Investments.”

Accrued interest receivable relating to our AFS and HTM securities is presented within “Prepaid expenses and other current assets” in the accompanying consolidated balance sheets, and amounted to $9 million and $12 million at September 30, 2020, and December 31, 2019, respectively. We do not measure an allowance for credit losses on accrued interest receivable. Instead, we write off accrued interest receivable that has not been collected within 90 days of the interest payment due date. We recognize such write offs as a reversal of interest income. No accrued interest was written off during the nine months ended September 30, 2020.

Premium Revenue Recognition and Premiums Receivable

Premium revenue is ~~fixed~~generated from our Health Plans segment contracts related to our Medicaid, Medicare and Marketplace programs. Premium revenue is generally received based on per member per month (“PMPM”) rates established in advance of the periods ~~covered and, except as described below, is not generally subject to significant accounting estimates. Premium~~covered. These premium revenues are recognized in the month that members are entitled to receive healthcare services, and premiums collected in advance are deferred. ~~Certain components~~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. Liabilities accrued for premiums to be returned under such provisions are ~~subject to accounting estimates~~recognized as “Amounts due government agencies” in the accompanying consolidated balance sheets, and ~~fall into~~included the following ~~categories:~~categories by program:


	September 30, 2020		December 31, 2019

	(In millions)
Medicaid program:
Minimum MLR and profit sharing	$	136	$	92
Other	83		95
Medicare program:
Risk adjustment and Part D risk sharing	38		14
Minimum MLR and profit sharing	35		36
Other	30		21
Marketplace program:
Risk adjustment	265		368
Minimum MLR	33		15

Other	20		23
Total amounts due government agencies	$	640	$	664

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Contractual Provisions That May Adjust or Limit Revenue or Profit

Medicaid Program

~~Medical Cost Floors (Minimums),~~Minimum MLR 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~~Under certain medical cost corridor provisions, of $95 million and $103 million at September 30, 2019 and December 31, 2018, respectively. Approximately $78 million and $87 million of the liabilities accrued at September 30, 2019 and December 31, 2018, respectively, relate 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 September 30, 2019 and December 31, 2018.~~

Profit ~~Sharing and Profit Ceiling.~~Sharing. Our contracts with certain states contain ~~profit-sharing or~~ profit ~~ceiling~~sharing 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 September 30, 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~~determine that the adjustment is probable and reasonably estimable, and is based on our best estimate of the ultimate premium we expect to realize for the period being adjusted.

Various states have implemented temporary premium refunds and related actions in response to the reduced demand for medical services stemming from COVID-19, which are resulting in a reduction of our medical margin. In some cases, these premium actions are retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal years in 2019. In the second quarter of 2020, we recognized approximately $75 million for certain of these retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. In most of those states, the refund period extended into the third quarter of 2020, and one additional state, Michigan, enacted a premium refund mechanism in the third quarter of 2020. Consequently, we recognized an additional $88 million related to these retroactive premium actions in the third quarter of 2020, resulting in $163 million recognized in the nine months ended September 30, 2020.

It is possible that certain states could increase the level of existing premium refunds, and it is also possible that other states could implement some form of retroactive premium refund during the fourth quarter of 2020. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.

Medicare Program

Risk ~~Adjusted Premiums.~~Adjustment. 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 Centers for Medicare ~~and~~& Medicaid Services (“CMS”) practices. ~~Consolidated balance sheet amounts related to anticipated Medicare risk adjusted premiums and Medicare Part D settlements were insignificant at September 30, 2019 and December 31, 2018.~~

Minimum MLR. The Affordable Care Act (“ACA”) ~~has~~ established a minimum annual medical loss ratio (“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 income. ~~The~~

Marketplace Program

Risk Corridor Settlement. In April 2020, the United States Supreme Court held that §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts ~~payable~~calculated by that statute, and that impacted insurers may sue the federal government in the U.S. Court of Federal Claims to recover damages for breach of that obligation. In June 2020, the Claims Court granted us judgment in the amount of $128.1 million for our 2014, 2015, and 2016 Marketplace risk corridor claims, which we received in October 2020. Since we accounted for the ~~Medicare Minimum MLR were not significant~~judgment as a gain contingency at September 30, ~~2019 and December 31, 2018.~~2020, it will be recognized in our fourth quarter 2020 financial results. The judgment does not create additional Minimum MLR rebates.

~~Marketplace Program~~

Risk 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 (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 income. As of September 30, 2020, Marketplace risk adjustment payables amounted

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to $265 million and related receivables amounted to $59 million, for a net payable of $206 million. This net payable consisted of $230 million in payables relating to 2020, and $24 million in receivables relating primarily to 2019. As of December 31, 2019, Marketplace risk adjustment payables amounted to ~~$285~~$368 million and related receivables amounted to ~~$76~~$63 million, for a net payable of ~~$209~~$305 million,~~. As of December 31, 2018, Marketplace risk adjustment payables amounted~~ which related primarily to ~~$466 million~~2019 and ~~related receivables amounted to $34 million, for a net payable of~~ ~~$432 million~~.prior periods.

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 income. ~~Aggregate balance sheet amounts related to the Minimum MLR were insignificant at September 30, 2019 and December 31, 2018.~~

~~A summary of the categories of amounts due government agencies follows:~~

September 30,
2019 December 31,
2018
(In millions)
Medicaid program:
Medical cost floors and corridors $ 95
$ 103
Other amounts due to states 69
81
Marketplace program:
Risk adjustment 285
466
Cost sharing reduction (“CSR”) —
183
Other 163
134
Total amounts due government agencies $ 612
$ 967

Quality Incentives

At many of our health plans, revenue ranging from approximately 1% to 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~~“Organization and Basis of ~~Presentation~~–Presentation–Use of Estimates,” recognition of quality incentive premium revenue is subject to the use of estimates.

~~We believe that the adjustments to prior years noted below are generally indicative of the potential future changes in our estimates as of September 30, 2019.~~ 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.

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(In millions)
Maximum available quality incentive premium - current period $ 47
$ 48
$ 138
$ 135

Quality incentive premium revenue recognized in current period:
Earned current period $ 46
$ 39
$ 109
$ 97
Earned prior periods 5
9
35
32
Total $ 51
$ 48
$ 144
129

Quality incentive premium revenue recognized as a percentage of total premium revenue 1.2 % 1.1 % 1.2 % 1.0 %


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019

	(In millions)
Maximum available quality incentive premium - current period	$	69		$	47		$	195		$	138

Quality incentive premium revenue recognized in current period:
Earned current period	$	63		$	46		$	180		$	109
Earned prior periods	19			5			23			35
Total	$	82		$	51		$	203		144

Quality incentive premium revenue recognized as a percentage of total premium revenue	1.7		%	1.2		%	1.5		%	1.2		%

~~Medical Care Costs~~Receivables

~~Marketplace Program~~Receivables consist primarily of amounts due from government agencies, which may be subject to potential retroactive adjustments. Because substantially all our receivable amounts are readily determinable and substantially all of our creditors are governmental authorities, our allowance for credit losses is insignificant.


	September 30, 2020		December 31, 2019

	(In millions)
Government receivables	$	1,180	$	1,056
Pharmacy rebate receivables	175		150
Health insurer fee reimbursement receivables	180		5
Other	240		195
Total	$	1,775	$	1,406

Reinsurance

We bear underwriting and reserving risks associated with our health plan subsidiaries. Until the ~~nine months ended~~second quarter of 2020, we limited our risk of catastrophic losses solely by maintaining high deductible reinsurance coverage with a highly-rated, unaffiliated insurance company (the “third-party reinsurer”). Beginning in the second quarter of 2020, we now retain certain of these risks through our wholly-owned, captive insurance subsidiary (the “captive”). We continue to reduce our exposure to significant catastrophic losses by insuring levels of coverage, with the third-party reinsurer, for losses in excess of what we retain with the captive. Because we remain liable to our policyholders in the event the third-party reinsurer is unable to pay its portion of the losses, we continually monitor the third-party reinsurer’s financial condition, including its ability to maintain high credit ratings. We report reinsurance premiums as

Molina Healthcare, Inc. September 30, ~~2018, we recognized~~ 2020 Form 10-Q | 12

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a ~~benefit of approximately $81 million in reduced~~reduction to premium revenue, while related reinsurance recoveries are reported as a reduction to medical care costs. Intercompany transactions with our captive are eliminated in consolidation.

Premium Deficiency Reserves on Loss Contracts

We assess the profitability of our medical care policies to identify groups of contracts where current operating results or forecasts indicate probable future losses. If anticipated future variable costs ~~related to 2017 dates of service, including $5 million in~~exceed anticipated future premiums and investment income, a premium deficiency reserve is recognized. In the third quarter of ~~2018, as~~2020, we recognized a ~~result~~premium deficiency reserve of ~~the federal government’s confirmation that the reconciliation~~$10 million for our Medicaid contract in Puerto Rico. As described in Note 1, “Organization and Basis 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.

~~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 thatPresentation,” 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~~exit Puerto Rico’s Medicaid program when 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 recognizedcurrent contract expires 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~~October 31, 2020. No premium deficiency reserve was 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 operating lease 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.December 31, 2019.

~~For further information, including the amount and location of the ROU assets and lease liabilities recognized in the accompanying consolidated balance sheet, see Note 13, “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.~~

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 maturity~~final maturities of less than 10 years, or less than 10 years average life for structured securities. Restricted investments are invested principally in cash, cash equivalents, and U.S. Treasury securities. Concentration of credit risk with respect to accounts receivable is ~~generally~~ limited because our payors consist principally of the federal government, and governments of each state or commonwealth in which our health plan subsidiaries operate.

Health Insurer Fee

Under the ACA, the federal government imposes an annual fee, or excise tax, on health insurers for each calendar year (the “HIF”). Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. The HIF was reinstated in 2020, but the Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020. The HIF is allocated to health insurers based on each health insurer's share of net premiums for all U.S. health insurers in the year preceding the assessment. Our HIF liability for 2020 is $277 million, of which $271 million was accrued as of January 1, 2020 and an additional $6 million was accrued in the second quarter, with a corresponding deferred expense asset amortized to expense through December 31, 2020, on a straight-line basis. We settled the 2020 HIF liability in September 2020. The HIF is not deductible for income tax purposes. Due to the reinstatement of the HIF in 2020, our effective tax rate is higher in 2020 compared with 2019.

Under the Medicaid program, we must secure additional reimbursement from our state partners for this added cost. We have obtained a contractual commitment or are receiving payments from all states in which we operate Medicaid programs to reimburse us for the HIF, and such HIF revenue is being recognized ratably throughout the year.

Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which generally differs from the U.S. federal statutory rate primarily because of foreign and state taxes, nondeductible expenses such as the ~~Health Insurer Fee (“HIF”),~~HIF, certain compensation, and other general and administrative expenses. ~~The effective tax rate will not be impacted by HIF in 2019 given the 2019 HIF moratorium.~~

The effective tax rate may be subject to fluctuations during the year as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including projected pretax earnings, 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.

Recent Accounting Pronouncements Adopted

~~Leases.~~ Credit Losses.In ~~February~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Topic 842, which was subsequently 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 the balance sheet. Most prominent among the changes in Topic 842 is the 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 of the earliest comparative period presented or on the adoption date.

We adopted Topic 842 effective January 1, 2019, and elected to apply the transition provisions as of that date. Accordingly, we recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings on January 1, 2019. In addition, we elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

As indicated in the accompanying consolidated statements of stockholders’ equity, the cumulative effect adjustment was an increase of $85 million to retained earnings, relating primarily to the transition provisions for sale-leaseback arrangements that did not qualify for sale treatment. Accordingly, such arrangements for certain office buildings 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 results of operations over the terms of the leases.

~~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 effective January 1, 2019, using the prospective method, ~~with no material impact to our financial condition,~~

results of operations or cash flows. Adoption of this 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~~Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, aswhich was subsequently modified ~~by:~~


•	~~ASU 2018-19,~~ ~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses~~;


•	~~ASU 2019-04~~,~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; and~~


•	~~ASU 2019-05~~, ~~Financial Instruments -~~ ~~Credit Losses (Topic 326), Targeted Transition Relief~~.

~~This standard introduces a new current expected credit loss (“CECL”) model for measuring expected credit losses for certain types of financial instruments~~by several ASUs issued in 2018 and replaces the incurred loss model. The CECL model requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount companies expect to collect over the instrument’s contractual life after consideration of historical experience, current conditions, and reasonable and supportable forecasts. This standard also introduces targeted changes to the available-for-sale (“AFS”) debt securities impairment model. ASU 2016-13 is2019. We adopted Topic 326 effective ~~beginning~~ January 1, 2020, ~~and must be adopted as a~~using the modified retrospective approach. Under this method we recognized the cumulative effect of adopting the standard as an adjustment to the opening balance of retained ~~earnings; early adoption is permitted.~~earnings on January 1, 2020, which was immaterial.

~~The most significant type of financial instrument reported in our consolidated balance sheets, subject to the CECL model, is Receivables. As of~~

Molina Healthcare, Inc. September 30, ~~2019, over 70%, or approximately $970 million~~2020 Form 10-Q | 13

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Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the ~~Receivables balance constitutes receivables~~Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by a change in the reference rate from ~~state~~the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued, if certain conditions are met. ASU 2020-04 is effective immediately and ~~federal government agencies. Based~~expires after December 31, 2022. We are evaluating the effect of reference rate reform and this guidance on our ~~preliminary analysis, we believe that the credit risk associated with such receivables is nominal due to a very low risk of default.~~

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.

~~We are currently evaluating the processes~~contracts and ~~controls necessary to adopt and implement ASU 2016-13, along with the effects the adoption will have on our consolidated results of operations and financial condition.~~other transactions.

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 our present or future consolidated financial statements.

3. Net Income per Share

The following table sets forth the calculation of net income per share:


										Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended September 30,				Nine Months Ended September 30,					2020		2019		2020		2019
	2019		2018		2019		2018
	(In millions, except net income per share)									(In millions, except net income per share)
Numerator:									Numerator:
Net income	$	175	$	197	$	569	$	506	Net income	$	185	$	175	$	639	$	569
Denominator:									Denominator:
Shares outstanding at the beginning of the period	62.2		61.3		62.1		59.3		Shares outstanding at the beginning of the period	58.7		62.2		61.9		62.1
Weighted-average number of shares issued:									Weighted-average number of shares issued:
Exchange of 1.625% Convertible Notes	—		—		—		1.3
Stock purchases									Stock purchases	0		0		(2.8)		0
Stock-based compensation	—		—		0.1		0.2		Stock-based compensation	0		0		0.1		0.1
Denominator for net income per share, basic	62.2		61.3		62.2		60.8
Denominator for basic net income per share									Denominator for basic net income per share	58.7		62.2		59.2		62.2
Effect of dilutive securities:(1)
1.125% Warrants ⁽¹⁾	0.8		5.6		1.8		5.0
1.625% Convertible Notes	—		0.6		—		0.5
Warrants									Warrants	0		0.8		0		1.8
Stock-based compensation	0.6		0.4		0.6		0.3		Stock-based compensation	0.9		0.6		0.8		0.6
Denominator for net income per share, diluted	63.6		67.9		64.6		66.6
Denominator for diluted net income per share									Denominator for diluted net income per share	59.6		63.6		60.0		64.6

Net income per share: ⁽²⁾
Basic	$	2.81	$	3.22	$	9.15	$	8.32
Diluted	$	2.75	$	2.90	$	8.80	$	7.60
Net income per share - Basic (2)									Net income per share - Basic (2)	$	3.14	$	2.81	$	10.80	$	9.15
Net income per share - Diluted (2)									Net income per share - Diluted (2)	$	3.10	$	2.75	$	10.65	$	8.80

(1) The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method. All warrants outstanding as of December 31, 2019, were settled in the first quarter of 2020. For more information refer to Note 9, “Stockholders' Equity.”

(2) Source data for calculations in thousands.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 14

~~______________________________~~Table of Contents


~~(1)~~	For more information and definitions regarding the 1.125% Warrants, including partial termination transactions, refer to Note 9, “Stockholders' Equity.” The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method.


~~(2)~~	~~Source data for calculations in thousands.~~

4. Business Combinations

In the third quarter of 2020, we closed on 2 business combinations in the Health Plans segment, consistent with our strategy to grow in our existing markets and expand into new markets. For both transactions, we applied the acquisition method of accounting, where the total purchase price was allocated, or preliminarily allocated, to the tangible and intangible assets acquired and liabilities assumed, based on their fair values as of the acquisition dates. We expect to complete the final determination of the purchase price allocations as soon as practicable, but no later than one year following the closing date in accordance with Accounting Standards Codification Topic 805, Business Combinations. The table below illustrates the intangible assets acquired, by major class, for the 2 acquisitions. Acquisition-related costs were insignificant.

New York. On July 1, 2020, we closed on the acquisition of certain assets of YourCare Health Plan, Inc., a Medicaid health plan, for a cash purchase price of $42 million. In connection with this transaction, we added approximately 47,000 Medicaid members in New York. We recorded goodwill of $31 million for this transaction, which is deductible for income tax purposes. The goodwill recorded relates to future economic benefits arising from expected synergies to be achieved, including the use of our existing infrastructure to support the added membership.

Kentucky. On September 1, 2020, we closed on the acquisition of certain assets of Passport Health Plan, Inc., a Medicaid health plan. Effective on that same date, the Kentucky Medicaid agency approved the novation of Passport’s Medicaid contract to Molina Healthcare of Kentucky, Inc. As a result, we added approximately 325,000 Medicaid members in Kentucky. As of September 30, 2020, the purchase price allocation was preliminary due to the proximity of the acquisition date to September 30, 2020, and the time and level of effort required to develop fair value measurements for the assets acquired and liabilities assumed.

The estimated total purchase price of $60 million includes our initial cash payment of $20 million in September 2020, plus estimated contingent consideration which consists primarily of an amount due to the seller for members we enroll in the open enrollment period for the 2021 plan year, over a minimum threshold, which resulted in an initial contingent consideration liability of $40 million. We expect to settle this liability in the first quarter of 2021. Contingent consideration liabilities are remeasured to fair value at each quarter until the contingencies are resolved with fair value adjustments, if any, recorded to operations. See further information in Note 5, “Fair Value Measurements.” We recorded goodwill of $27 million for this transaction, which is deductible for income tax purposes. The goodwill recorded relates to future economic benefits arising from the assembled workforce, and the future growth associated with the member contract rights that are incremental to the contract rights identified.

The following table presents the intangible assets identified in the transactions described above. The weighted-average amortization period for the identified intangible assets, in the aggregate, is 10.7 years.


	Fair Value		Life

	(In millions)		(Years)
Intangible asset by type:
Contract rights - member list	$	24	5	-	10
Trade name	15				16
Provider network	8				10
	$	47

4. 5. Fair Value Measurements

We generally 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 the three-tier fair value hierarchy. For a description of the methods and assumptions that we use to a) estimate the fair value; and b) determine the classification according to the fair value hierarchy for each financial instrument, ~~see Note 4, “Fair Value Measurements,” in~~refer to our ~~2018~~2019 Annual Report on Form ~~10-K.~~10-K, Note 4, “Fair Value Measurements.”

~~Derivative~~As of September 30, 2020, our Level 3 financial instruments ~~include~~recorded at fair value on a recurring basis included contingent consideration liabilities of $40 million, in connection with the ~~1.125% Call Option derivative asset~~Kentucky acquisition described in Note 4, “Business Combinations.” Such liabilities are reported in “Accounts payable, accrued liabilities and other” in the ~~1.125% Conversion Option derivative liability (see Note 8 “~~accompanying consolidated balance sheets. The fair value of the contingent consideration was estimated using a

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 15

Table of Contents~~Derivatives,” for definitions and further information). These derivatives are not actively traded and are valued based on an~~

simulation-based option pricing model ~~that uses observable~~through the end of the measurement period of approximately 5 months, and ~~unobservable market data for~~included certain non-observable inputs. ~~Significant market data inputs used~~The key assumptions included a U.S. Treasury based risk-free rate of return, expected asset volatility of 35%, expected revenue volatility of 9%, forecasted membership enrollment, and other estimated revenue, asset and payment correlations and discount rates. The model produced an estimated range of undiscounted amounts Molina could pay under the contingent consideration arrangement of $25 million to ~~determine~~$75 million.

Our financial instruments measured at fair value ~~as of~~on a recurring basis at September 30, 2020, were as follows:


			Observable Inputs		Directly or Indirectly Observable Inputs		Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)

	(In millions)
Corporate debt securities	$	1,041	$	0	$	1,041	$	0
Mortgage-backed securities	417		0		417		0
Municipal securities	168		0		168		0
Asset-backed securities	136		0		136		0
Certificates of deposit	5		0		5		0
U.S. Treasury notes	2		0		2		0


Total assets	$	1,769	$	0	$	1,769	$	0

Contingent consideration liabilities	$	40	$	0	$	0	$	40
Total liabilities	$	40	$	0	$	0	$	40

Our financial instruments measured at fair value on a recurring basis at December 31, 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. The 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such derivative instruments is mitigated.as follows:


			Observable Inputs		Directly or Indirectly Observable Inputs		Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)

	(In millions)
Corporate debt securities	$	1,178	$	0	$	1,178	$	0
Mortgage-backed securities	420		0		420		0
Municipal securities	78		0		78		0
Asset-backed securities	127		0		127		0
Certificates of deposit	1		0		1		0
U.S. Treasury notes	86		0		86		0
GSEs	49		0		49		0
Other	7		0		7		0
Subtotal	1,946		0		1,946		0
Call option derivative asset	29		0		0		29
Total assets	$	1,975	$	0	$	1,946	$	29

Conversion option derivative liability	$	29	$	0	$	0	$	29
Total liabilities	$	29	$	0	$	0	$	29

The net changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the nine months ended September 30, ~~2019.~~2020.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 16

Table of Contents

~~Our~~Derivatives

The following table summarizes the fair values and the presentation of our derivative financial instruments ~~measured at fair value on a recurring basis at September 30, 2019, were as follows:~~

Total Observable Inputs (Level 1) Directly or Indirectly Observable Inputs (Level 2) Unobservable Inputs (Level 3)
(In millions)
Corporate debt securities $ 1,129
$ —
$ 1,129
$ —
Mortgage-backed securities 303
—
303
—
Asset-backed securities 110
—
110
—
Government-sponsored enterprise securities (“GSEs”) 97
—
97
—
Municipal securities 68
—
68
—
U.S. Treasury notes 40
—
40
—
Foreign securities 7
—
7
—
Certificates of deposit 3
—
3
—
Subtotal - current investments 1,757
—
1,757
—
1.125% Call Option derivative asset 21
—
—
21
Total assets $ 1,778
$ —
$ 1,757
$ 21

1.125% Conversion Option derivative liability $ 21
$ —
$ —
$ 21
Total liabilities $ 21
$ —
$ —
$ 21

in the accompanying consolidated balance sheets:

~~Our~~


	Balance Sheet Location	September 30, 2020		December 31, 2019

		(In millions)
Derivative asset:
Call option	Current assets: Prepaid expenses and other current assets	$	0	$	29
Derivative liability:
Conversion option	Current liabilities: Accounts payable, accrued liabilities and other	$	0	$	29

For additional information regarding our derivative financial instruments, ~~measured at fair value~~see Note 11, “Debt,” and Note 12, “Derivatives,” in our 2019 Annual Report on ~~a recurring basis at December 31, 2018, were as follows:~~

Total Observable Inputs (Level 1) Directly or Indirectly Observable Inputs (Level 2) Unobservable Inputs (Level 3)
(In millions)
Corporate debt securities $ 1,123
$ —
$ 1,123
$ —
Asset-backed securities 82
—
82
—
GSEs 163
—
163
—
Municipal securities 114
—
114
—
U.S. Treasury notes 181
—
181
—
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

Form 10-K.

In the first quarter of 2020, we received $27 million for the settlement of the call option derivative asset, and we paid $39 million to settle the outstanding $12 million principal amount of the 1.125% Convertible Notes, and settle the related conversion option. For more information, refer to Notes 8, “Debt,” and 9, “Stockholders' Equity.”

Fair Value Measurements – Disclosure Only

The carrying amounts and estimated fair values of our 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~~


	September 30, 2020				December 31, 2019
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

	(In millions)
4.375% Notes	$	789	$	816	$	0	$	0
5.375% Notes	697		731		696		745
4.875% Notes	327		337		327		340
Term loan facility (1)	0		0		220		220
1.125% Convertible Notes (1)	0		0		12		42
Total	$	1,813	$	1,884	$	1,255	$	1,347

______________________

(1)For more information on financing activities, refer to determine its fair value are not observable. As of September 30, 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.Note 8, “Debt.”

September 30, 2019 December 31, 2018

Carrying
Amount

Fair Value

Carrying
Amount

Fair Value
(In millions)
5.375% Notes $ 695
$ 744
$ 694
$ 674
4.875% Notes 327
334
326
301
Term Loan Facility 220
220
—
—
1.125% Convertible Notes ^(1),(2)
12
34
240
732
Totals $ 1,254
$ 1,332
$ 1,260
$ 1,707

~~______________________~~


~~(1)~~	The fair value of the 1.125% Conversion Option (the embedded cash conversion option), which is reflected in the fair value amounts presented above, amounted to $21 million and $476 million as of September 30, 2019, and December 31, 2018, respectively. See further discussion at Note 7, “Debt,” and Note 8, “Derivatives.”


~~(2)~~	~~For more information on debt repayments in 2019, refer to Note 7, “Debt.”~~

5. 6. 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 investments as of the dates indicated:


										September 30, 2020
	September 30, 2019									Amortized Cost		Gross Unrealized				Estimated Fair Value
	Amortized		Gross Unrealized				Estimated Fair					Gains		Losses
	Cost		Gains		Losses		Value
	(In millions)									(In millions)
Corporate debt securities	$	1,125	$	5	$	1	$	1,129	Corporate debt securities	$	1,007	$	35	$	1	$	1,041
Mortgage-backed securities	302		1		—		303		Mortgage-backed securities	408		10		1		417
Municipal securities									Municipal securities	166		2		0		168
Asset-backed securities	109		1		—		110		Asset-backed securities	133		3		0		136
GSEs	97		—		—		97
Municipal securities	68		—		—		68
Certificates of deposit									Certificates of deposit	5		0		0		5
U.S. Treasury notes	40		—		—		40		U.S. Treasury notes	2		0		0		2
Foreign securities	7		—		—		7
Certificates of deposit	3		—		—		3
Totals	$	1,751	$	7	$	1	$	1,757

Total									Total	$	1,721	$	50	$	2	$	1,769

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 17

Table of Contents

December 31, 2018
Amortized
Gross
Unrealized

Estimated
Fair
Cost Gains Losses Value
(In millions)
Corporate debt securities $ 1,131
$ —
$ 8
$ 1,123
Asset-backed securities 83
—
1
82
GSEs 164
—
1
163
Municipal securities 115
—
1
114
U.S. Treasury notes 181
—
—
181
Foreign securities 4
—
—
4
Certificates of deposit 14
—
—
14
Totals $ 1,692
$ —
$ 11
$ 1,681


	December 31, 2019
	Amortized Cost		Gross Unrealized				Estimated Fair Value
			Gains		Losses

	(In millions)
Corporate debt securities	$	1,174	$	5	$	1	$	1,178
Mortgage-backed securities	420		1		1		420
Municipal securities	78		0		0		78
Asset-backed securities	126		1		0		127
Certificates of deposit	1		0		0		1
U.S. Treasury notes	86		0		0		86
GSEs	49		0		0		49
Other	7		0		0		7
Total	$	1,941	$	7	$	2	$	1,946

The contractual maturities of our available-for-sale investments as of September 30, ~~2019~~2020 are summarized below:

Amortized Cost
Estimated
Fair Value
(In millions)
Due in one year or less $ 498
$ 498
Due after one year through five years 875
878
Due after five years through ten years 107
108
Due after ten years 271
273
Totals $ 1,751
$ 1,757


	Amortized Cost		Estimated Fair Value

	(In millions)
Due in one year or less	$	193	$	195
Due after one year through five years	943		975
Due after five years through ten years	160		165
Due after ten years	425		434
Total	$	1,721	$	1,769

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 were insignificant for the three months ended September 30, 2020, and amounted to $6 million for the nine months ended September 30, 2020. Gross realized investment gains amounted to $11 million infor the ~~third quarter of 2019~~three and nine months ended September 30, 2019. Gross realized investment losses were insignificant infor the ~~third quarter of 2019~~three and nine months ended September 30, ~~2019. Gross realized investment gains~~2020, and ~~losses were insignificant in the third quarter of 2018 and nine months ended September 30, 2018.~~2019.

We have determined that unrealized losses at September 30, ~~2019,~~2020, and December 31, ~~2018, are temporary in nature, because the change in market value for these securities has~~2019, primarily resulted from fluctuating interest rates, rather than a deterioration of the creditworthiness of the issuers. Therefore, we determined that an allowance for credit losses was not necessary. 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 as of September 30, 2020 and ~~those that have been~~December 31, 2019:


	September 30, 2020					December 31, 2019
	Estimated Fair Value		Unrealized Losses		Total Number of Positions	Estimated Fair Value		Unrealized Losses		Total Number of Positions

	(Dollars in millions)
Corporate debt securities	$	35	$	1	18	$	222	$	1	167
Mortgage-backed securities	104		1		7	143		1		72



Total	$	139	$	2	25	$	365	$	2	239

None of our available-for-sale investments were in a continuous loss position for 12 months or more as of September 30, ~~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 $ 151
$ 1
90
$ —
$ —
—
Totals $ 151
$ 1
90
$ —
$ —
—

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 months2020, or ~~more as of~~ December 31, ~~2018:~~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 $ 509
$ 3
285
$ 412
$ 5
298
Asset-backed securities —
—
—
68
1
52
GSEs —
—
—
127
1
76
Municipal securities —
—
—
87
1
90
Totals $ 509
$ 3
285
$ 694
$ 8
516

Held-to-Maturity ~~Investments~~

Pursuant 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 regulations in the various states in which we operate, or as needed in the event

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 18

Table of Contents

of insolvency of capitated providers. Therefore, such investments are reported as ~~non-current~~ “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. Such investments amounted to ~~$79~~$93 million at September 30, ~~2019, and~~2020, of which $91 million will mature in one year or ~~less.~~

less, and $2 million will mature in after one through five years.

7. Medical Claims and Benefits Payable

The following table provides the details of our medical claims and benefits payable as of the dates ~~indicated.~~indicated:

September 30,
2019 December 31,
2018
(In millions)
Fee-for-service claims incurred but not paid (“IBNP”) $ 1,424
$ 1,562
Pharmacy payable 128
115
Capitation payable 57
52
Other 366
232
$ 1,975
$ 1,961


	September 30, 2020		December 31, 2019

	(In millions)
Fee-for-service claims incurred but not paid (“IBNP”)	$	1,615	$	1,406
Pharmacy payable	148		126
Capitation payable	73		55
Other	453		267
Total	$	2,289	$	1,854

“Other” medical claims and benefits payable includes ~~non-risk provider payables, where~~amounts payable to certain providers for which we act as an intermediary on behalf of various government agencies ~~for certain providers,~~ without assuming financial risk. Such receipts ~~from government agencies~~ and payments ~~to providers~~ do not impact our consolidated statements of income. Non-risk provider payables amounted to ~~$239~~$168 million and ~~$107~~$132 million as of September 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, 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”~~years” represent the amounts by which our original ~~estimate~~estimates of medical claims and benefits payable at the beginning of the ~~period~~year were more than the actual ~~amount of the liability,~~liabilities, based on information (principally the payment of claims) developed since ~~that liability was~~those liabilities were first reported.


	Nine Months Ended September 30,
	2020		2019

	(In millions)
Medical claims and benefits payable, beginning balance	$	1,854	$	1,961
Components of medical care costs related to:
Current year	11,478		10,613
Prior years	(66)		(253)
Total medical care costs	11,412		10,360
Change in non-risk and other provider payables	50		131
Payments for medical care costs related to:
Current year	9,500		8,996
Prior years	1,527		1,481
Total paid	11,027		10,477
Medical claims and benefits payable, ending balance	$	2,289	$	1,975

Nine Months Ended September 30,
2019 2018
(In millions)
Medical claims and benefits payable, beginning balance $ 1,961
$ 2,192
Components of medical care costs related to:
Current period 10,613
11,670
Prior periods ⁽¹⁾
(253 ) (308 )
Total medical care costs 10,360
11,362
Change in non-risk and other provider payables 131
60
Payments for medical care costs related to:
Current period 8,996
9,866
Prior periods 1,481
1,706
Total paid 10,477
11,572
Medical claims and benefits payable, ending balance $ 1,975
$ 2,042

~~_______________________~~


~~(1)~~	~~The September 30, 2018, amount includes the 2018 benefit of the 2017 Marketplace CSR reimbursement of $81 million.~~

Our estimates of medical claims and benefits payable recorded at December 31, ~~2018,~~2019, and ~~2017~~2018 developed favorably by approximately ~~$253~~$66 million and ~~$308~~$253 million as of September 30, ~~2019,~~2020, and ~~2018,~~2019, respectively.

~~The favorable prior year development recognized in~~In the nine months ended September 30, ~~2019, was primarily due~~2020, medical care costs related to ~~lower~~the prior year reflect the release of additional reserves for moderately adverse conditions included in our prior year estimates, partially offset by higher than expected ~~utilization of medical services by~~costs for settling certain claims with certain providers. The differences between our ~~Medicaid members,~~original estimates for such claims in 2019, and ~~improved operating performance. Consequently,~~ the ultimate costs ~~recognized~~ in ~~2019,~~2020, were not discernible until additional information was provided to us in 2020 and the effect became clearer over time as ~~claims~~claim payments were ~~processed, were lower than our original estimates in 2018.~~processed. The release of

7. ~~Debt~~

~~As of~~Molina Healthcare, Inc. September 30, ~~2019, contractual maturities~~2020 Form 10-Q | 19

Table of ~~debt were as follows. All amounts represent~~Contents

additional reserves for moderately adverse conditions included in our prior year estimates was substantially offset by the ~~principal amounts due on~~replenishment of the ~~debt instruments outstanding as of December 31 for each year presented, based on September 30, 2019 balances.~~reserve recorded in medical care costs related to the current year.

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
—
—
—
—
—
Totals $ 1,262
$ 18
$ 16
$ 722
$ 22
$ 154
$ 330

8. Debt

All of our debt is held at the parent, which is reported ~~for segment purposes,~~ in the Other segment. The following table summarizes our outstanding debt obligations and their classification in the accompanying consolidated balance sheets:

September 30,
2019 December 31,
2018
(In millions)
Current portion of long-term debt:
1.125% Convertible Notes, net of unamortized discount $ 12
$ 241
Term Loan Facility 3
—
Lease financing obligations —
1
Debt issuance costs —
(1 )
$ 15
$ 241
Non-current portion of long-term debt:
5.375% Notes $ 700
$ 700
4.875% Notes 330
330
Term Loan Facility 217
—
Debt issuance costs (8 ) (10 )
Totals $ 1,239
$ 1,020

~~Interest cost recognized relating to our convertible senior notes for the periods presented was as follows:~~


	September 30, 2020		December 31, 2019

	(In millions)
Current portion of long-term debt: (1)
Term loan facility	$	0	$	6
1.125% Convertible Notes, net of unamortized discount	0		12
Total	$	0	$	18
Non-current portion of long-term debt:
4.375% Notes due 2028	$	800	$	0
5.375% Notes due 2022	700		700
4.875% Notes due 2025	330		330
Term loan facility	0		214
Deferred debt issuance costs	(17)		(7)
Total	$	1,813	$	1,237

______________________

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(In millions)
Contractual interest at coupon rate $ —
$ 1
$ 1
$ 5
Amortization of the discount 1
5
5
18
Totals $ 1
$ 6
$ 6
$ 23

(1)Reported in “Accounts payable, accrued liabilities and other.”

Credit Agreement

~~We are party to~~In June 2020, we entered into a credit agreement (the “Credit Agreement”) that replaced our prior credit agreement. The terms of the Credit Agreement ~~which provides for an unsecured delayed draw term loan facility (the “Term Loan Facility”), and an unsecured $500 million~~are substantially similar to the terms of the prior agreement. Among various provisions, significant changes incorporated to the Credit Agreement included:

•An increase of the revolving credit facility (the “Credit Facility”). from $500 million to $1.0 billion;

•A $15 million swingline sub-facility and a $100 million letter of credit sub-facility;

•An increase of incremental term loans available to finance certain acquisitions from $150 million to $500 million, plus an unlimited amount as long as our consolidated net leverage ratio is not greater than 3:1;

•The ability to engage in acquisitions where the consummation of such acquisitions is not conditioned on the availability of, or on obtaining, third-party financing;

•Termination of the term loan facility under the prior credit agreement, which was repaid as described below; and

•LIBOR succession provisions.

The Credit Agreement has a term of five years, and all amounts outstanding will be due and payable on June 8, 2025. Borrowings under ~~our~~the Credit Agreement 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.~~covenants. As of September 30, ~~2019,~~2020, 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 September 30, 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 September 30, 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 September 30, 2019,~~2020, 0 amounts were outstanding under the Credit ~~Facility,~~Facility.

In the nine months ended September 30, 2020, we recognized losses on debt repayment of $5 million in connection with repayment of our term loan facility and ~~outstanding letters~~other financing transactions. In the third quarter and nine months ended September 30, 2019, we recognized a loss on debt repayment of ~~credit amounting to~~ $2 million ~~reduced~~and a gain on debt repayment of $15 million, respectively, in connection with convertible senior notes repayment transactions.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 20

Table of Contents

High-Yield Senior Notes

Our high-yield senior notes are described below. Each of these 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. In addition, each of the notes contain customary non-financial covenants and change of control provisions.

The indentures governing the high-yield senior notes contain cross-default provisions that are triggered upon default by us or any of our ~~borrowing capacity~~subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture.

4.375% Notes due 2028.On June 2, 2020, we completed the private offering of $800 million aggregate principal amount of senior notes (the “4.375% Notes”) due June 15, 2028, unless earlier redeemed. The 4.375% Notes contain optional early redemption provisions, with redemption prices in excess of par. Interest, at a rate of 4.375% per annum, is payable semiannually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. A portion of the net proceeds from the 4.375% Notes offering was used to repay $600 million principal amount outstanding under the ~~Credit Facility~~term loan facility of our prior credit agreement, and the balance is intended to ~~$498~~be used for general corporate purposes. Deferred issuance costs amounted to $11 million.

5.375% Notes due ~~2022~~

2022.We had $700 million aggregate principal amount of senior notes (the “5.375% Notes”) outstanding as of September 30, ~~2019,~~2020, 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 in control provisions.~~

4.875% Notes due ~~2025~~

2025. We had $330 million aggregate principal amount of senior notes (the “4.875% Notes”) outstanding as of September 30, ~~2019,~~2020, 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

InFor a description of the ~~nine months ended September 30, 2019, we received conversion requests and 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”).

, see Note 11, “Debt,” in our 2019 Annual Report on Form 10-K. In ~~the third quarter of 2019,~~January 2020, we paid ~~$161~~$39 million to settle ~~$55 million aggregate principal amount, or $54 million aggregate carrying amount, of~~ the 1.125% Convertible Notes, including the related 1.125% Convertible Notes’ embedded cash conversion option (which is a derivative liability we refer to as the “1.125% Conversion Option”) and the mark to market valuation adjustments discussed below.

In the nine months ended September 30, 2019, we paid $794 million to settle $240 million aggregate principal amount, or $232 million aggregate carrying amount, of the 1.125% Convertible Notes, including the related 1.125% Conversion Option and the mark to market valuation adjustments discussed below.

In the three and nine months ended September 30, 2019, we recorded a loss on debt extinguishment of $2 million, and a gain on debt extinguishment of approximately $15 million, respectively, for the 1.125% Convertible Notes repayments (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 expenses (income), net” in the accompanying consolidated statements of income. No common shares were issued in connection with the transaction.

In connection with the 1.125% Convertible Notes purchases, we also entered into privately negotiated agreements in the first, second, and third quarters of 2019, to partially terminate the Call Spread Overlay, defined and further discussed in Note 8, “~~Derivatives,” and Note 9, “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,~~outstanding $12 million ~~aggregate~~ principal amount of the 1.125% Convertible Notes, and settle the related conversion option.

9. Stockholders' Equity

Stock Purchase Programs

In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program will be funded with cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase will be 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. No shares were ~~outstanding at September 30, 2019. Interest at~~purchased under this program through October 29, 2020.

In December 2019, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program was funded with existing cash on hand and was completed in March 2020. Under this program, pursuant to 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~~Rule 10b5-1 trading plan, we purchased approximately 3.4 million 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. 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, determinedfor $446 million in the ~~manner set forth~~first quarter of 2020 (average cost of $132.45 per share). In the first quarter of 2020, we also paid $7 million to settle shares purchased in ~~the indenture. We may not redeem the~~ late December 2019.

1.125% ~~Convertible Notes prior to the maturity date. The 1.125% Convertible Notes mature on January 15, 2020; therefore, they are reported in current portion of long-term debt.~~Warrants

~~Concurrent with the issuance~~For a description of the 1.125% ~~Convertible Notes in 2013, the 1.125% Conversion Option was separated from the 1.125% Convertible Notes~~Warrants, refer to our 2019 Annual Report on Form 10-K, Note 12, “Derivatives,” and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the 1.125% Conversion Option fully settles or expires. This initial liability simultaneously reduced the carrying valueNote 14, “Stockholders’ Equity.” Approximately 310,000 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 of 6% approximates the interest rate we would have incurred had we issued nonconvertible debt with otherwise similar terms. As of September 30, 2019, the 1.125% Convertible Notes had a remaining amortization period of less than one year, and their ‘if-converted’ value exceeded their principal amount by approximately $28 million and $581 million as of September 30, 2019 andWarrants were outstanding at December 31, ~~2018, respectively.~~

~~Cross-Default Provisions~~

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.

8. ~~Derivatives~~

~~The following table summarizes the fair values and the presentation of our derivative financial instruments (defined and discussed individually below) in the accompanying consolidated balance sheets:~~

Balance Sheet Location September 30,
2019 December 31,
2018
(In millions)
Derivative asset:
1.125% Call Option Current assets: Derivative asset $ 21
$ 476
Derivative liability:
1.125% Conversion Option Current liabilities: Derivative liability $ 21
$ 476

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 income, and reported in “Other 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~~

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.

2019. In the ~~nine months ended September 30, 2019, in connection with the 1.125% Convertible Notes purchases (described in Note 7, “Debt”),~~first quarter of 2020, 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 third quarter of 2019, we received $105 million for the settlement of the 1.125% Call Option (which is a derivative asset), and paid $90 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $15 million from the Counterparties.

In the nine months ended September 30, 2019, we received $578 million for the settlement of the 1.125% Call Option (which is a derivative asset), and paid $514 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $64 million from the Counterparties.

~~1.125% Call Option~~

~~The 1.125% Call Option,~~under 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 Value Measurements~~.”

~~1.125% Conversion 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 income 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 Value Measurements~~.”

As of September 30, 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 mature on January 15, 2020, as described in Note 7, “~~Debt~~.”

9. ~~Stockholders' Equity~~

~~1.125% Warrants~~

~~In connection with the Call Spread Overlay transaction described in Note 8, “Derivatives~~,” in 2013, we issued 13.5 million warrants with a strike price of $53.8475 per share. Under certain circumstances, beginning in April 2020, if the price of our common stock exceeds the strike price of the 1.125% Warrants, we will 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 Income 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, 0.3 million of the 1.125% Warrants remain outstanding.

~~As described in Note 8, “Derivatives~~,” in the nine months ended September 30, 2019, 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 third quarter of 2019,~~ we paid ~~$90~~$30 million to the ~~Counterparties~~counterparties for the termination of ~~1.4 million of~~ the remaining 1.125% Warrants outstanding, which resulted in a reduction of additional paid-in-capital for the same amount.

In the nine months ended September 30, 2019, we paid $514 million to the Counterparties for the termination of 5.9 million of the 1.125% Warrants outstanding, which resulted in a reduction of additional paid-in-capital for the same amount.

Share-Based Compensation

In connection with our employee stock plans, approximately ~~184,000~~192,000 shares of common stock vested or were purchased, net of shares used to settle employees’ income tax obligations, during the nine months ended September 30, ~~2019.~~2020.

Share-based compensation is recorded to “General and administrative expenses” in the accompanying consolidated statements of income. Total share-based compensation expense amounted to ~~$10~~$15 million and $7 $10

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 21

Table of Contents

million, respectively, in the ~~three months ended September 30, 2019~~third quarter of 2020 and ~~2018.~~2019. Total share-based compensation expense amounted to ~~$29~~$43 million and ~~$20~~$29 million, respectively, in the nine months ended September 30, ~~2019~~2020 and ~~2018.~~

~~Equity Incentive Plan~~

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 stock awards, performance units, 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 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.2019.

As of September 30, ~~2019,~~2020, there was ~~$55~~approximately $76 million of total unrecognized compensation expense related to unvested restricted stock awards (“RSAs”), and performance stock units (“PSUs”), which we expect to recognize over remaining weighted-average periods of ~~2.5~~2.4 years and ~~1.8~~1.5 years, respectively. This unrecognized compensation cost assumes an estimated forfeiture rate of ~~16.2%~~11.5% for non-executive employees as of September 30, ~~2019.~~2020.

~~Also as~~As of September 30, ~~2019, there~~2020, unrecognized stock option expense was ~~$5 million of total unrecognized compensation expense related to unvested stock options, which we expect to recognize over a weighted-average period of 1.0 year.~~insignificant. NaN stock options were granted or exercised in the nine months ended September 30, ~~2019.~~

2020.

Activity for RSAs ~~performance stock awards (“PSAs”)~~ and PSUs is summarized below:


	RSAs	Weighted Average Grant Date Fair Value		PSUs	Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2019	447,680	$	102.41	324,078	$	101.45
Granted	334,233	125.99		187,028	123.09
Vested	(166,115)	96.19		(7,368)	68.16
Forfeited	(26,439)	114.48		(29,271)	98.72
Unvested balance, September 30, 2020	589,359	$	116.99	474,467	$	110.67

RSAs PSAs PSUs Total
Weighted
Average
Grant Date
Fair Value
Unvested balance, December 31, 2018 399,795
3,132
201,383
604,310
$ 71.50
Granted 228,902
—
141,828
370,730
137.53
Vested (133,828 ) (3,132 ) (10,528 ) (147,488 ) 72.21
Forfeited (46,780 ) —
(11,616 ) (58,396 ) 87.99
Unvested balance, September 30, 2019 448,089
—
321,067
769,156
$ 101.93

The aggregate fair values of RSAs ~~PSUs~~ and ~~PSAs~~PSUs granted and vested are presented in the following table:


	Nine Months Ended September 30,
	2020		2019

	(In millions)
Granted:
RSAs	$	42	$	32
PSUs	23		19
Total granted	$	65	$	51
Vested:
RSAs	$	21	$	18
PSUs	1		2
Total vested	$	22	$	20

Nine Months Ended September 30,
2019 2018
(In millions)
Granted:
RSAs $ 32
$ 26
PSUs 19
16
Total granted $ 51
$ 42
Vested:
RSAs $ 18
$ 14
PSUs 2
—
PSAs —
3
Total vested $ 20
$ 17

~~Employee Stock Purchase Plan~~

In May 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 9, 2029.

10. ~~Restructuring Costs~~

~~Restructuring costs are reported by the same name in the accompanying consolidated statements of income.~~

~~IT Restructuring Plan~~

Management is focused on a margin recovery plan that includes identification and implementation of various profit improvement initiatives. To that end, we began a plan to restructure our information technology department (the “IT Restructuring Plan”) in 2018, which is reported in the Other segment. In early 2019, we entered into services agreements with an outsourcing vendor who manages certain of our information technology services.

We expect the IT Restructuring Plan to be substantially completed by the end of 2019. We estimate that we will incur approximately $15 million of cumulative total costs, which is lower than the $20 million reported in our Annual Report on Form 10-K for the year ended December 31, 2018, because more of our IT employees transitioned to our outsourcing vendor than originally contemplated. Once employed by our outsourcing vendor, such employees are no longer included in the IT Restructuring Plan, resulting in lower one-time termination costs.

As of December 31, 2018, there was $6 million accrued under the IT Restructuring Plan, primarily for one-time termination benefits that require cash settlement. In the nine months ended September 30, 2019, we incurred $2 million of other restructuring costs, paid $5 million to settle one-time termination benefits, and paid $3 million to settle other restructuring costs. As of September 30, 2019, 0 amounts were accrued under the IT Restructuring Plan.

As of September 30, 2019, we had incurred cumulative restructuring costs under the IT Restructuring Plan of $11 million, including $7 million of one-time termination benefits and $4 million of other restructuring costs (primarily consulting fees).

~~2017 Restructuring Plan~~

As of December 31, 2018, accrued liabilities of $18 million remained for the restructuring and profitability improvement plan approved by the board of directors in June 2017 (the “2017 Restructuring Plan”). In the nine months ended September 30, 2019, we incurred $3 million of restructuring costs for adjustments to previously recorded lease contract termination costs, and paid $7 million to settle one-time termination and lease contract termination costs. As of September 30, 2019, accrued liabilities of $14 million remained for lease contract termination costs under the 2017 Restructuring Plan. We expect to continue to settle these liabilities through 2025, unless the leases are terminated sooner.

~~11.~~ Segments

We currently have 2 reportable segments: ~~our~~the Health Plans segment and ~~our~~the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.

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 for~~The key metrics used to assess the performance of our Health Plans segment ~~is referred to as “Medical Margin,” which represents the amount earned after~~are premium revenue, medical ~~costs are deducted from premium revenue. The medical care ratio~~margin 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 ~~Medical Margin~~margin, or the amount earned by the Health Plans segment after medical costs 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.”

The following table presents total revenue by segment. Inter-segment revenue was insignificant for all periods presented.

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(In millions)
Total revenue:
Health Plans $ 4,239
$ 4,565
$ 12,546
$ 13,826
Other 4
132
9
400
Consolidated $ 4,243
$ 4,697
$ 12,555
$ 14,226

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 22

Table of Contents


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(In millions)
Total revenue:
Health Plans	$	5,020	$	4,239	$	14,181	$	12,546
Other	1		4		7		9
Consolidated	$	5,021	$	4,243	$	14,188	$	12,555

The following table reconciles margin ~~by segment~~ to consolidated income before income taxes:


														Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended September 30,						Nine Months Ended September 30,							2020		2019		2020		2019
	2019			2018			2019			2018
	(In millions)													(In millions)
Margin:													Margin:
Health Plans	$	561		$	547		$	1,725		$	1,812		Health Plans	$	670	$	561	$	2,032	$	1,725
Other	—			19			—			42
Total margin	561			566			1,725			1,854

Add: other operating revenues ⁽¹⁾	159			230			470			661			Add: other operating revenues (1)	253		159		744		470
Add: gain on sale of subsidiary	—			37			—			37

Less: other operating expenses ⁽²⁾	(463		)	(538		)	(1,393		)	(1,693		)	Less: other operating expenses (2)	(634)		(463)		(1,789)		(1,393)
Operating income	257			295			802			859			Operating income	289		257		987		802
Other expenses, net	24			36			52			116			Other expenses, net	27		24		77		52
Income before income tax expense	$	233		$	259		$	750		$	743		Income before income tax expense	$	262	$	233	$	910	$	750

______________________


~~(1)~~	~~Other operating revenues include premium tax revenue, health insurer fees reimbursed, and investment income and other revenue.~~

(1)Other operating revenues include premium tax revenue, health insurer fees reimbursed, and investment income and other revenue.


~~(2)~~	~~Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fees, depreciation and amortization, and restructuring costs.~~

(2)Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fees, depreciation and amortization, and other costs.

~~12.~~ 11. Commitments and Contingencies

COVID-19 Pandemic

We continue to monitor and assess the estimated operating and financial impact of the COVID-19 pandemic, and as it evolves, we continue to process, assemble, and assess member utilization information. We believe that our cash resources, borrowing capacity available under the Credit Agreement, and cash flow generated from operations will be sufficient to withstand the financial impact of the pandemic, and will enable us to continue to support our operations, regulatory requirements, debt repayment obligations, and capital expenditures for the foreseeable future.

Legal Proceedings

The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. Penalties associated with violations of these laws and regulations include significant fines, exclusion from participating in publicly funded programs, and the repayment of previously collected revenues.

In the ordinary course of business we are involved in legal actions, some of which seek monetary damages ~~including claims for punitive damages,~~ which are not covered by insurance. We have accrued liabilities for certain matters for which we deem the loss to be both probable and reasonably estimable, but the outcome of legal actions is inherently uncertain and our estimates of such losses could be understated, and could also subsequently change as a result of further developments of these matters. For certain pending matters, accruals have not been established because we believe we are not liable or because such matters have not progressed sufficiently through discovery or factual development to enable us to reasonably estimate a range of possible loss. An adverse determination in one or more of these pending matters could have ~~a material~~an adverse effect on our consolidated financial position, 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 and Children’s Health Insurance Program (“CHIP”) programs. The states and Commonwealth in which we operate our health plans regularly face significant budgetary pressures.

~~13.~~ ~~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 three-month and nine-month periods ended

Molina Healthcare, Inc. September 30, ~~2019, only.~~2020 Form 10-Q | 23

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 10 years, some of which include options to extend the leases for up to 10 years. As of September 30, 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 September 30, 2019, the weighted average remaining finance lease term is 16 years.

As of September 30, 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:

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
(In millions)
Operating lease expense $ 9
$ 26

Finance lease expense:
Amortization of right-of-use (“ROU”) assets $ 4
$ 12
Interest on lease liabilities 3
11
Total finance lease expense $ 7
$ 23

~~Supplemental consolidated cash flow information related to leases follows:~~

Nine Months Ended September 30, 2019
(In millions)
Cash used in operating activities:
Operating leases $ 28
Finance leases 12
Cash used in financing activities:
Finance leases 4
ROU assets recognized in exchange for lease obligations:
Operating leases 95
Finance leases 245

Table of Contents

~~Supplemental information related to leases, including location of amounts reported in the accompanying consolidated balance sheets, follows:~~

September 30, 2019
(In millions)
Operating leases:
ROU assets
Other assets $ 69
Lease liabilities
Accounts payable and accrued liabilities (current) $ 28
Other long-term liabilities (non-current) 49
Total operating lease liabilities $ 77
Finance leases:
ROU assets
Property, equipment, and capitalized software, net $ 233
Lease liabilities
Accounts payable and accrued liabilities (current) $ 8
Finance lease liabilities (non-current) 233
Total finance lease liabilities $ 241

~~Maturities of lease liabilities as of September 30, 2019, were as follows:~~

Operating Leases Finance Leases
(In millions)
2019 (for the three months ended December 31, 2019) $ 9
$ 6
2020 28
23
2021 18
23
2022 12
22
2023 10
21
Thereafter 8
311
Total lease payments 85
406
Less imputed interest (8 ) (165 )
Totals $ 77
$ 241

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, and results of operations within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Securities Exchange Act. ~~We intend such~~Many of the forward-looking statements are located under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be ~~covered~~identified by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. All statements included in this quarterly report, other than statements of historical fact, may be deemed to be forward-looking statements for purposes of the Securities Act and the Securities Exchange Act. Without limiting the foregoing, we use the words ~~“anticipate(s),~~such as “guidance,” ~~“believe(s),~~“future,” ~~“estimate(s),~~“anticipates,” ~~“expect(s),~~“believes,” ~~“intend(s),~~“estimates,” ~~“may,~~“expects,” ~~“plan(s),~~“growth,” ~~“project(s),~~“intends,” “plans,” “predicts,” “projects,” “will,” “would,” “could,” ~~“should”~~“can,” “may,” and similar ~~expressions~~terms. Readers are cautioned not to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and, accordingly, you should not place undue reliance on ~~our forward-looking statements. We caution you that we do not undertake~~ any ~~obligation to update~~ forward-looking statements, ~~made by us. Forward-looking~~as forward-looking statements ~~involve~~are not guarantees of future performance and the Company’s actual results may differ significantly due to numerous known and unknown risks and ~~uncertainties that may cause our actual results in future periods to differ materially from those projected, estimated, or expected.~~uncertainties. Those known risks and uncertainties include, but are not limited to, ~~risks~~the risk factors identified in the sections titled “Risk Factors” in this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2019, and ~~uncertainties related to~~our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, and June 30, 2020, including without limitation the following:

•the impact of the COVID-19 pandemic on our operations and financial results;

•the numerous political, judicial, and market-based uncertainties associated with the Affordable Care Act (the “ACA”) or “Obamacare,” including the ultimate outcome ~~on appeal~~ of the Texas et al. v. U.S. et al. ~~matter;~~matter now pending before the U.S. Supreme Court;

•significant budget pressures on state governments from diminished tax revenues and their efforts to curtail current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;

•the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated with the elasticity of demand for our products based on our pricing, risk adjustment ~~requirements,~~estimates and results, the potential for disproportionate enrollment of higher acuity members, and the discontinuation of premium tax ~~credits,~~credits;

•the uncertainties associated with the November 2020 Presidential and ~~the adequacy of agreed rates;~~Congressional election;

•subsequent adjustments to reported premium revenue based upon subsequent developments or new information, including changes to estimated amounts payable or receivable related to Marketplace risk adjustment;

•the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity, and meet our general liquidity needs;

•our ability to consummate, integrate, and realize benefits from acquisitions, including the announced acquisitions of Magellan Complete Care and of Affinity;

•the outcome of the protest and appeal proceedings in Kentucky with regard to the Medicaid contract award to our Kentucky health plan;

•effective management of our medical costs;

•our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with ~~seasonal~~the flu ~~patterns~~ or ~~other newly emergent diseases;~~coronavirus;

significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;

•the full reimbursement of the ACA health insurer fee, or HIF;

•the success of our efforts to retain existing or awarded government contracts, and the success of any bid submissions in response to requests for proposal, ~~protest filings or defenses,~~ including ~~the pending~~our contracts in Ohio, California, Texas, ~~STAR+PLUS~~ and ~~STAR/CHIP RFPs;~~Kentucky;

•the ability to manage our operations, including maintaining and creating adequate internal systems and controls relating to authorizations, approvals, provider payments, and the overall success of our care management initiatives;

•our receipt of adequate premium rates to support increasing pharmacy costs, including costs associated with specialty drugs and costs resulting from formulary changes that allow the option of higher-priced non-generic drugs;

•our ability to operate profitably in an environment where the trend in premium rate increases lags behind the trend in increasing medical costs;

•the interpretation and implementation of federal or state medical cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, ~~profit sharing~~profit-sharing arrangements, and risk adjustment provisions and requirements;

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 24

Table of Contents

•our estimates of amounts owed for such cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit-sharing arrangements, and risk adjustment ~~provisions;~~provisions and requirements;

•the Medicaid expansion medical cost corridor, and any other retroactive adjustment to revenue where methodologies and procedures are subject to interpretation or dependent upon information about the health status of participants other than Molina members;

•the interpretation and implementation of at-risk premium rules and state contract performance requirements regarding the achievement of certain quality measures, and our ability to recognize revenue amounts associated therewith;

•cyber-attacks, ransomware attacks, or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;

the success of our health plan in Puerto Rico, including the resolution of the debt crisis and the effect of the PROMESA law, the effects of political and regulatory instability, and the impact of any future significant weather events;

•the success and renewal of our duals demonstration programs in California, Illinois, Michigan, Ohio, South Carolina, and Texas;

•the accurate estimation of incurred but not reported or paid medical costs across our health plans;

•efforts by states to recoup previously paid and recognized premium amounts;

~~our ability to consummate, integrate, and realize benefits from acquisitions;~~

•complications, member confusion, eligibility re-determinations, or enrollment backlogs related to the renewal of Medicaid coverage, as well as the chilling effect of the new so-called public charge rule;

•government audits, reviews, comment letters, or potential investigations, and any fine, sanction, enrollment freeze, monitoring program, or premium recovery that may result therefrom;

•our expected exit from Puerto Rico, including the successful transfer of our members to alternative health plans, the effective run-out of claims, and the return of our capital;

•changes with respect to our provider contracts and the loss of providers;

•approval by state regulators of dividends and distributions by our health plan subsidiaries;

•changes in funding under our contracts as a result of regulatory changes, programmatic adjustments, or other reforms;

•high dollar claims related to catastrophic illness;

•the favorable resolution of litigation, arbitration, or administrative proceedings, including litigation involving the ACA to which we are not a direct party;

•the relatively small number of states in which we operate health plans, including the greater scale and revenues of our California, Ohio, Texas, and Washington health plans;

the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity and meet our liquidity needs, including the interest expense and other costs associated with such financing;

•the failure to comply with the financial or other covenants in ~~our credit agreement~~the Credit Agreement or the indentures governing our outstanding notes;

•the sufficiency of funds on hand to pay the amounts due upon ~~conversion or~~ maturity of our outstanding notes;

•the failure of a state in which we operate to renew its federal Medicaid waiver;

•changes generally affecting the managed care industry;

•increases in government surcharges, taxes, and assessments;

~~newly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated public alarm;~~

•the unexpected loss of the leadership of one or more of our senior executives; and

•increasing competition and consolidation in the Medicaid industry.

Each of the terms “Molina Healthcare, Inc.” “Molina Healthcare,” “Company,” “we,” “our,” and “us,” as used herein, refers collectively to Molina Healthcare, Inc. and its wholly owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Readers should refer to the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q, in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, and June 30, 2020, and in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurance that any results or events projected or contemplated by our forward-looking statements will in fact occur.

This Quarterly Report on Form 10-Q and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report, and the audited financial statements and Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 25

Table of Contents

OVERVIEW

Molina Healthcare, Inc., a FORTUNE 500 company, provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). Through our locally operated health plans in 1415 states and the Commonwealth of Puerto Rico, we served approximately ~~3.3~~4.0 million members as of September 30, ~~2019.~~2020. The health plans are generally operated by our respective wholly owned subsidiaries in those states ~~each of which is~~and licensed as a health maintenance ~~organization~~organizations (“HMO”).

We currently have two reportable segments: our Health Plans segment and our Other segment. We manage the vast majority of our operations through our Health Plans segment. The Other segment includes the historical results of the Medicaid management information systems (“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.

THIRD QUARTER ~~2019~~2020 HIGHLIGHTS

~~In summary, we produced pretax earnings of $233 million, and~~We reported net income per diluted share of ~~$175 million in~~$3.10 for the third quarter of ~~2019, resulting in an after-tax margin of 4.1%. On a year-to-date basis, pretax earnings were $750 million and~~2020, with net income ~~was $569~~of $185 million, ~~resulting in an after-tax margin~~which consisted of ~~4.5%. These results include, on a consolidated and year-to-date basis, a~~the following:

•Premium revenue of $4.8 billion, which increased 16.8% compared with the third quarter of 2019;

•Consolidated medical care ratio (“MCR”) of ~~85.7% and a general and administrative (“G&A”) expense ratio of 7.6%.~~

~~Program Performance~~

~~We have a broad and well diversified business portfolio, and all of our lines of business and our local health plans are continuing to perform well for the third quarter and nine months year to date.~~

~~In the Medicaid business, our MCR for the third quarter was sequentially flat at approximately 88.1%. These results were in line~~85.9%, which decreased 40 basis points compared with ~~our expectations and performance in this business continued to be stable, as we have achieved an 88.2% MCR for the first nine months of the year.~~

~~Our Medicare business, comprising our Medicare Special Needs Plans and MMP products, continued to perform well~~86.3% in the third quarter of 2019;

•General and ~~was also in line~~administrative expense (“G&A”) ratio of 7.3%, which decreased 30 basis points compared with ~~our expectation. The 85.6% MCR~~7.6% in the third quarter ~~was fairly stable compared to 85.2% MCR in~~of 2019; and

•After-tax margin of 3.7%.

COVID Impacts

Unlike the second quarter of ~~this year. We achieved an 85.2% MCR for~~2020, in which the ~~first nine months of the year, as we continue to manage high-acuity members by providing access to high-quality healthcare at a reasonable cost, including~~combined COVID-related impacts temporarily increased our ~~management of long term services and supports, or LTSS, benefits which are embedded~~earnings, in our MMP product. Additionally, we continue to see the results of our quality and risk adjustment efforts, as our Medicare risk scores are becoming more commensurate with the acuity of this population and risk adjustment revenue has increased.

~~Our Marketplace business has also continued to perform well and the results are in line with seasonal expectations, as we reported a 71.2% MCR for~~ the third quarter ~~compared~~of 2020 the combination of COVID-related impacts netted to ~~67.2% MCR~~a negligible to slightly positive impact on earnings and included:

•A modest net decrease in medical costs due primarily to COVID-related utilization curtailment;

•Premium refunds to a number of our state Medicaid customers in response to the COVID-related utilization curtailment, which we experienced in both the second and third quarters of 2020;

•An increase in our G&A spending on activities related to COVID; and

•A meaningful increase to our Medicaid membership.

As we work through this unprecedented period of the COVID pandemic, we remain focused on executing on the underlying fundamentals of our business to continue to produce solid results, regardless of the short-term COVID-related impacts on our reported financial metrics and results.

Growth Initiatives

We made another major stride in the third quarter of 2020 related to the activation of our growth strategy. In September 2020, we signed a definitive agreement to purchase the net assets of Affinity Health Plan in New York for approximately $380 million, which we currently expect to close as early as the second quarter of 2021. We believe this ~~year. For the first nine months of the year, the Marketplace MCR was 66.7%, and the attractive margin profile of this business will allow us~~purchase is another milestone in a growth-oriented 2020. Our growth initiatives continue to be ~~more competitive on premium rates, increase value added benefits,~~anchored by our capital allocation priorities: first, organic growth of our core businesses; second, inorganic growth through accretive acquisitions; and ~~offer more competitive commissions in 2020, so we can grow membership - albeit at a lower, but still attractive and more sustainable margin.~~third, programmatically returning excess capital to shareholders.

~~G&A Expenses~~

~~Our G&A expense ratio increased 60 basis points to 7.6% in the nine months ended~~

Molina Healthcare, Inc. September 30, ~~2019, from 7.0% for the same period in 2018, due mainly to the year-over-year decline in total revenues.~~2020 Form 10-Q | 26

~~Balance Sheet and Capital Management~~

~~We continue to improve our balance sheet, as we repaid an additional $55 million aggregate principal amount~~Table of our 1.125% Convertible Notes in the third quarter, for a total of $240 million year to date. The impact of capital deployment actions in the quarter resulted in lower interest expense, a slight loss on repayment of the convertible notes, and a lower share count.Contents

FINANCIAL SUMMARY


														Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,						Nine Months Ended September 30,							2020			2019			2020			2019
	2019			2018			2019			2018
	(Dollars in millions, except per-share amounts)													(Dollars in millions, except per-share amounts)
Premium revenue	$	4,084		$	4,337		$	12,085		$	13,174		Premium revenue	$	4,768		$	4,084		$	13,444		$	12,085
Premium tax revenue	119			110			367			320			Premium tax revenue	170			119			477			367
Health insurer fees reimbursed	—			83			—			248			Health insurer fees reimbursed	69			—			206			—
Investment income and other revenue	40			37			103			93			Investment income and other revenue	14			40			61			103

Medical care costs	3,523			3,790			10,360			11,362			Medical care costs	$	4,098		$	3,523		$	11,412		$	10,360
General and administrative expenses	323			311			953			998			General and administrative expenses	368			323			1,030			953
Premium tax expenses	119			110			367			320			Premium tax expenses	170			119			477			367
Health insurer fees	—			87			—			261			Health insurer fees	70			—			209			—
Restructuring costs	—			5			5			38
Gain on sale of subsidiary	—			37			—			37

Operating income	257			295			802			859			Operating income	$	289		$	257		$	987		$	802
Interest expense	22			26			67			91			Interest expense	27			22			72			67
Other expenses (income), net	2			10			(15		)	25
Other expense (income), net													Other expense (income), net	—			2			5			(15)
Income before income tax expense	233			259			750			743			Income before income tax expense	262			233			910			750
Income tax expense	58			62			181			237			Income tax expense	77			58			271			181
Net income	175			197			569			506			Net income	185			175			639			569

Net income per diluted share	$	2.75		$	2.90		$	8.80		$	7.60
Net income per share - Diluted													Net income per share - Diluted	$	3.10		$	2.75		$	10.65		$	8.80

Operating Statistics:													Operating Statistics:
Ending total membership	3,346,000			3,999,000			3,346,000			3,999,000			Ending total membership	4,033,000			3,346,000			4,033,000			3,346,000
MCR ⁽¹⁾	86.3		%	87.4		%	85.7		%	86.2		%	MCR (1)	85.9		%	86.3		%	84.9		%	85.7		%
G&A ratio ⁽²⁾	7.6		%	6.6		%	7.6		%	7.0		%	G&A ratio (2)	7.3		%	7.6		%	7.3		%	7.6		%
Premium tax ratio ⁽¹⁾	2.8		%	2.5		%	2.9		%	2.4		%	Premium tax ratio (1)	3.4		%	2.8		%	3.4		%	2.9		%
Effective income tax rate	24.7		%	24.0		%	24.1		%	31.9		%	Effective income tax rate	29.5		%	24.7		%	29.8		%	24.1		%
After-tax margin ⁽²⁾	4.1		%	4.2		%	4.5		%	3.6		%	After-tax margin (2)	3.7		%	4.1		%	4.5		%	4.5		%

________________________


~~(1)~~	(1) MCR represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium tax expenses as a percentage of premium revenue plus premium tax revenue.


~~(2)~~	~~G&A ratio represents general and administrative expenses as a percentage of total revenue. After-tax margin represents net income as a percentage of total revenue.~~

(2) G&A ratio represents general and administrative expenses as a percentage of total revenue. After-tax margin represents net income as a percentage of total revenue.

CONSOLIDATED RESULTS

NET INCOME AND OPERATING INCOME

Net income in the third quarter of ~~2019~~2020 amounted to ~~$175~~$185 million, or ~~$2.75~~$3.10 per diluted share, compared with ~~$197~~$175 million, or ~~$2.90~~$2.75 per diluted share, in the third quarter of ~~2018.~~2019. Operating income of $289 million in the third quarter of 2020, was higher compared with $257 million in the third quarter of 2019, was lower compared with $295 million in the third quarter of 2018, mainly resulting from the year-over-year decline in premium revenue. Additionally, results for the third quarter of 2018 included the recognition of a $37 million gain on the sale of subsidiary.2019.

Net income in the nine months ended September 30, ~~2019,~~2020, amounted to ~~$569~~$639 million, or ~~$8.80~~$10.65 per diluted share, compared with ~~$506~~$569 million, or ~~$7.60~~$8.80 per diluted share, in the nine months ended September 30, ~~2018.~~2019. Operating income ~~amounted to~~of $987 million in the nine months ended September 30, 2020, was higher compared with $802 million in the nine months ended September 30, ~~2019, compared with $859 million~~2019.

The improvement in operating income for both periods was mainly due to higher premium revenues and a reduction in the ~~nine months ended September 30, 2018.~~MCR.

InNet income per share in the third quarter and nine months ended September 30, ~~2019, net income per diluted share~~2020, was favorably impacted by the reduction ~~of the dilutive impact of the 1.125% Warrants,~~in common shares outstanding as a result of our share repurchase program that began in late 2019 and concluded in the ~~1.125% Warrants partial termination transactions that settled between September 2018 and September 2019.~~first quarter of 2020. See further discussion in ~~Notes to Consolidated~~“Liquidity and Financial ~~Statements, Note 9, “~~Condition,” below.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 27

~~Stockholders' Equity~~.”Table of Contents

PREMIUM REVENUE

Premium revenue ~~decreased $253~~increased $684 million in the third quarter of ~~2019,~~2020, when compared with the third quarter of ~~2018. Member months declined 18%, partially offset by a per-member per-month (“PMPM”) revenue increase of 12%. Premium revenue decreased $1,089~~2019, and increased $1,359 million in the nine months ended September 30, ~~2019,~~2020, when compared with the nine months ended September 30, ~~2018. Member months declined 18%, partially offset by a PMPM revenue increase of 10%. The~~2019.

In both periods, the higher premium revenue ~~decline~~reflected the increase in ~~both periods was~~membership, primarily in ~~the~~ Medicaid, and ~~Marketplace programs.~~

~~The decline in Medicaid premium revenue was driven primarily by~~included the ~~loss in membership due to~~impact from the ~~previously announced loss~~YourCare and Passport acquisitions. In the third quarter of 2020, we added 325,000 members from our acquisition of the Kentucky Passport business on September 1, 2020, and 47,000 members from our acquisition of the New ~~Mexico Medicaid contract, along with the resizing of the Florida Medicaid contract as reported throughout 2018. This~~York YourCare business on July 1, 2020. The increase in premium revenues from these acquisitions was ~~partially~~slightly offset by ~~Medicaid premium rate increases, and~~ the ~~impact of a $57 million reduction~~decline in ~~premium revenue recognized~~membership, in the third quarter of ~~2018, relating to a retroactive California Medicaid Expansion risk corridor for the state’s 2017 fiscal year.~~

2020, associated with our announced exit of operations in Puerto Rico. The ~~decline~~increase in ~~Marketplace~~ premium revenue was ~~primarily due to declining membership, which also drove a relatively smaller benefit from prior year Marketplace risk adjustment~~net of COVID-related premium refunds that were enacted in ~~2019 compared with 2018, partially offset by premium rate increases.~~several states.

MEDICAL CARE RATIO

The consolidated MCR in the third quarter of 2020 decreased to 85.9%, compared to 86.3% in the third quarter of 2019, ~~from 87.4%~~reflecting improved operating performance in Medicaid and Medicare, partially offset by underperformance in the ~~third quarter~~Marketplace program. Additionally, the net effect of ~~2018. The consolidated MCR in~~all of the ~~third quarter of 2018 would have been 86.4% excluding~~COVID-related impacts, such as the ~~retroactive California Medicaid Expansion risk corridor adjustment~~reduced demand for medical services and the premium refunds, profit corridors and related actions, had a ~~slight benefit from the Marketplace cost sharing (“CSR”) reimbursement related to 2017 dates of service. Prior period reserve development in the quarter was negligible.~~slightly favorable impact on our overall financial results.

~~The consolidated MCR decreased to 85.7% in the nine months ended September 30, 2019, from 86.2% in the nine months ended September 30, 2018.~~ The consolidated MCR in the nine months ended September 30, ~~2018, would have been 86.5%~~2020, decreased to 84.9%, ~~excluding~~compared to 85.7% in the ~~retroactive California Medicaid Expansion risk corridor adjustment and~~nine months ended September 30, 2019. Reserve development for the ~~$81 million benefit from~~first nine months of 2020 was not material. The comparable period in the ~~Marketplace CSR reimbursement related to 2017 dates~~prior year was positively impacted by 100 basis points of ~~service.~~

~~The improvement in both periods was due to a decrease~~favorable reserve development, primarily in the Medicaid ~~and Medicare MCRs, partially offset by an increase in the Marketplace MCR.~~program.

PREMIUM TAX REVENUE AND EXPENSES

The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue) was ~~2.8%~~3.4% in the third quarter of ~~2019,~~2020, compared with ~~2.5% in~~2.8% the third quarter of ~~2018;~~2019; and ~~2.9%~~3.4% compared with ~~2.4%~~2.9% for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The current year ratio increase iswas mainly ~~attributed~~due to ~~the state of Michigan’s implementation of an insurance provider assessment in 2019, and~~ the state of Illinois’ implementation of a managed care organization provider assessment in the third quarter of 2019.

INVESTMENT INCOME AND OTHER REVENUE

Investment income and other revenue ~~increased~~decreased to $14 million in the third quarter of 2020, compared with $40 million in the third quarter of 2019, ~~compared with $37~~and decreased to $61 million in the ~~third quarter of 2018, and increased to~~nine months ended September 30, 2020, compared with $103 million in the nine months ended September 30, 2019. The year-over-year decrease was consistent with our expectation and was due to the low interest rate environment.

G&A EXPENSES

The G&A expense ratio decreased to 7.3% in the third quarter of 2020, from 7.6% in the third quarter of 2019, and decreased to 7.3% in the nine months ended September 30, 2020, compared with ~~$93~~7.6% in the nine months ended September 30, 2019. In both periods, the ratio improved due to increased revenues, partially offset by increased costs associated with the COVID-19 pandemic. The third quarter and nine months ended September 30, 2020, reflected approximately $7 million and $38 million, respectively, of net incremental expenses associated with a variety of new COVID-related operational protocols, technology implementations, and benefits for our employees.

HEALTH INSURER FEES (“HIF”)

In the third quarter of 2020 and the nine months ended September 30, 2020, HIF expense amounted to $70 million and $209 million, respectively, and HIF reimbursements amounted to $69 million and $206 million, respectively. Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. The HIF was reinstated in 2020, but the Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020.

INTEREST EXPENSE

Interest expense increased to $27 million in the third quarter of 2020, compared with $22 million in the third quarter of 2019, and increased to $72 million in the nine months ended September 30, ~~2018, mainly due to gains realized on the sale~~2020, compared with $67 million in

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 28

Table of ~~certain investments in the third quarter of 2019, and improved annualized portfolio yields overall in 2019.~~Contents

~~G&A EXPENSES~~

~~The G&A expense ratio increased to 7.6% in the third quarter of 2019, from 6.6% in the third quarter of 2018, and increased to 7.6% in~~ the nine months ended September 30, ~~2019, compared with 7.0% in the nine months ended September 30, 2018. These increases were due mainly~~2019. Additional interest expense relating to the ~~year-over-year decline~~4.375% Notes issued in ~~total revenues.~~

~~HEALTH INSURER FEES~~

~~There are no health insurer fees (“HIF”) expensed or reimbursed~~June 2020 was partially offset by the decrease in ~~2019 due to~~interest expense resulting from the ~~moratorium under Public Law No. 115-120. In~~settlement of the third quarter of 2018 and the nine months ended September 30, 2018, the HIF amounted to $87 million and $261 million, respectively, and HIF reimbursements amounted to $83 million and $248 million, respectively.

~~RESTRUCTURING COSTS~~

~~We incurred restructuring costs of $5 million~~convertible senior notes in the nine months ended September 30, 2019, mainly due to true-ups of lease terminations recorded in our 2017 Restructuring Plan. In the third quarter of 2018 and the nine months ended September 30, 2018, we incurred restructuring costs of $5 million and $38 million, respectively, related to our 2017 Restructuring Plan.

~~INTEREST EXPENSE~~

Interest expense declined to $22 million in the third quarter of 2019, from $26 million in the third quarter of 2018, and declined to $67 million in the nine months ended September 30, 2019, from $91 million in the nine months ended September 30, 2018.January 2020. As further described below in “Liquidity,” ~~we reduced~~a portion of the net proceeds from the 4.375% Notes offering was used to repay $600 million principal amount outstanding under the term loan facility of our 1.125% Convertible Notes by $240 million in the nine months ended September 30, 2019, and reduced total debt by $759 million in the year ended December 31, 2018. The decrease in interest expense in 2019 was partially offset by interest expense attributable to $220 million borrowed under our Term Loan Facility in the nine months ended September 30, 2019.

Interest expense includes non-cash interest expense relating primarily to the amortization of the discount on convertible senior notes, which amounted to $1 million and $5 million in the third quarter of 2019, and 2018, respectively, and $5 million and $18 million in the nine months ended September 30, 2019 and 2018, respectively. The decline in 2019 is due to repayment of our convertible senior notes throughout 2018 and in the nine months ended September 30, 2019.prior credit agreement. See further discussion in Notes to Consolidated Financial Statements, Note ~~7, “Debt~~.8, “Debt.”

OTHER ~~EXPENSES~~EXPENSE (INCOME), NET

In the nine months ended September 30, 2020, we recognized losses on debt repayment of $5 million in connection with repayment of our term loan facility and other financing transactions. In the third quarter ~~of 2019~~ and ~~the~~ nine months ended September 30, 2019, we recognized a loss on debt repayment of $2 million, and a gain on debt repayment of $15 million, ~~respectively. In the third quarter of 2018 and the nine months ended September 30, 2018, we recognized losses on debt repayment of $10 million and $25 million,~~ respectively, in connection with convertible senior notes repayment transactions. The net gain year to date in 2019 was due to a favorable mark to market valuation on the partial termination of the Call Spread Overlay executed in connection with the related debt repayment. See further discussion in Notes to Consolidated Financial Statements, Note 7, “~~Debt~~.”

INCOME TAXES

~~The provision for income taxes was recorded at an effective rate of 24.7%~~Income tax expense amounted to $77 million in the third quarter of ~~2019,~~2020, or 29.5% of pretax income, compared with ~~24.0%~~income tax expense of $58 million, or 24.7% of pretax income in the third quarter of ~~2018, and 24.1%~~2019. Income tax expense amounted to $271 million in the nine months ended September 30, ~~2019,~~2020, or 29.8% of pretax income, compared with ~~31.9%~~income tax expense of $181 million, or 24.1% of pretax income in the nine months ended September 30, ~~2018.~~2019. The effective tax rate ~~was~~has been higher in ~~2018~~2020 due to higher ~~non-deductible~~nondeductible expenses in ~~2018,~~2020, primarily related to the ~~non-deductible~~nondeductible HIF. ~~The~~As discussed above, the HIF iswas not applicable in 2019 ~~due to the moratorium under Public Law No. 115-120.~~and has been repealed for years after 2020.

~~SUMMARY OF NON-RUN RATE ITEMS~~

The table below summarizes the impact of certain expenses and other items that management believes are not indicative of longer-term business trends and operations. The individual items presented below increase (decrease) income before income tax expense.

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Amount
Per Diluted Share ⁽¹⁾
Amount
Per Diluted Share ⁽¹⁾
Amount
Per Diluted Share ⁽¹⁾
Amount
Per Diluted Share ⁽¹⁾
(In millions except per diluted share amounts)
(Loss) gain on debt repayment $ (2 ) $ (0.03 ) $ (10 ) $ (0.12 ) $ 15
$ 0.18
$ (25 ) $ (0.33 )
Restructuring costs —
—
(5 ) (0.06 ) (5 ) (0.06 ) (38 ) (0.45 )
Gain on sale of subsidiary —
—
37
0.42
—
—
37
0.43
$ (2 ) $ (0.03 ) $ 22
0.24
$ 10
$ 0.12
$ (26 ) $ (0.35 )

~~___________________~~


~~(1)~~	Except for permanent differences between GAAP and tax (such as certain expenses that are not deductible for tax purposes), per diluted share amounts are generally calculated at the statutory income tax rate of 22.6% and 22% for 2019 and 2018, respectively.

REPORTABLE SEGMENTS

We currently have two 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.

HOW WE ASSESS PERFORMANCE

We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid agencies and the federal government.

~~One of the~~The key metrics used to assess the performance of our Health Plans segment ~~is the~~are premium revenue, margin and MCR. MCR ~~which~~ represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying margin, or the amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most important measure of earnings reviewed by management.

Margin for our Health Plans segment is referred to as “Medical Margin.” Medical Margin amounted to $670 million in the third quarter of 2020, and $561 million in the third quarter of ~~2019, and $547~~2019. Medical Margin amounted to $2,032 million in the ~~third quarter of 2018. Medical Margin amounted to~~nine months ended September 30, 2020, and $1,725 million in the nine months ended September 30, ~~2019, and $1,812 million in the nine months ended September 30, 2018.~~2019. Management’s discussion and analysis of the changes in the individual components of Medical Margin follows.

See Notes to Consolidated Financial Statements, Note ~~11, “Segments~~,10, “Segments,” for more information on our reportable segments.

HEALTH PLANS

~~The~~As of September 30, 2020, the Health Plans segment ~~consists~~consisted of health plans operating in 1415 states and the Commonwealth of Puerto ~~Rico. As of September 30, 2019, these health plans~~Rico, and served approximately ~~3.3~~4.0 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies.

TRENDS AND UNCERTAINTIES

~~Decline in Membership~~COVID-19 Pandemic

As the COVID-19 pandemic continues to evolve, its ultimate impact to our business, results of operations, financial condition and ~~Premium Revenue~~cash flows is uncertain and difficult to predict. Specific trends and uncertainties related to our Health Plans segment follow.

~~Medicaid Program~~

Our Medicaid contracts in New Mexico and in all but two regions in Florida terminated in late 2018 and early 2019. As a result, our Medicaid membership has decreased to approximately 96,000 members in Florida as of

Molina Healthcare, Inc. September 30, ~~2019, from 468,000 members in Florida and New Mexico, in the aggregate, as~~2020 Form 10-Q | 29

Table of ~~December 31, 2018. In 2019, we continue to serve Medicare and Marketplace members in both Florida and New Mexico, as well as Medicaid members in two regions in Florida.~~Contents

Federal Economic Stabilization Programs

~~In addition, our Medicaid membership has declined further in Puerto Rico as~~As a result of the ~~entry~~pandemic, various stabilization programs were enacted beginning in March 2020, which may impact our business directly or indirectly, including the following:

Phase 1 - Coronavirus Preparedness and Response Supplemental Appropriations Act. Enacted on March 6, 2020, this legislation provided $8.3 billion in COVID-19 response funding for developing a vaccine and preventing further spread of the virus.

Phase 2 - Families First Coronavirus Response Act. Enacted on March 18, 2020, this legislation provided $100 billion in worker assistance, temporarily increased each qualifying state and territory’s federal medical assistance percentage (“FMAP”) by 6.2% beginning January 1, 2020, and waived cost sharing for COVID-19 testing. The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s FMAP.

Effective October 23, 2020, the U.S. Department of Health and Human Services (“HHS”) announced that it has extended the COVID public health emergency for another 90 days. The renewal extends the emergency period until late January 2021. As a result, the enhanced FMAP rate will be extended through the end of the first quarter of 2021. The accompanying requirement that bans the loss of coverage from state eligibility redeterminations would be extended through the end of January 2021. Redetermination is the process through which Medicaid enrollees demonstrate whether they continue to meet the requirements for participation in the Medicaid program, in particular maximum household income. This is likely a positive indicator for continued membership gains, and to provide more ~~managed~~support for an actuarially sound rate environment.

Phase 3 - Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Enacted on March 27, 2020, the CARES Act provided an estimated $2 trillion to fight the COVID-19 pandemic and stimulate the U.S. economy. This assistance included loans and support to major industries, including airlines and small businesses, direct payments to individuals and families, and $175 billion in relief funds to hospitals and other healthcare providers.

Phase 3b - Paycheck Protection Program and Health Care Enhancement Act. Enacted on April 24, 2020, this legislation provided $310 billion for the depleted Paycheck Protection Program, and additional funding for hospitals and testing.

The Phase 4 stimulus package is currently under consideration by Congress.

Due to the uncertainty as to the duration and breadth of the COVID-19 pandemic, we are unable to reasonably estimate the ultimate impact of the economic stabilization programs to our business, financial condition, and operating results.

Health Plan Operations

The pandemic has impacted our business, and we currently expect it to further impact our business in the areas described below. As noted above, in the third quarter of 2020 the combination of COVID-related impacts netted to a negligible to slightly positive impact on earnings.

Medical Care Costs and Demand for Healthcare Services. Beginning in early 2020 the pandemic, along with the related quarantine and social distancing measures, initially reduced demand for certain routine and non-critical medical services, while at the same time increased demand for other medical services, such as COVID-19 testing and emergency services. Early in the second quarter of 2020, we experienced significantly lower utilization in a variety of cost categories, representing approximately two-thirds of our total medical cost spend, with utilization levels increasing slowly as the quarter progressed. We experienced several significant COVID-related impacts on medical care ~~organizations~~costs in the third quarter of 2020 as follows:

•At the beginning of the third quarter of 2020, utilization was still moderately curtailed, but rebounded to more normal levels during the quarter.

•We attracted approximately 300,000 new Medicaid members since March 31, 2020, and we believe that ~~market late last year. We served~~the acuity of that population is lower than our average.

•Direct costs to care for COVID patients totaled $35 million in the third quarter of 2020, as a resurgence of COVID infections and episodes has occurred in places such as Texas and California, and also disproportionately impacted certain of our Marketplace members.

In the third quarter of 2020, the net effect of these three factors reduced medical care costs and increased pretax earnings by a range of approximately ~~186,000 members in Puerto Rico as of~~$95 million to $105 million.

Molina Healthcare, Inc. September 30, ~~2019, compared with 252,000 members~~2020 Form 10-Q | 30

Table of Contents

Medicaid Premium Actions. Various states have implemented temporary premium refunds and related actions in response to the reduced demand for medical services stemming from COVID-19, which are resulting in a reduction of our medical margin. In some cases, these premium actions are retroactive to earlier periods in 2020, or as early as the beginning of ~~December 31, 2018.~~

~~Our Medicaid~~the states’ fiscal years in 2019. In the second quarter of 2020, we recognized approximately $75 million for certain of these retroactive premium ~~revenues have decreased 9%~~actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. In most of those states, the refund period extended into the third quarter of 2020, and one additional state, Michigan, enacted a premium refund mechanism in the third quarter of 2020. Consequently, we recognized an additional $88 million related to these retroactive premium actions in the third quarter of 2020, resulting in $163 million recognized in the nine months ended September 30, ~~2019, when compared with~~2020.

It is possible that certain states could increase the ~~nine months ended September 30, 2018, primarily~~level of existing premium refunds, and it is also possible that other states could implement some form of retroactive premium refund during the fourth quarter of 2020. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of ~~the~~ changes ~~described above.~~ in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.

Our position on rate adequacy has been consistent:

•We ~~expect~~do not intend, nor do we want, to keep state Medicaid money that was supposed to be spent on medical benefits but was not due to utilization curtailment caused by COVID;

•In many of our Medicaid ~~premium revenues~~states, there are already mechanisms in place to ~~continue to decline~~protect against a surplus margin, as there are Minimum MLRs in ~~2019 compared with 2018.~~seven of our states and profit caps in two others; and

~~Marketplace Program~~•Once the COVID-19 pandemic abates, we believe that the traditional process of establishing prospective actuarially sound rates based on a credible medical cost baseline and cost trend off that baseline will resume.

Member Enrollment. We ~~estimate that our 2019 Marketplace end-of-year enrollment will decrease to approximately 270,000~~added 625,000 Medicaid members ~~due to expected attrition. This projected enrollment is lower than the 289,000 and 362,000 members enrolled~~ as of September 30, ~~2019, and December 31, 2018, respectively. Consequently, we expect our Marketplace premium revenues to continue to decrease in 2019~~2020, compared with ~~2018.~~

~~Status~~our Medicaid membership as of ~~Upcoming Contract Re-Procurements~~

~~Medicaid Program~~

~~Texas Health Plan.~~ ~~On October 29, 2019,~~March 31, 2020, when we first began to report on the ~~Texas Health and Human Services Commission (HHSC) notified~~impacts of the pandemic. Included in this total are 325,000 members added from our ~~Texas health plan, Molina Healthcare~~acquisition of ~~Texas, Inc., that HHSC intends to award contracts to Molina Healthcare of Texas, Inc. for~~ the ~~STAR+PLUS program in the Hidalgo and North East service areas. The awards will be for an initial contract term of 3 years, and anticipated to have an operational effective date of~~Kentucky Passport business on September 1, 2020. STAR+PLUS is a Texas Medicaid Managed Care program integrating the delivery of Acute Care services and Long-Term Services and Supports (LTSS) for people who are age 65 or older, blind, or disabled. Currently,The 47,000 member increase from our Texas health plan services the Bexar, Dallas, El Paso, Harris, Hidalgo, and Jefferson service areas, with total membership of approximately 86,000 enrollees. Under the existing STAR+PLUS contract, the premium revenue for this program amounted to approximately $1.2 billion for the nine months ended September 30, 2019. We are seeking to understand the basis for HHSC’s selection of intended contract awards. We do not expect this matter to affect our earnings during fiscal year 2019.

Our Texas health plan has submitted a request for proposal (“RFP”) response with regard to the STAR/CHIP program. We currently expect the STAR/CHIP award to be announced in the fourth quarter of 2019. The STAR/CHIP program is currently expected to have an operational effective date of December 1, 2020. As of September 30, 2019, our Texas health plan served 116,000 members under the existing STAR/CHIP contracts, under which we estimate annualized premium revenues of approximately $310 million in 2019.

~~Ohio Health Plan.~~ ~~We have received information that the state of Ohio expects to release its Medicaid contract RFP early in 2020, with an announcement~~acquisition of the ~~awards expected~~New York YourCare business on July 1, 2020, was offset by the decline in membership, in the third quarter of 2020, ~~and an operational effective date~~associated with our announced exit of ~~January 1, 2021.~~operations in Puerto Rico. The remaining 300,000 increase in membership was mainly due to the suspension of redeterminations, as we believe that unemployment-related enrollment has not yet materially accessed managed Medicaid.

It remains unclear how high the COVID-related membership peak will be, how quickly it will fall as the economy recovers, and where it will ultimately settle. However it does now appear that since unemployment nationally is now just under 8%, the initial industry estimates of unemployment-related Medicaid membership increases were somewhat overstated. On a related note, the declaration of the extension of the public health emergency period into next year will also likely have an impact. Therefore, we are currently unable to predict the timing or amount of the expected increases in enrollment. Increased membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs. We believe that we have the scalability necessary to both serve new members, and ably partner with our state customers for increases in membership.

~~California Health Plan.~~Capital and Financial Resources ~~We have received information that the state of California expects~~. Refer to ~~release its Medicaid contract RFP in 2020, with new contracts effective in 2023.~~

~~Losses of any~~“Liquidity and Financial Condition” below for a discussion of our ~~Texas, Ohio, or California Medicaid contracts could have a material adverse effect on our business,~~capital and financial ~~condition, cash flows,~~resources.

We continue to monitor and ~~results of operations.~~

~~MMP Program~~

~~Our California, Illinois~~assess the estimated operating and ~~Ohio MMP contracts have been extended, with one-year renewal terms, through December 31, 2022. These contracts represent aggregate annualized revenues of approximately $910 million in 2019.~~

~~Our Michigan, South Carolina and Texas MMP contracts are active through December 31, 2020. In October 2019, the Michigan Medicaid agency submitted a three-year extension request to CMS.~~

~~Pressures on Medicaid Funding~~

Due to states’ budget challenges and political agendas at both the state and federal levels, there are a number of different legislative proposals being considered, some of which would involve significantly reduced federal or state spending on the Medicaid program, constitute a fundamental change to the federal role in healthcare and, if enacted, could have a material adverse effect on our business, financial ~~condition, cash flows and results of operations. These proposals include elements such as the following, as well as numerous other potential changes and reforms:~~

~~Changes in the entitlement nature of Medicaid (and perhaps Medicare as well) by capping future increases in federal health spending for these programs, and shifting much more~~impact of the ~~risk~~COVID-19 pandemic, and as it evolves, we continue to process, assemble, and assess member utilization information. We believe that our cash resources, borrowing capacity available under the Credit Agreement, and cash flow generated from operations will be sufficient to withstand the financial impact of the pandemic, and will enable us to continue to support our operations, regulatory requirements, debt repayment obligations, and capital expenditures for ~~health costs in~~ the foreseeable future.

~~future to states and consumers;~~

~~Reversing the ACA’s expansion of Medicaid that enables states to cover low-income childless adults;~~

~~Changing Medicaid to a state block grant program, including potentially capping spending on a per-enrollee basis;~~

~~Requiring Medicaid beneficiaries to work; and~~

~~Limiting the amount of lifetime benefits for Medicaid beneficiaries.~~

~~ACA~~Affordable Care Act

In December 2018, in a case brought by the state of Texas and nineteen other states, a federal judge in Texas held that the ACA’s individual mandate is unconstitutional. He further held that since the individual mandate is inseverable from the entire body of the ACA, ~~and thus~~ the entire ACA is unconstitutional. The ~~District~~effect of his ruling was stayed pending the appeal of the ruling to the Fifth Circuit Court ~~stayed its order pending appeal, and the decision has now been appealed to and argued before~~of Appeals. In December 2019, a ~~three judge~~three-judge panel of the Fifth Circuit Court of ~~Appeals. A~~Appeal, in a two to one decision, affirmed the District Court’s ruling that the individual mandate

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 31

Table of ~~that court~~Contents

is unconstitutional, but remanded the case back to the District Court for additional analysis and findings regarding severability and the consideration of additional arguments.

The U.S. Supreme Court has accepted the appeal of the Fifth Circuit Court’s decision. Oral arguments before the Supreme Court are scheduled to take place on November 10, 2020, and a decision is expected in the ~~fourth quarter~~first half of ~~2019, after which~~2021. The ACA remains in effect pending the ~~case may be further appealed~~issuance of the Supreme Court’s opinion.

As of September 30, 2020, we served a significant number of members enrolled in programs created by the ACA, including approximately 730,000 Medicaid Expansion members and 325,000 Marketplace members. In the nine months ended September 30, 2020, premium revenue associated with these members amounted to $3,644 million, and contributed Medical Margin of $681 million. A decision by the ~~United States~~ Supreme ~~Court. Any final, non-appealable determination~~Court that the entirety of the ACA is unconstitutional ~~would~~could have a material adverse effect on our business, financial condition, cash flows, ~~and~~or results of operations.

Other Recent Developments

New York. In September 2020, we entered into a definitive agreement to acquire substantially all of the assets of Affinity Health Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the second quarter of 2021.

On July 1, 2020, we closed on the acquisition of certain assets of YourCare Health Plan, Inc., a Medicaid health plan, for a cash purchase price of $42 million. In connection with this transaction, we added approximately 47,000 Medicaid members in New York.

Acquisition of Magellan Complete Care. In April 2020, we entered into a definitive agreement to acquire the MCC line of business of Magellan Health, Inc. The purchase price for the transaction is approximately $820 million, net of certain tax benefits, which we intend to fund with cash on hand.

MCC is a managed care organization serving members in six states, including Medicaid members in Arizona and statewide in Virginia, and Integrated Acute Care members in Florida. Through its Senior Whole Health branded plans, MCC provides fully integrated plans for Medicaid and Medicare dual beneficiaries in Massachusetts, as well as Managed Long-Term Care in New York. MCC also provides consultative services to participants who self-direct their care through Wisconsin’s long-term services and supports (“LTSS”) program. As of December 31, 2019, MCC served approximately 155,000 members in managed care plans and provided services to 25,000 LTSS program participants in Wisconsin, with full year 2019 revenues over $2.7 billion.

The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close around the end of 2020. In connection with this transaction, Magellan Health, Inc. has agreed to provide certain transition services following the closing.

Marketplace Risk Corridor Ruling. In April 2020, the United States Supreme Court held that §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute, and that impacted insurers may sue the federal government in the U.S. Court of Federal Claims to recover damages for breach of that obligation. In June 2020, the Claims Court granted us judgment in the amount of $128.1 million for our 2014, 2015, and 2016 Marketplace risk corridor claims, which we received in October 2020. Since we accounted for the judgment as a gain contingency at September 30, 2020, it will be recognized in our fourth quarter 2020 financial results. The judgment does not create additional Minimum MLR rebates.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 32

Table of Contents

Puerto Rico. We will exit Puerto Rico’s Medicaid program when our current contract expires on October 31, 2020. We are working closely with the regulatory authorities and the provider community to ensure that our members in Puerto Rico have reliable continuity of care. As discussed in the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” we recognized a $10 million premium deficiency reserve at September 30, 2020, in connection with the exit from this business.

Update on Status of Significant Medicaid Contracts

California. Our managed care contracts with the California Department of Health Care Services (“DHCS”) cover six regions in central and southern California (including the Los Angeles region covered under a separate subcontract with Health Net, LLC). These contracts are effective through December 31, 2020, which we expect to be renewed annually until the effectiveness of new forms of contract following RFP awards. DHCS has publicly indicated it expects to release the final Medicaid RFP in 2021, for implementation in January 2024.

Ohio. Our managed care contract with the Ohio Department of Medicaid (“ODM”) is effective through July 1, 2021. In September 2020, the ODM released the RFP for the Ohio Medicaid program with a due date of November 20, 2020. The program will be regionally based on the current three regions (Central/Southeast, Northeast and West); plans may bid on one or all regions, and be awarded one or all regions. The contracts will be awarded on

January 25, 2021, with a go-live date of January 5, 2022.

Texas. On March 25, 2020, the Texas Health and Human Services Commission (“HHSC”), notified our Texas health plan that HHSC had upheld our protest and had canceled all previously awarded contracts associated with the re-procurement awards announced in October 2019 for the ABD program (known in Texas as “STAR+PLUS”). In addition, HHSC canceled the pending re-procurement associated with the TANF and CHIP programs (known in Texas as “STAR/CHIP”). HHSC further indicated that it was deliberating next steps with respect to both re-procurements. We do not expect the HHSC to re-issue the RFPs in the near future.

Update on Status of MMP Contracts

Our MMP contracts in California, Illinois and Ohio are effective through December 31, 2022. Updates to our current Michigan, South Carolina and Texas MMP contracts are described below. The Michigan, South Carolina and Texas MMP contracts represented aggregate revenues of approximately $586 million in nine months ended September 30, 2020.

Michigan. A one-year contract extension has been executed, through December 31, 2021. The state has submitted a formal letter of intent to extend the contract for five years through 2026; the five-year contract extension is under development.

South Carolina. A three-year contract extension has been executed, effective through December 31, 2023.

Texas. A three-year contract extension amendment, through December 31, 2023, is under review and pending full execution.

For a discussion of additional Health Plans segment trends, uncertainties and other developments, refer to our 2019 Annual Report on Form 10-K, “Item 1. Business—Our Business,” and “—Legislative and Political Environment.”

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 33

Table of Contents

MEMBERSHIP

The following tables set forth our Health Plans segment membership as of the dates indicated:


	September 30, 2020	December 31, 2019	September 30, 2019
Ending Membership by Government Program:
Medicaid	3,595,000	2,956,000	2,955,000
Medicare	113,000	101,000	102,000
Marketplace	325,000	274,000	289,000
Total	4,033,000	3,331,000	3,346,000

Ending Membership by Health Plan:
California	584,000	565,000	580,000
Florida	136,000	132,000	136,000
Illinois	282,000	224,000	224,000
Kentucky (1)	325,000	—	—
Michigan	391,000	362,000	361,000
Ohio	348,000	288,000	292,000
South Carolina	153,000	131,000	134,000
Texas	357,000	341,000	350,000
Washington	947,000	832,000	818,000
Other (2)	510,000	456,000	451,000
Total	4,033,000	3,331,000	3,346,000

_________________________

(1)

September 30,
2019 December 31,
2018 September 30,
2018
Ending Membership by Program:
TANF and CHIP 1,993,000
2,295,000
2,436,000
Medicaid Expansion 598,000
660,000
664,000
ABD 364,000
406,000
415,000
Total Medicaid 2,955,000
3,361,000
3,515,000
MMP – Integrated ⁽¹⁾
58,000
54,000
55,000
Medicare Special Needs Plans (“Medicare”) 44,000
44,000
45,000
Total Medicare 102,000
98,000
100,000
Total Medicaid and Medicare 3,057,000
3,459,000
3,615,000
Marketplace 289,000
362,000
384,000
3,346,000
3,821,000
3,999,000

Ending Membership by Health Plan:
California 580,000
608,000
623,000
Florida ⁽²⁾
136,000
313,000
395,000
Illinois 224,000
224,000
223,000
Michigan 361,000
383,000
394,000
New Mexico ⁽²⁾
24,000
222,000
234,000
Ohio 292,000
302,000
315,000
Puerto Rico 186,000
252,000
320,000
South Carolina 134,000
120,000
117,000
Texas 350,000
423,000
436,000
Washington 818,000
781,000
770,000
Other ⁽³⁾
241,000
193,000
172,000
3,346,000
3,821,000
3,999,000

~~_________________________~~On September 1, 2020, we closed on the acquisition of certain assets of Passport Health Plan, Inc., a Medicaid health plan. Effective on that same date, the Kentucky Medicaid agency approved the novation of Passport’s Medicaid contract to Molina Healthcare of Kentucky, Inc.


~~(1)~~	~~MMP members receive both Medicaid and Medicare coverage from Molina Healthcare.~~


~~(2)~~	Our Medicaid contracts in New Mexico and in all but two regions in Florida terminated in late 2018 and early 2019. During 2019, we continue to serve Medicare and Marketplace members in both Florida and New Mexico, as well as Medicaid members in two regions in Florida.


~~(3)~~	~~“Other” includes the Idaho, Mississippi, New York, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results.~~

(2)“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results.

~~THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019, COMPARED WITH THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018~~

FINANCIAL PERFORMANCE ~~BY PROGRAM~~

The ~~following~~ tables in the section below summarize ~~member months,~~ premium revenue, ~~medical care costs,~~Medical Margin, and MCR by state health plan and ~~medical margin~~ by government program for the periods indicated ~~(PMPM amounts are in whole dollars; member months and other dollar amounts are~~(dollars in millions):

HEALTH PLANS


	Three Months Ended September 30,
	2020						2019
	Premium Revenue		Medical Margin		MCR		Premium Revenue		Medical Margin		MCR

California	$	554	$	87	84.3	%	$	567	$	111	80.3	%
Florida	166		27		83.5		171		19		89.0
Illinois	339		32		90.5		257		25		90.6
Kentucky	169		16		90.7		—		—		—
Michigan	398		76		80.8		408		72		82.3
Ohio	808		124		84.6		640		58		91.0
South Carolina	158		18		88.8		151		13		91.6
Texas	801		104		87.1		734		89		87.8
Washington	807		116		85.7		688		85		87.7
Other (1)	568		70		87.6		468		89		80.9
Total	$	4,768	$	670	85.9	%	$	4,084	$	561	86.3	%

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 34

Table of Contents

Three Months Ended September 30, 2019

Member
Months ⁽¹⁾
Premium Revenue Medical Care Costs
MCR ⁽²⁾
Medical Margin
Total PMPM Total PMPM
TANF and CHIP 6.0
$ 1,225
$ 202.46
$ 1,071
$ 176.88
87.4 % $ 154
Medicaid Expansion 1.8
696
385.63
622
345.25
89.5
74
ABD 1.1
1,247
1,136.67
1,097
1,000.56
88.0
150
Total Medicaid 8.9
3,168
353.81
2,790
311.70
88.1
378
MMP 0.2
399
2,328.70
345
2,010.50
86.3
54
Medicare 0.1
160
1,230.01
134
1,029.75
83.7
26
Total Medicare 0.3
559
1,854.96
479
1,587.61
85.6
80
Total Medicaid and Medicare 9.2
3,727
402.76
3,269
353.31
87.7
458
Marketplace 0.9
357
410.23
254
292.21
71.2
103
10.1
$ 4,084
$ 403.40
$ 3,523
$ 348.06
86.3 % $ 561


	Nine Months Ended September 30,
	2020						2019
	Premium Revenue		Medical Margin		MCR		Premium Revenue		Medical Margin		MCR

California	$	1,660	$	280	83.1	%	$	1,682	$	295	82.4	%
Florida	482		82		83.0		570		115		79.9
Illinois	953		116		87.8		726		94		87.1
Kentucky	169		16		90.7		—		—		—
Michigan	1,224		256		79.1		1,226		221		81.9
Ohio	2,279		326		85.7		1,914		208		89.2
South Carolina	472		60		87.3		427		49		88.7
Texas	2,273		276		87.9		2,246		292		87.0
Washington	2,351		364		84.5		2,011		223		88.9
Other (1)	1,581		256		83.7		1,283		228		82.2
Total	$	13,444	$	2,032	84.9	%	$	12,085	$	1,725	85.7	%

__________________

Three Months Ended September 30, 2018

Member
Months ⁽¹⁾
Premium Revenue Medical Care Costs
MCR ⁽²⁾
Medical Margin
Total PMPM Total PMPM
TANF and CHIP 7.4
$ 1,379
$ 187.03
$ 1,228
$ 166.41
89.0 % $ 151
Medicaid Expansion 2.0
671
333.11
640
317.62
95.3
31
ABD 1.2
1,322
1,054.92
1,186
946.38
89.7
136
Total Medicaid 10.6
3,372
316.86
3,054
286.86
90.5
318
MMP 0.2
353
2,159.72
323
1,981.45
91.7
30
Medicare 0.1
156
1,157.71
121
895.25
77.3
35
Total Medicare 0.3
509
1,706.95
444
1,490.63
87.3
65
Total Medicaid and Medicare 10.9
3,881
354.70
3,498
319.63
90.1
383
Marketplace 1.2
456
394.02
292
252.61
64.1
164
12.1
$ 4,337
$ 358.46
$ 3,790
$ 313.23
87.4 % $ 547
(1)“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results.

As discussed in “Trends and Uncertainties” above, the combination of all the COVID-19 pandemic-related impacts netted to a negligible to slightly positive impact on our overall financial results for the third quarter of 2020. Some of these items increased earnings, such as lower than expected medical costs from the curtailment of utilization that benefited all our state health plans, and a meaningful increase in Medicaid membership, while others served to decrease earnings, such as the temporary, retroactive Medicaid premium refunds and related actions enacted by certain states.

Comments relating to the performance of our health plans in California, Ohio, Texas and Washington, which represent our largest health plans from a premium revenue standpoint, follow:

Nine Months Ended September 30, 2019

Member
Months ⁽¹⁾
Premium Revenue Medical Care Costs
MCR ⁽²⁾
Medical Margin
Total PMPM Total PMPM
TANF and CHIP 18.3
$ 3,594
$ 196.01
$ 3,141
$ 171.30
87.4 % $ 453
Medicaid Expansion 5.4
2,055
380.08
1,810
334.85
88.1
245
ABD 3.3
3,590
1,097.94
3,200
978.64
89.1
390
Total Medicaid 27.0
9,239
342.03
8,151
301.77
88.2
1,088
MMP 0.5
1,193
2,368.38
1,034
2,051.90
86.6
159
Medicare 0.4
489
1,270.32
399
1,037.24
81.7
90
Total Medicare 0.9
1,682
1,892.63
1,433
1,612.29
85.2
249
Total Medicaid and Medicare 27.9
10,921
391.44
9,584
343.53
87.8
1,337
Marketplace 2.8
1,164
414.17
776
276.28
66.7
388
30.7
$ 12,085
$ 393.52
$ 10,360
$ 337.37
85.7 % $ 1,725

Nine Months Ended September 30, 2018

Member
Months ⁽¹⁾
Premium Revenue Medical Care Costs
MCR ⁽²⁾
Medical Margin
Total PMPM Total PMPM
TANF and CHIP 22.3
$ 4,145
$ 186.12
$ 3,705
$ 166.35
89.4 % $ 440
Medicaid Expansion 6.1
2,184
359.37
1,957
322.01
89.6
227
ABD 3.7
3,864
1,034.25
3,550
950.11
91.9
314
Total Medicaid 32.1
10,193
317.70
9,212
287.10
90.4
981
MMP 0.5
1,077
2,173.90
941
1,899.26
87.4
136
Medicare 0.4
470
1,171.59
385
959.54
81.9
85
Total Medicare 0.9
1,547
1,725.71
1,326
1,479.06
85.7
221
Total Medicaid and Medicare 33.0
11,740
355.96
10,538
319.50
89.8
1,202
Marketplace 3.8
1,434
379.91
824
218.44
57.5
610
36.8
$ 13,174
$ 358.42
$ 11,362
$ 309.12
86.2 % $ 1,812

~~_______________________~~


~~(1)~~	~~A member month is defined as the aggregate of each month’s ending membership for the period presented.~~


~~(2)~~	~~“MCR” represents medical costs as a percentage of premium revenue.~~

~~Medicaid Program~~

~~The~~California. For the third quarter and nine months ended September 30, 2020, Medical Margin declined as the lower medical costs from the curtailment of ~~our~~utilization were more than offset by Medicaid premium actions and underperformance in the Marketplace.

Ohio. For the third quarter and nine months ended September 30, 2020, Medical Margin was higher when compared with the same periods in 2019 due to higher premiums and improved operating performance in Medicaid. Premium revenues were higher year-over-year, mainly due to increased membership, program changes and rate increases in Medicaid established before COVID-19. In the third quarter of 2020, the combined impacts from COVID-19 were negligible; however, the health plan experienced a modest benefit for the nine months ended September 30, 2020, as lower medical costs from the curtailment of utilization slightly exceeded the impact of retroactive Medicaid premium refunds and related actions.

Texas. For the third quarter of 2020, Medical Margin improved compared with the third quarter of 2019, due to a decrease in the MCR in Medicaid, partially offset by underperformance in Marketplace. For the nine months ended September 30, 2020, performance declined year-over-year, with a lower Medical Margin compared with the same period in 2019. The decline resulted mainly from underperformance in Marketplace, due primarily to lower premiums and higher acuity mix for the new members we now serve, partially offset by lower MCRs in Medicaid and Medicare.

Washington. For the third quarter and nine months ended September 30, 2020, Medical Margin was higher when compared with the same periods in 2019, mainly driven by improved results in Medicaid. Medicaid premium revenues increased ~~$60~~in both the third quarter and nine months ended September 30, 2020, due to membership growth in Medicaid. In addition, results in the nine months ended September 30, 2020, benefited modestly from lower medical costs due to the curtailment of utilization driven by COVID-19, which was partially offset by COVID-related provider payments mandated by the state in the second quarter of 2020.

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 35

Table of Contents

PROGRAMS


	Three Months Ended September 30,
	2020						2019
	Premium Revenue		Medical Margin		MCR		Premium Revenue		Medical Margin		MCR

Medicaid	$	3,754	$	509	86.4	%	$	3,168	$	378	88.1	%
Medicare	632		91		85.6		559		80		85.6
Marketplace	382		70		81.6		357		103		71.2
Total	$	4,768	$	670	85.9	%	$	4,084	$	561	86.3	%


	Nine Months Ended September 30,
	2020						2019
	Premium Revenue		Medical Margin		MCR		Premium Revenue		Medical Margin		MCR

Medicaid	$	10,415	$	1,427	86.3	%	$	9,239	$	1,088	88.2	%
Medicare	1,896		333		82.4		1,682		249		85.2
Marketplace	1,133		272		76.0		1,164		388		66.7
Total	$	13,444	$	2,032	84.9	%	$	12,085	$	1,725	85.7	%

Medicaid

Medicaid premium revenue increased $586 million ~~or 19%~~ in the third quarter of ~~2019~~2020 when compared with the third quarter of ~~2018,~~2019, and increased ~~$107~~$1,176 million ~~or 11%~~ in the nine months ended September 30, ~~2019,~~2020, when compared with the nine months ended September 30, ~~2018.~~2019. The increase in both periods was mainly due to ~~improvement~~membership growth and premium increases in ~~the overall Medicaid MCR, which more than~~several states, partially offset by premium refunds and related actions stemming from COVID-19. The increase in membership includes the impact of ~~declining~~the Passport members in Kentucky that we assumed on September 1, and the YourCare membership in New York that we assumed on July 1, as well as the impact from suspension of redeterminations due to COVID-19.

As described above in “Health Plans—Trends and Uncertainties,” we recognized approximately $88 million and $163 million, respectively, in the third quarter and nine months ended September 2020, for the impact of premium refunds and related actions enacted in several states in response to the lower utilization of medical services resulting from COVID-19.

The Medical Margin in our Medicaid ~~premium revenue. The Medicaid MCR decreased to 88.1% from 90.5%,~~program increased $131 million, or ~~240 basis points,~~35%, in the third quarter of ~~2019~~2020 when compared with the ~~same period in 2018,~~third quarter of 2019, and ~~decreased to 88.2% from 90.4%,~~increased $339 million, or ~~220 basis points,~~31% in the nine months ended September 30, ~~2019, when compared with the same period in 2018.~~

The Medicaid MCR for both periods in 2019 benefited from improvements across all programs. The MCR for TANF and CHIP improved for both periods due to PMPM premium revenue increases. The improved MCR for the ABD program was principally driven by increases in premium revenue PMPM, lower pharmacy costs from re-contracted pharmacy benefits management, and our continued focus on medical cost management.

The decrease in the Medicaid Expansion MCR for both periods in 2019 when compared to 2018, was mainly due to the impact of a $57 million reduction in premium revenue, recognized in the third quarter of 2018, relating to a retroactive California Medicaid Expansion risk corridor for the state’s 2017 fiscal year.

Medicaid premium revenue decreased $204 million and $954 million in the third quarter of 2019 and the nine months ended September 30, 2019, respectively, mainly due to the loss in membership in connection with the termination of our Medicaid contracts in New Mexico and in all but two regions in Florida in late 2018 and early 2019, partially offset by net rate increases in certain other markets. As noted above, we expect lower Medicaid premium revenue throughout 2019, when compared with 2018.

~~Medicare Program~~

The Medical Margin of our Medicare program increased $15 million, or 23%, in the third quarter of 2019, when compared with the third quarter of 2018, and increased $28 million, or 13%, in the nine months ended September 30, 2019,2020, when compared with the nine months ended September 30, ~~2018. Premiums continue~~2019. The increase in both periods was driven by increased premium revenues and margin associated with the membership growth discussed above, and from a reduction in the MCR.

The Medicaid MCR decreased to ~~increase~~86.4% in the third quarter of 2020, from 88.1% in the third quarter of 2019, or 170 basis points, and decreased to 86.3% in the nine months ended September 30, 2020, from 88.2% in the nine months ended September 30, 2019, or 190 basis points. The improvements were generally present across all our programs. The year-over-year decrease in the third quarter of 2020 was due to increases in the premium revenue per member per month (“PMPM”) and improved operating performance, including enhanced medical cost initiatives. The combined impacts from COVID-19 were negligible to slightly positive in the third quarter of 2020. At the beginning of the third quarter of 2020, utilization was still moderately curtailed but reverted more to normal levels by the end of the quarter. For the nine months ended September 30, 2020, the MCR benefited from lower medical costs due to the curtailment of utilization from COVID-19, which modestly exceeded the impact of the retroactive Medicaid premium refunds and related actions enacted in several states.

In the third quarter of 2020, we recognized a $10 million premium deficiency reserve (“PDR”) associated with the Puerto Rico Medicaid business. As previously announced, we will exit this business when our current contract expires on October 31, 2020. The PDR represents the estimated remaining claims and administrative costs that exceed the estimated remaining premiums associated with the contract.

The MCR for TANF and CHIP was relatively flat in the third quarter of 2020, when compared with the third quarter of 2019, while the MCR for the ABD program decreased 180 basis points, and the MCR for Medicaid Expansion decreased by 440 basis points. The MCR for TANF and CHIP reflected the impact of the Puerto Rico PDR

Molina Healthcare, Inc. September 30, 2020 Form 10-Q | 36

Table of Contents

discussed above. Excluding the PDR, the MCR in all our Medicaid programs improved year-over-year, mainly from increases in the premium revenue PMPM rates and improved operating performance.

For the nine months ended September 30, 2020, the MCR decreased 40 basis points for TANF and CHIP, decreased 190 basis points for ABD, and decreased 440 basis points for Medicaid Expansion, when compared with the same period in 2020. The year-over-year improvement in the nine months ended September 30, 2020, was due to the increase in premium revenue PMPM, operating improvements, and the COVID-19 related net impacts. These improvements were partially offset by unfavorable year-over-year changes in prior year ~~mainly~~reserve development.

Medicare

Medicare premium revenue increased $73 million in the third quarter of 2020 and $214 million in the nine months ended September 30, 2020, primarily due to increases in premium revenue PMPM and member months. PMPMs improved due to increased revenue resulting from risk scores that are more commensurate with the acuity of our ~~population.~~population and increases in quality incentive premium revenues.

The Medical Margin for Medicare increased $11 million, or 14%, in the third quarter of 2020, and increased $84 million, or 34%, in the nine months ended September 30, 2020, when compared with the same periods, respectively, in 2019. The year-over-year improvement in both periods was mainly attributed to the increased revenues described above, and to a lesser extent, lower utilization of medical services stemming from COVID-19.

The Medicare MCR was unchanged at 85.6% in the third quarter of 2020. The 280 basis point year-over-year decrease in the MCR in the nine months ended September 30, 2020, was due to the same factors impacting the year-over-year changes in Medical Margin as discussed above.

Marketplace

Marketplace ~~Program~~

~~The Marketplace Medical Margin decreased $61~~premium revenue increased $25 million in the third quarter of ~~2019, when compared with the third quarter of 2018, and~~2020, but decreased ~~$222~~$31 million in the nine months ended September 30, ~~2019,~~2020, mainly due to lower pricing in an effort to be more competitive, and lower risk scores that were not commensurate with the risk of the population. The decrease in the nine months period also resulted from the impact of more health plans being subject to minimum medical loss ratio rebates when compared with the nine months ended September 30, 2018. The decrease in both periods in 2019 is mainly attributed to a decrease in premium revenues, driven by a decrease in membership of over 20%, partially offset by premium rate increasesprior year, and ~~increased premiums tied~~the benefit from favorable retrospective adjustments to risk ~~scores. Additionally,~~adjustment premiums was higher in the ~~decrease in premiums in both periods in 2019 reflects a relatively smaller benefit from~~ prior ~~year~~year.

The Marketplace ~~risk adjustment in 2019 compared with 2018. As noted above, we expect Marketplace premium revenue to be lower in 2019, when compared with 2018.~~

~~The decrease in~~ Medical Margin ~~for~~decreased $33 million in the ~~nine months ended September 30, 2019, was partially driven by the impact~~third quarter of ~~the $81~~2020, and $116 million ~~CSR reimbursement recognized~~ in the nine months ended September 30, ~~2018.~~ 2020, when compared with the same periods, respectively, in 2019. In both periods, the Medical Margin decrease was primarily due to the decline in premium revenues discussed above, and a higher than expected member acuity mix. Our risk scores continue to lag the acuity of our membership, and the rebound in utilization for Marketplace has been much more pronounced than our Medicaid and Medicare programs.The ~~CSR benefit~~COVID-19 related utilization impact was unfavorable to ~~2017 dates of service~~the Marketplace business and ~~was recognized following~~contributed to 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.year-over-year decline.

The Marketplace MCR ~~for the Marketplace program amounted to 71.2%~~increased in the third quarter ~~of 2019, compared with 64.1% in the third quarter of 2018,~~ and ~~66.7% in~~ the nine months ended September 30, ~~2019, compared with 57.5%~~2020, attributable to same factors impacting the year-over-year changes in the nine months ended September 30, 2018. The increased MCR in both periods in 2019 reflects a relatively smaller benefit from prior year Marketplace risk adjustment in 2019 compared with 2018, and the impact of higher acuity membership, partially offset by the impact of rate increases and increased premiums tied to risk scores. Additionally, the increase in MCR for the nine months ended September 30, 2019, reflects the impact of the CSR reimbursement recognized in the nine months ended September 30, 2018.Medical Margin discussed above.

~~FINANCIAL PERFORMANCE BY HEALTH PLAN~~

The following tables summarize member months, premium revenue, medical care costs, MCR, and medical margin by state health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):

~~Health Plans Segment Financial Data — Medicaid and Medicare~~

Three Months Ended September 30, 2019
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 1.6
$ 510
$ 315.90
$ 423
$ 261.97
82.9 % $ 87
Florida 0.3
130
436.99
127
427.80
97.9
3
Illinois 0.7
257
383.41
232
347.28
90.6
25
Michigan 1.1
401
373.01
332
307.97
82.6
69
Ohio 0.9
615
687.38
563
628.98
91.5
52
Puerto Rico 0.6
117
209.25
102
182.53
87.2
15
South Carolina 0.4
151
379.20
138
347.23
91.6
13
Texas 0.7
592
912.76
540
833.51
91.3
52
Washington 2.3
643
269.52
570
238.55
88.5
73
Other ^{(1) (2)}
0.6
311
437.60
242
341.29
78.0
69
9.2
$ 3,727
$ 402.76
$ 3,269
$ 353.31
87.7 % $ 458

Three Months Ended September 30, 2018
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 1.7
$ 435
$ 249.00
$ 446
$ 255.22
102.5 % $ (11 )
Florida 1.0
388
363.16
362
339.33
93.4
26
Illinois 0.7
207
312.72
182
274.98
87.9
25
Michigan 1.1
397
350.05
321
282.49
80.7
76
New Mexico ⁽²⁾
0.6
304
471.66
275
426.69
90.5
29
Ohio 0.9
584
624.84
532
568.93
91.1
52
Puerto Rico 1.0
179
189.65
162
171.96
90.7
17
South Carolina 0.4
124
354.53
112
318.56
89.9
12
Texas 0.7
577
848.47
525
772.14
91.0
52
Washington 2.3
511
226.77
444
197.04
86.9
67
Other ⁽¹⁾
0.5
175
334.29
137
261.49
78.2
38
10.9
$ 3,881
$ 354.70
$ 3,498
$ 319.63
90.1 % $ 383

Nine Months Ended September 30, 2019
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 4.9
$ 1,508
$ 306.96
$ 1,286
$ 261.76
85.3 % $ 222
Florida 1.0
418
410.71
374
367.95
89.6
44
Illinois 2.0
726
365.35
632
318.26
87.1
94
Michigan 3.3
1,199
370.77
990
305.99
82.5
209
Ohio 2.7
1,835
682.59
1,653
614.89
90.1
182
Puerto Rico 1.8
341
190.42
301
167.98
88.2
40
South Carolina 1.2
427
368.35
378
326.61
88.7
49
Texas 2.0
1,789
910.64
1,623
826.20
90.7
166
Washington 7.1
1,868
261.92
1,691
236.98
90.5
177
Other ^{(1) (2)}
1.9
810
402.31
656
325.93
81.0
154
27.9
$ 10,921
$ 391.44
$ 9,584
$ 343.53
87.8 % $ 1,337

Nine Months Ended September 30, 2018
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 5.3
$ 1,446
$ 270.63
$ 1,299
$ 243.14
89.8 % $ 147
Florida 3.2
1,147
356.15
1,069
331.93
93.2
78
Illinois 1.8
551
308.45
474
265.47
86.1
77
Michigan 3.4
1,161
343.08
983
290.26
84.6
178
New Mexico ⁽²⁾
2.0
936
469.19
875
438.70
93.5
61
Ohio 2.8
1,670
590.71
1,474
521.26
88.2
196
Puerto Rico 2.9
549
190.34
501
173.83
91.3
48
South Carolina 1.1
369
350.94
323
306.76
87.4
46
Texas 2.1
1,715
831.21
1,554
753.31
90.6
161
Washington 6.8
1,666
245.40
1,544
227.41
92.7
122
Other ⁽¹⁾
1.6
530
323.84
442
269.98
83.4
88
33.0
$ 11,740
$ 355.96
$ 10,538
$ 319.50
89.8 % $ 1,202

~~______________________~~


~~(1)~~	~~“Other” includes the Idaho, Mississippi, New York, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results.~~


~~(2)~~	In 2019, “Other” includes the New Mexico health plan. The New Mexico health plan’s Medicaid contract terminated on December 31, 2018, and therefore its 2019 results are not individually significant to our consolidated operating results.

~~Health Plans Segment Financial Data — Marketplace~~

Three Months Ended September 30, 2019
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 0.2
$ 57
$ 371.07
$ 33
$ 210.87
56.8 % $ 24
Florida 0.1
41
349.53
25
212.00
60.7
16
Michigan —
7
431.41
4
289.45
67.1
3
Ohio —
25
792.96
19
626.30
79.0
6
Texas 0.4
142
351.04
105
257.68
73.4
37
Washington 0.1
45
719.67
33
548.75
76.2
12
Other⁽¹⁾
0.1
40
480.41
35
408.35
85.0
5
0.9
$ 357
$ 410.23
$ 254
$ 292.21
71.2 % $ 103

Three Months Ended September 30, 2018
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 0.2
$ 49
$ 309.04
$ 37
$ 235.63
76.2 % $ 12
Florida 0.2
66
548.60
45
362.39
66.1
21
Michigan —
12
233.51
7
145.13
62.1
5
New Mexico 0.1
28
419.20
18
249.33
59.5
10
Ohio 0.1
27
485.08
18
336.86
69.4
9
Texas 0.6
228
357.54
134
209.80
58.7
94
Washington —
44
656.70
34
518.75
79.0
10
Other⁽²⁾
—
2
NM
(1 ) NM
NM
3
1.2
$ 456
$ 394.02
$ 292
$ 252.61
64.1 % $ 164

Nine Months Ended September 30, 2019
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 0.5
$ 174
$ 364.72
$ 101
$ 210.76
57.8 % $ 73
Florida 0.4
152
389.44
81
207.22
53.2
71
Michigan —
27
474.12
15
265.95
56.1
12
Ohio 0.1
79
801.90
53
543.00
67.7
26
Texas 1.3
457
344.19
331
249.44
72.5
126
Washington 0.2
143
744.47
97
509.50
68.4
46
Other⁽¹⁾
0.3
132
494.59
98
364.71
73.7
34
2.8
$ 1,164
$ 414.17
$ 776
$ 276.28
66.7 % $ 388

Nine Months Ended September 30, 2018
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 0.6
$ 171
$ 326.82
$ 89
$ 169.98
52.0 % $ 82
Florida 0.5
211
491.13
67
155.24
31.6
144
Michigan 0.1
40
248.24
23
145.38
58.6
17
New Mexico 0.2
93
426.07
55
247.57
58.1
38
Ohio 0.2
84
466.75
58
324.91
69.6
26
Texas 2.0
679
330.92
440
214.65
64.9
239
Washington 0.2
139
654.78
105
497.00
75.9
34
Other⁽²⁾
—
17
NM
(13 ) NM
NM
30
3.8
$ 1,434
$ 379.91
$ 824
$ 218.44
57.5 % $ 610

~~_________________________~~


~~(1)~~	~~“Other” includes the New Mexico, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results in 2019.~~


~~(2)~~	~~“Other” includes the Utah and Wisconsin health plans, where we did not participate in the Marketplace in 2018. Therefore, the ratios for 2018 periods are not meaningful (NM).~~

~~Health Plans Segment Financial Data — Total~~

Three Months Ended September 30, 2019

Member
Months
Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 1.8
$ 567
$ 320.67
$ 456
$ 257.55
80.3 % $ 111
Florida 0.4
171
412.29
152
366.86
89.0
19
Illinois 0.7
257
383.41
232
347.28
90.6
25
Michigan 1.1
408
373.92
336
307.68
82.3
72
Ohio 0.9
640
690.88
582
628.89
91.0
58
Puerto Rico 0.6
117
209.25
102
182.53
87.2
15
South Carolina 0.4
151
379.20
138
347.23
91.6
13
Texas 1.1
734
696.46
645
611.78
87.8
89
Washington 2.4
688
280.85
603
246.36
87.7
85
Other ^{(1) (2)}
0.7
351
442.14
277
348.40
78.8
74
10.1
$ 4,084
$ 403.40
$ 3,523
$ 348.06
86.3 % $ 561

Three Months Ended September 30, 2018

Member
Months
Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 1.9
$ 484
$ 253.96
$ 483
$ 253.60
99.9 % $ 1
Florida 1.2
454
382.20
407
341.70
89.4
47
Illinois 0.7
207
312.72
182
274.98
87.9
25
Michigan 1.1
409
345.28
328
276.88
80.2
81
New Mexico⁽²⁾
0.7
332
466.63
293
409.68
87.8
39
Ohio 1.0
611
616.95
550
555.83
90.1
61
Puerto Rico 1.0
179
189.65
162
171.96
90.7
17
South Carolina 0.4
124
354.53
112
318.56
89.9
12
Texas 1.3
805
611.01
659
500.14
81.9
146
Washington 2.3
555
239.25
478
206.38
86.3
77
Other ⁽¹⁾
0.5
177
336.18
136
260.19
77.4
41
12.1
$ 4,337
$ 358.46
$ 3,790
$ 313.23
87.4 % $ 547

Nine Months Ended September 30, 2019

Member
Months
Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 5.4
$ 1,682
$ 312.08
$ 1,387
$ 257.25
82.4 % $ 295
Florida 1.4
570
404.81
455
323.37
79.9
115
Illinois 2.0
726
365.35
632
318.26
87.1
94
Michigan 3.3
1,226
372.58
1,005
305.29
81.9
221
Ohio 2.8
1,914
686.80
1,706
612.35
89.2
208
Puerto Rico 1.8
341
190.42
301
167.98
88.2
40
South Carolina 1.2
427
368.35
378
326.61
88.7
49
Texas 3.3
2,246
682.10
1,954
593.50
87.0
292
Washington 7.3
2,011
274.52
1,788
244.10
88.9
223
Other ^{(1) (2)}
2.2
942
413.13
754
330.48
80.0
188
30.7
$ 12,085
$ 393.52
$ 10,360
$ 337.37
85.7 % $ 1,725

Nine Months Ended September 30, 2018

Member
Months
Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 5.9
$ 1,617
$ 275.64
$ 1,388
$ 236.61
85.8 % $ 229
Florida 3.7
1,358
372.07
1,136
311.09
83.6
222
Illinois 1.8
551
308.45
474
265.47
86.1
77
Michigan 3.5
1,201
338.83
1,006
283.77
83.7
195
New Mexico⁽²⁾
2.2
1,029
464.92
930
419.78
90.3
99
Ohio 3.0
1,754
583.29
1,532
509.52
87.4
222
Puerto Rico 2.9
549
190.34
501
173.83
91.3
48
South Carolina 1.1
369
350.94
323
306.76
87.4
46
Texas 4.1
2,394
581.74
1,994
484.70
83.3
400
Washington 7.0
1,805
257.82
1,649
235.59
91.4
156
Other ⁽¹⁾
1.6
547
334.26
429
262.27
78.5
118
36.8
$ 13,174
$ 358.42
$ 11,362
$ 309.12
86.2 % $ 1,812

~~__________________~~


~~(1)~~	~~“Other” includes the Idaho, Mississippi, New York, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results.~~


~~(2)~~	In 2019, “Other” includes the New Mexico health plan. The New Mexico health plan’s Medicaid contract terminated on December 31, 2018, and therefore its 2019 results are not individually significant to our consolidated operating results.

OTHER

The Other segment includes ~~the historical results of the Medicaid management information systems (“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~~Such amounts are immaterial to our consolidated results of ~~service revenue as a result of the sales of the MMIS and behavioral health subsidiaries noted above.~~operations.

~~FINANCIAL OVERVIEW~~

~~The Other segment margin in the third quarter and nine months ended September 30, 2018, was insignificant.~~

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 Health Plans segment regulated ~~health plan~~ subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. ~~Such cash flows are~~Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, ~~may~~could have a negative impact on

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our liquidity. In the nine months ended September 30, 2020, we did not experience noticeable delays of, or changes in, the timing and level of premium receipts as a result of the COVID-19 pandemic, but there can be no assurances that we will not experience such delays in the future. See further discussion below regarding various states’ premium actions in “Future Sources and Uses of Liquidity—Future Uses.”

A 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. In the third quarter ~~of 2019~~ and nine months ended September 30, ~~2019,~~2020, the parent received ~~$430~~$120 million and ~~$1,064~~$355 million, respectively, in dividends from the regulated health plan subsidiaries. ~~In addition, the parent received $185 million~~See further discussion of dividends below in ~~dividends from the regulated health plan subsidiaries during October 2019.~~“Future Sources and Uses of Liquidity—Future Sources.”

~~To satisfy minimum statutory net worth requirements, the~~The parent company may also contribute capital to the regulated health plan ~~subsidiaries.~~subsidiaries to satisfy minimum statutory net worth requirements, including funding for newer health plans with growing enrollment. In the third quarter ~~of 2019~~ and nine months ended September 30, ~~2019,~~2020, the parent contributed capital of ~~$19~~$10 million and ~~$25~~$62 million, respectively, to the regulated health plan subsidiaries.

Cash, cash equivalents and investments at the parent company amounted to ~~$796~~$1,286 million, and ~~$170~~$997 million as of September 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively. The increase ~~in 2019~~as of September 30, 2020, was mainly due to net proceeds of $789 million for the 4.375% Notes issued in June 2020, $380 million drawn on the term loan facility in the first quarter of 2020, and $355 million of dividends received from our regulated health plan subsidiaries ~~as described above, and proceeds from borrowings under the Term Loan Facility,~~year to date. The increase was partially offset by ~~principal repayments~~the $600 million repayment of the term loan facility, purchases of our ~~outstanding 1.125% Convertible Notes, as~~common stock amounting to $453 million, $62 million contributed to our health plan subsidiaries (including $42 million for the YourCare acquisition), $63 million for purchases of property, equipment and capitalized software, $42 million net cash paid for the aggregate convertible notes-related transactions, and $20 million for the initial cash payment for the Passport acquisition. As described ~~further below~~ in ~~“Cash Flow Activities.~~Note 2,” Significant Accounting Policies,” we received $128.1 million for the Marketplace risk corridor settlement in October 2020.

Investments

After considering expected cash flows from operating activities, we generally invest cash of regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to ~~board approved~~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.

We believe that the risks of the COVID-19 pandemic, as they relate to our investments, are minimal. The overall rating of our portfolio remains strong and is rated AA. Our investment policy has directives in conjunction with state guidelines to minimize risks and exposures in volatile markets. Additionally, our portfolio managers assist us in navigating the current volatility in the capital markets.

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.

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Cash Flow Activities

Our cash flows are summarized as follows:

Nine Months Ended September 30,
2019 2018 Change
(In millions)
Net cash provided by (used in) operating activities $ 398
$ (191 ) $ 589
Net cash (used in) provided by investing activities (80 ) 821
(901 )
Net cash used in financing activities (510 ) (1,012 ) 502
Net decrease in cash, cash equivalents, and restricted cash and cash equivalents $ (192 ) $ (382 ) $ 190


	Nine Months Ended September 30,
	2020		2019		Change

	(In millions)
Net cash provided by operating activities	$	591	$	398	$	193
Net cash provided by (used in) investing activities	98		(80)		178
Net cash provided by (used in) financing activities	69		(510)		579
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents	$	758	$	(192)	$	950

Operating Activities

We typically receive capitation payments monthly, in advance of payments for medical claims; however, government payors may adjust their payment schedules, positively or negatively impacting our reported cash flows from operating activities in any given period. For example, government payors may delay our premium payments, or they may prepay the following month’s premium payment.

Net cash provided by operations for the nine months ended September 30, ~~2019~~2020 was ~~$398~~$591 million, compared with ~~$191~~$398 million ~~used in operations~~ in the nine months ended September 30, ~~2018.~~2019. The ~~$589~~$193 million increase in cash flow was due to stronger operating results in the nine months ended September 30, 2020, and the net impact of timing differences in government receivables ~~payables~~ and ~~other current assets, settlements with government agencies, mainly related to the final 2017 CSR settlement paid in 2019, and timing of premium receipts.~~payables.

Investing Activities

Net cash ~~used in~~provided by investing activities was ~~$80~~$98 million in the nine months ended September 30, ~~2019,~~2020, compared with ~~$821~~$80 million ~~provided by~~used in investing activities in the nine months ended September 30, ~~2018, a decrease~~2019, an increase in cash flow of ~~$901~~$178 million. The year over year ~~decline~~increase was primarily due to ~~increased~~decreased purchases ~~of investments, net of lower proceeds from sales and maturities~~ of investments in the nine months ended September 30, ~~2019.~~2020.

Financing Activities

Net cash ~~used in~~provided by financing activities was ~~$510~~$69 million in the nine months ended September 30, ~~2019,~~2020, compared with ~~$1,012~~$510 million used in financing activities in the nine months ended September 30, ~~2018.~~2019, an increase in cash flow of $579 million. In the nine months ended September 30, 2020, cash inflows included $789 million from the issuance of the 4.375% Notes and $380 million borrowed under the term loan facility. Cash outflows included the $600 million repayment of the term loan facility, common stock purchases of $453 million, which included $7 million to settle shares purchased in late December 2019, and net cash paid for the aggregate convertible senior notes‑related transactions amounting to $42 million. In the nine months ended September 30, 2019, net cash paid for the aggregate ~~1.125% Convertible Notes-related~~convertible senior notes-related transactions amounted to ~~$794~~$754 million, partially offset by proceeds of $220 million borrowed under the Term Loan Facility. In the nine months ended September 30, 2018, net cash used in financing activities included net cash paid for the aggregate 1.125% Convertible Notes-related transactions of $710 million, the $300 million repayment of the Credit Facility, and $64 million repayment of the 1.625% Convertible Notes.term loan facility.

FINANCIAL CONDITION

We believe that our cash resources, ~~our~~ borrowing capacity available under ~~our~~the 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, at September 30, ~~2019,~~2020, our working capital was ~~$2,569~~$3,397 million, compared with ~~$2,216~~$2,698 million at December 31, ~~2018.~~2019. At September 30, ~~2019,~~2020, our cash and investments amounted to ~~$4,517~~$5,058 million, compared with ~~$4,629~~$4,477 million at December 31, ~~2018.~~2019.

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 ~~$1,100~~$1,300 million at September 30, ~~2019,~~2020, compared ~~to $1,040~~with

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$1,110 million at December 31, ~~2018.~~2019. 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 ~~through the remainder of 2019~~ by our HMO subsidiaries without prior approval by regulatory authorities as of September 30, ~~2019,~~2020, is approximately ~~$56~~$187 million in the aggregate. Our HMO subsidiaries may pay dividends over this amount, but only after approval is granted by the regulatory authorities.

Based on our cash and investments balances as of September 30, 2020, management believes that its regulated health plan subsidiaries remain well capitalized and exceed their regulatory minimum requirements. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with statutory capital and surplus requirements.

Debt Ratings

~~Our 5.375% Notes and 4.875% Notes are~~Each of our high-yield senior notes is rated “BB-” by Standard & Poor’s, and ~~“B2”~~“Ba3” 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~~The 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 September 30, 2019~~

~~Net leverage ratio~~	~~<4.0x~~	~~0.9x~~
~~Interest coverage ratio~~	~~>3.5x~~	~~15.3x~~

As of September 30, 2020, we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt.

In addition, the indentures governing the ~~4.875% Notes, the 5.375% Notes and the 1.125% Convertible Notes~~high-yield 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 September 30, 2019, we were in compliance with all covenants under the Credit Agreement and the indentures governing our outstanding notes.~~

~~Capital Plan Progress~~

In the first quarter of 2019, we repaid $46 million aggregate principal amount of our 1.125% Convertible Notes and entered into privately negotiated termination agreements to terminate the respective portion of the related 1.125% Call Option and 1.125% Warrants.

In the second quarter of 2019, we repaid $139 million aggregate principal amount of our 1.125% Convertible Notes and entered into privately negotiated termination agreements to terminate the respective portion of the related 1.125% Call Option and 1.125% Warrants.

In the third quarter of 2019, we repaid $55 million aggregate principal amount of our 1.125% Convertible Notes and entered into privately negotiated termination agreements to terminate the respective portion of the related 1.125% Call Option and 1.125% Warrants. Following these transactions, the remaining principal amount outstanding of our 1.125% Convertible Notes is $12 million.

FUTURE SOURCES AND USES OF LIQUIDITY

Future Sources

Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which weis generally ~~receive~~received a short time before ~~we pay for the~~ related healthcare ~~services. Such cash flows~~services are paid. Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, ~~may~~could have a negative impact on our liquidity.

Potential Impact of COVID-19 Pandemic. We added 625,000 Medicaid members as of September 30, 2020, compared with our Medicaid membership as of March 31, 2020, when we first began to report on the impacts of the pandemic. Included in this total are 325,000 members added from our acquisition of the Kentucky Passport business on September 1, 2020. The 47,000 member increase from our acquisition of the New York YourCare business on July 1, 2020, was offset by the decline in membership, in the third quarter of 2020, associated with our announced exit of operations in Puerto Rico. The remaining 300,000 increase in membership was mainly due to the suspension of redeterminations, as we believe that unemployment-related enrollment has not yet materially accessed managed Medicaid. It remains unclear how high the COVID-related membership peak will be, how quickly it will fall as the economy recovers, and where it will ultimately settle. However it does now appear that since unemployment nationally is now just under 8%, the initial industry estimates of unemployment-related Medicaid membership increases were somewhat overstated. On a related note, the declaration of the extension of the public health emergency period into next year will also likely have an impact. Therefore, we are currently unable to predict the timing or amount of the expected increases in enrollment. Increased membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs.

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. As a result of the COVID-19 pandemic, state regulators could restrict the ability of our regulated health plan subsidiaries to pay dividends to the parent company, which would reduce the liquidity of the parent company.

Credit Agreement Borrowing Capacity. As of September 30, ~~2019,~~2020, we had available borrowing capacity of ~~$380 million~~$1 billion under the ~~Term Loan Facility, following~~revolving credit facility of our ~~draw down~~Credit Agreement. In addition, the Credit Agreement provides for a $15 million swingline sub-facility and a $100 million letter of ~~$220 million in the first half of 2019. Under the Term Loan Facility, we may request~~credit sub-facility, as well as incremental term loans available to finance certain acquisitions up to ~~ten advances, each in~~$500 million, plus an unlimited amount of such term loans as long as

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we maintain a minimum ~~principal amount of $50 million, until July 31, 2020. In addition, we have available borrowing capacity of $498 million under our Credit Facility.~~consolidated net leverage ratio. See further discussion in the Notes to Consolidated Financial Statements, Note ~~7, “Debt~~.8, “Debt.”

Future Uses

~~Savings from~~Common Stock Purchases. In September 2020, our board of directors authorized the ~~IT Restructuring Plan.~~ ~~Management is focused on a margin recovery plan that includes identification and implementation~~purchase of ~~various profit improvement initiatives. To that end, we began a plan~~up to restructure our information technology department (the “IT Restructuring Plan”) in 2018, which is reported in the Other segment. In early 2019, we entered into services agreements with an outsourcing vendor who manages certain of our information technology services. We expect the IT Restructuring Plan to be substantially completed by the end of 2019. We currently estimate that this plan will reduce annualized run-rate expenses by approximately $10 million to $15$500 million, in the ~~first full year, increasing~~aggregate, of our common stock. This program will be funded with cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase will be determined by management based on market conditions and share price, in addition to ~~approximately $25 million~~other factors, and subject to ~~$30 million by~~ the ~~end of the fifth full year. Such savings, if achieved, would reduce Other segment general~~restrictions relating to volume, price, and ~~administrative expenses in~~timing under applicable law. No shares were purchased under this program through October 29, 2020.

Acquisitions. We have a disciplined and steady approach to growth. Organic growth, which includes leveraging our ~~consolidated statements of income. Further details~~existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will consider targeted acquisitions that are ~~described in~~a strategic fit that we believe will leverage operational synergies, and lead to incremental earnings accretion. For further information on our acquisitions, refer to the Notes to Consolidated Financial Statements, Note ~~10, “Restructuring Costs~~.4, “Business Combinations.”

~~Future Uses~~

~~Acquisition.~~ ~~On October 10, 2019,~~In September 2020, we entered into a definitive agreement to acquire substantially all of the assets of Affinity Health Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the second quarter of 2021.

In September 2020, we completed the acquisition of certain assets of ~~YourCare~~Passport Health Plan, Inc. ~~Upon~~The estimated total purchase price of $60 million includes our initial cash payment of $20 million in September 2020, plus estimated contingent consideration which consists primarily of an amount due to the seller for members we enroll in the open enrollment period for the 2021 plan year, over a minimum threshold, which resulted in an estimated contingent consideration liability of $40 million. We expect to settle this liability in the first quarter of 2021.

In April 2020, we entered into a definitive agreement to acquire the MCC line of business of Magellan Health, Inc. The purchase price for the transaction is approximately $820 million, net of certain tax benefits, which we intend to fund with cash on hand. The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close around the end of 2020. In connection with this transaction, ~~expected~~Magellan Health, Inc. has agreed to ~~occur~~provide certain transition services following the closing.

Outcome of ACA Litigation. As described above in “Health Plans Segment—Trends and Uncertainties,” the U.S. Supreme Court has accepted the appeal of the Fifth Circuit Court’s decision regarding the constitutionality and severability of the individual mandate. The ACA remains in effect pending the issuance of the Supreme Court’s opinion. A decision by the Supreme Court that the entirety of the ACA is unconstitutional could have a material adverse effect on our business, financial condition, cash flows, or results of operations.

Potential Impact of COVID-19 Pandemic. Beginning in early 2020 the pandemic, along with the related quarantine and social distancing measures, initially reduced demand for certain routine and non-critical medical services, while at the same time increased demand for other medical services, such as COVID-19 testing and emergency services. At the beginning of the third quarter of 2020, utilization was still moderately curtailed, but rebounded to more normal levels during the quarter. Increased demand for medical services, which we ~~will serve~~are presently unable to predict the timing or magnitude, could result in a significant increase in medical care costs and related provider claims payments.

Also, as described above in “Health Plans Segment—Trends and Uncertainties,” we have been subject to Medicaid premium actions as a result of the pandemic. Various states have implemented temporary premium refunds and related actions in response to the reduced demand for medical services stemming from COVID-19, which are resulting in a reduction of our medical margin. In some cases, these premium actions are retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal years in 2019. In the second quarter of 2020, we recognized approximately ~~46,000 Medicaid members in seven counties~~$75 million for certain of these retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. In most of those states, the refund period extended into the third quarter of 2020, and one additional state, Michigan, enacted a premium refund mechanism in the ~~Western New York~~third quarter of 2020. Consequently, we recognized an additional $88 million related to these retroactive premium actions in the third quarter of 2020, resulting in $163 million recognized in the nine months ended September 30, 2020.

It is possible that certain states could increase the level of existing premium refunds, and ~~Finger Lakes regions. The purchase price~~it is also possible that other states could implement some form of ~~approximately $40 million will be funded with available~~retroactive premium refund during the fourth quarter of 2020. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts

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or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash ~~and the closing is subject to customary closing conditions.~~flows.

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 statutory capital and surplus requirements.

~~1.125% Convertible Notes.~~The Molina Healthcare Charitable Foundation. ~~The fair value~~In August 2020, we announced our commitment of ~~the 1.125% Convertible Notes was $34~~$150 million as of September 30, 2019, which amount reflects both the principal amount outstanding and the estimated fair value of the 1.125% Conversion Option. We have sufficient available cash, combined with borrowing capacity available under our Credit Agreement, to fund ~~conversions, and~~The Molina Healthcare Charitable Foundation (the “Foundation”), an independent not-for-profit charitable foundation. We intend to ~~repay the outstanding principal amount of the 1.125% Convertible Notes at maturity on January 15, 2020. Refer~~make a sizable contribution to the ~~Notes to Consolidated Financial Statements, Note 7, “Debt,” for a detailed discussion~~Foundation in the fourth quarter of ~~the 1.125% Convertible Notes, including recent transactions.~~2020.

CONTRACTUAL OBLIGATIONS

A summary of future obligations under our various contractual obligations and commitments as of December 31, ~~2018,~~2019, was disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Other than the financing transactions described in ~~the~~ Notes to Consolidated Financial Statements, Note ~~7, “Debt~~,8, “Debt,” there were no significant changes to ~~this previously filed information~~our contractual obligations and commitments outside the ordinary course of business during the nine months ended September 30, ~~2019. See also Note 13, “~~2020.

~~Leases,” for a summary of the maturities of our lease liabilities as of September 30, 2019.~~

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. Our critical accounting estimates relate to:

•

•Medical claims and benefits payable. Refer to Notes to Consolidated Financial Statements, Note 7, “Medical Claims and Benefits Payable,” for a table that presents the components of the change in medical claims and benefits payable, and for additional information regarding the factors used to determine our changes in estimates for all periods presented in the accompanying consolidated financial statements. Other than the discussion as noted above, there have been no significant changes during the nine months ended September 30, 2020, to our disclosure reported in “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2019.~~. Refer to Notes to Consolidated Financial Statements, Note 6, “Medical Claims and Benefits Payable~~,” for a table that presents the components of the change in medical claims and benefits payable, and for additional information regarding the factors used to determine our changes in estimates for all periods presented in the accompanying consolidated financial statements. Other than the discussion as noted above, there have been no significant changes during the nine months ended September 30, 2019, to our disclosure reported in “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2018.


•	~~Contractual provisions that may adjust or limit revenue or profit. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies~~.”


•	~~Quality incentives. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies~~.”


•	~~Goodwill and intangible assets, net.~~ There have been no significant changes, during the nine months ended September 30, 2019, to our disclosure reported in “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2018.

•Contractual provisions that may adjust or limit revenue or profit. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”

•Quality incentives. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”

•Goodwill and intangible assets, net. There have been no significant changes, during the nine months ended September 30, 2020, to our disclosure reported in “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2019.

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 September 30, ~~2019,~~2020, the fair value of our fixed income investments would decrease by approximately ~~$39~~$42 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 Notes to Consolidated Financial Statements, Note ~~4, “Fair~~5, “Fair Value Measurements,,” and Note ~~5, “Investments~~.6, “Investments.”

Borrowings under ~~our~~the 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 September 30, 2019, $220 million was outstanding under the Term Loan Facility.~~ For further information, see Notes to Consolidated Financial Statements, Note ~~7, “~~8, “Debt.”

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~~Debt~~.”

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and our chief financial officer, has concluded, based upon its evaluation as of the end of the period covered by this report, that the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act), are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting during the fiscal quarter ended September 30, ~~2019~~2020, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

LEGAL PROCEEDINGS

For information regarding legal proceedings, see Notes to Consolidated Financial Statements, Note ~~12, “Commitments~~11, “Commitments and ~~Contingencies~~Contingencies.”

.”

RISK FACTORS

Certain risks may have a material adverse effect on our business, financial condition, cash flows, results of operations, or stock price, and you should carefully consider them before making an investment decision with respect to our securities. In addition to the other information set forth in this report, you should carefully consider the risk factors set forth below and those discussed inunder the caption “Risk Factors,” in our Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2018.~~2019, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. The risk factors below, together with those described in ~~our Annual Report on Form 10-K for~~ the ~~year ended December 31, 2018,~~reports listed above, are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, cash flows, results of operations, or stock price. In addition to the risks relating to the COVID-19 pandemic in the reports listed above, the effects of the COVID-19 pandemic may also have the effect of significantly heightening many of the other risks associated with our business.

The May 2020 contract award to our Kentucky Medicaid plan is the subject of a legal challenge.

On October 23, 2020, pursuant to the appeal of a protest denial with regard to the May 2020 Kentucky RFP awards, a court ordered the addition of a sixth health plan to the Kentucky Medicaid program for 2021. That ruling did not rescind the Medicaid contract award to our Kentucky health plan for 2021, nor did it impact the earlier novation of the Passport Medicaid contract to us. On October 27, 2020, a different health plan filed an appeal with regard to the court’s October 23rd order. The outcome of litigation and appellate proceedings is inherently unpredictable. In the event the contract award to our Kentucky health plan or the novation of the Passport Medicaid contract is challenged or overturned, the business and revenues of our Kentucky health plan may be materially affected.

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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

Purchases of common stock made by us, or on our behalf during the quarter ended September 30, ~~2019,~~2020, including shares withheld by us to satisfy our employees’ income tax obligations, are set forth below:


	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares Authorized to Be Purchased Under the Plans or Programs			Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1 - July 31	375	$	140.31	—	$	—	July 1 - July 31	821	$	179.12	—	$	—
August 1 - August 31	—	$	—	—	$	—	August 1 - August 31	—	$	—	—	$	—
September 1 - September 30	—	$	—	—	$	—	September 1 - September 30	—	$	—	—	$	500,000,000
Total	375	$	140.31	—			Total	821	$	—	—

_______________________


~~(1)~~	During the three months ended September 30, 2019, we withheld 375 shares of common stock, to settle employee income tax obligations, for releases of awards granted under the Molina Healthcare, Inc. 2011 Equity Incentive Plan. This plan was amended, restated and merged into the Molina Healthcare, Inc. 2019 Equity Incentive Plan. For further information refer to Note 9, “Stockholders' Equity.”

(1)During the three months ended September 30, 2020, we withheld 821 shares of common stock, to settle employee income tax obligations, for releases of awards granted under the Molina Healthcare, Inc. 2019 Equity Incentive Plan. For further information refer to Note 9, “Stockholders' Equity.”

(2)In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program will be funded with cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase will be 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. No shares were purchased under this program through October 29, 2020.

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INDEX TO EXHIBITS

Exhibit No.

Title

Method of Filing

2.1

Asset Purchase Agreement, dated as of September 28, 2020, by and between Molina Healthcare, Inc. and Affinity Health Plan, Inc.*

Filed herewith.

~~Exhibit No.~~

~~Title~~

~~Method of Filing~~

~~10.1~~31.1

~~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 herewith.~~

~~31.1~~

Section 302 Certification of Chief Executive Officer

Filed herewith.

31.2

Section 302 Certification of Chief Financial Officer

Filed herewith.

32.1

Certification 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.

32.2

Certification 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.

101.INS

XBRL Taxonomy Instance Document.

Filed herewith.

101.SCH

XBRL Taxonomy Extension Schema Document.

Filed herewith.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

Filed herewith.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

Filed herewith.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

Filed herewith.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

104

Cover Page Interactive Data file (formatted as Inline XBRL and embedded within Exhibit 101)

Filed herewith.


*			Certain portions of this agreement have been omitted in accordance with Item 601(b)(10) of Regulation S-K. A copy of any omitted portion will be furnished to the Securities and Exchange Commission upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	MOLINA HEALTHCARE, INC.
		(Registrant)

Dated:	October ~~30, 2019~~29, 2020	/s/ JOSEPH M. ZUBRETSKY
		Joseph M. Zubretsky
		Chief Executive Officer
		(Principal Executive Officer)

Dated:	October ~~30, 2019~~29, 2020	/s/ THOMAS L. TRAN
		Thomas L. Tran
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

Molina Healthcare, Inc. September 30, ~~2019~~2020 Form 10-Q | 5146



ITEM NUMBER		Page

PART I - Financial Information

1.	Financial Statements	3

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

3.	Quantitative and Qualitative Disclosures About Market Risk	47

4.	Controls and Procedures	48

Part II - Other Information

1.	Legal Proceedings	48

1A.	Risk Factors	48

2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

3.	Defaults Upon Senior Securities	Not Applicable.

4.	Mine Safety Disclosures	Not Applicable.

5.	Other Information	Not Applicable.

6.	Exhibits	50

	Signatures	51



	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total
	Outstanding	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total
	(In millions)
	(Unaudited)
Balance at December 31, 2017	60	$	—	$	1,044		$	(5	)	$	298	$	1,337
Net income	—	—		—			—			107		107
Adoption of new accounting standards	—	—		—			(1		)	7		6
Exchange of 1.625% Convertible Notes	2	—		108			—			—		108
Other comprehensive loss, net	—	—		—			(6		)	—		(6		)
Share-based compensation	—	—		1			—			—		1
Balance at March 31, 2018	62	—		1,153			(12		)	412		1,553
Net income	—	—		—			—			202		202
Partial termination of 1.125% Warrants	—	—		(113		)	—			—		(113		)
Other comprehensive income, net	—	—		—			1			—		1
Share-based compensation	—	—		15			—			—		15
Balance at June 30, 2018	62	—		1,055			(11		)	614		1,658
Net income	—	—		—			—			197		197
Partial termination of 1.125% Warrants	—	—		(306		)	—			—		(306		)
Conversion of 1.625% Convertible Notes	—	—		4			—			—		4
Other comprehensive income, net	—	—		—			1			—		1
Share-based compensation	—	—		7			—			—		7
Balance at September 30, 2018	62	$	—	$	760		$	(10	)	$	811	$	1,561



	Total		Observable Inputs (Level 1)		Directly or Indirectly Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(In millions)
Corporate debt securities	$	1,129	$	—	$	1,129	$	—
Mortgage-backed securities	303		—		303		—
Asset-backed securities	110		—		110		—
Government-sponsored enterprise securities (“GSEs”)	97		—		97		—
Municipal securities	68		—		68		—
U.S. Treasury notes	40		—		40		—
Foreign securities	7		—		7		—
Certificates of deposit	3		—		3		—
Subtotal - current investments	1,757		—		1,757		—
1.125% Call Option derivative asset	21		—		—		21
Total assets	$	1,778	$	—	$	1,757	$	21

1.125% Conversion Option derivative liability	$	21	$	—	$	—	$	21
Total liabilities	$	21	$	—	$	—	$	21



	September 30, 2019				December 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In millions)
5.375% Notes	$	695	$	744	$	694	$	674
4.875% Notes	327		334		326		301
Term Loan Facility	220		220		—		—
1.125% Convertible Notes ^(1),(2)	12		34		240		732
Totals	$	1,254	$	1,332	$	1,260	$	1,707



	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	$	151	$	1	90	$	—	$	—	—
Totals	$	151	$	1	90	$	—	$	—	—



	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		—		—		—		—		—
Totals	$	1,262	$	18	$	16	$	722	$	22	$	154	$	330



	RSAs		PSAs		PSUs		Total		Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2018	399,795		3,132		201,383		604,310		$	71.50
Granted	228,902		—		141,828		370,730		137.53
Vested	(133,828	)	(3,132	)	(10,528	)	(147,488	)	72.21
Forfeited	(46,780	)	—		(11,616	)	(58,396	)	87.99
Unvested balance, September 30, 2019	448,089		—		321,067		769,156		$	101.93



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(In millions)
Operating lease expense	$	9	$	26

Finance lease expense:
Amortization of right-of-use (“ROU”) assets	$	4	$	12
Interest on lease liabilities	3		11
Total finance lease expense	$	7	$	23



	Nine Months Ended September 30, 2019
	(In millions)
Cash used in operating activities:
Operating leases	$	28
Finance leases	12
Cash used in financing activities:
Finance leases	4
ROU assets recognized in exchange for lease obligations:
Operating leases	95
Finance leases	245



	September 30, 2019
	(In millions)
Operating leases:
ROU assets
Other assets	$	69
Lease liabilities
Accounts payable and accrued liabilities (current)	$	28
Other long-term liabilities (non-current)	49
Total operating lease liabilities	$	77
Finance leases:
ROU assets
Property, equipment, and capitalized software, net	$	233
Lease liabilities
Accounts payable and accrued liabilities (current)	$	8
Finance lease liabilities (non-current)	233
Total finance lease liabilities	$	241



	September 30, 2019	December 31, 2018	September 30, 2018
Ending Membership by Program:
TANF and CHIP	1,993,000	2,295,000	2,436,000
Medicaid Expansion	598,000	660,000	664,000
ABD	364,000	406,000	415,000
Total Medicaid	2,955,000	3,361,000	3,515,000
MMP – Integrated ⁽¹⁾	58,000	54,000	55,000
Medicare Special Needs Plans (“Medicare”)	44,000	44,000	45,000
Total Medicare	102,000	98,000	100,000
Total Medicaid and Medicare	3,057,000	3,459,000	3,615,000
Marketplace	289,000	362,000	384,000
	3,346,000	3,821,000	3,999,000

Ending Membership by Health Plan:
California	580,000	608,000	623,000
Florida ⁽²⁾	136,000	313,000	395,000
Illinois	224,000	224,000	223,000
Michigan	361,000	383,000	394,000
New Mexico ⁽²⁾	24,000	222,000	234,000
Ohio	292,000	302,000	315,000
Puerto Rico	186,000	252,000	320,000
South Carolina	134,000	120,000	117,000
Texas	350,000	423,000	436,000
Washington	818,000	781,000	770,000
Other ⁽³⁾	241,000	193,000	172,000
	3,346,000	3,821,000	3,999,000



	Three Months Ended September 30, 2019
	Member Months ⁽¹⁾	Premium Revenue				Medical Care Costs				MCR ⁽²⁾		Medical Margin
	Member Months ⁽¹⁾	Total		PMPM		Total		PMPM		MCR ⁽²⁾		Medical Margin
TANF and CHIP	6.0	$	1,225	$	202.46	$	1,071	$	176.88	87.4	%	$	154
Medicaid Expansion	1.8	696		385.63		622		345.25		89.5		74
ABD	1.1	1,247		1,136.67		1,097		1,000.56		88.0		150
Total Medicaid	8.9	3,168		353.81		2,790		311.70		88.1		378
MMP	0.2	399		2,328.70		345		2,010.50		86.3		54
Medicare	0.1	160		1,230.01		134		1,029.75		83.7		26
Total Medicare	0.3	559		1,854.96		479		1,587.61		85.6		80
Total Medicaid and Medicare	9.2	3,727		402.76		3,269		353.31		87.7		458
Marketplace	0.9	357		410.23		254		292.21		71.2		103
	10.1	$	4,084	$	403.40	$	3,523	$	348.06	86.3	%	$	561



	Three Months Ended September 30, 2018
	Member Months ⁽¹⁾	Premium Revenue				Medical Care Costs				MCR ⁽²⁾		Medical Margin
	Member Months ⁽¹⁾	Total		PMPM		Total		PMPM		MCR ⁽²⁾		Medical Margin
TANF and CHIP	7.4	$	1,379	$	187.03	$	1,228	$	166.41	89.0	%	$	151
Medicaid Expansion	2.0	671		333.11		640		317.62		95.3		31
ABD	1.2	1,322		1,054.92		1,186		946.38		89.7		136
Total Medicaid	10.6	3,372		316.86		3,054		286.86		90.5		318
MMP	0.2	353		2,159.72		323		1,981.45		91.7		30
Medicare	0.1	156		1,157.71		121		895.25		77.3		35
Total Medicare	0.3	509		1,706.95		444		1,490.63		87.3		65
Total Medicaid and Medicare	10.9	3,881		354.70		3,498		319.63		90.1		383
Marketplace	1.2	456		394.02		292		252.61		64.1		164
	12.1	$	4,337	$	358.46	$	3,790	$	313.23	87.4	%	$	547



	Nine Months Ended September 30, 2018
	Member Months ⁽¹⁾	Premium Revenue				Medical Care Costs				MCR ⁽²⁾		Medical Margin
	Member Months ⁽¹⁾	Total		PMPM		Total		PMPM		MCR ⁽²⁾		Medical Margin
TANF and CHIP	22.3	$	4,145	$	186.12	$	3,705	$	166.35	89.4	%	$	440
Medicaid Expansion	6.1	2,184		359.37		1,957		322.01		89.6		227
ABD	3.7	3,864		1,034.25		3,550		950.11		91.9		314
Total Medicaid	32.1	10,193		317.70		9,212		287.10		90.4		981
MMP	0.5	1,077		2,173.90		941		1,899.26		87.4		136
Medicare	0.4	470		1,171.59		385		959.54		81.9		85
Total Medicare	0.9	1,547		1,725.71		1,326		1,479.06		85.7		221
Total Medicaid and Medicare	33.0	11,740		355.96		10,538		319.50		89.8		1,202
Marketplace	3.8	1,434		379.91		824		218.44		57.5		610
	36.8	$	13,174	$	358.42	$	11,362	$	309.12	86.2	%	$	1,812



	Three Months Ended September 30, 2019
	Member Months	Premium Revenue				Medical Care Costs				MCR		Medical Margin
	Member Months	Total		PMPM		Total		PMPM		MCR		Medical Margin
California	1.6	$	510	$	315.90	$	423	$	261.97	82.9	%	$	87
Florida	0.3	130		436.99		127		427.80		97.9		3
Illinois	0.7	257		383.41		232		347.28		90.6		25
Michigan	1.1	401		373.01		332		307.97		82.6		69
Ohio	0.9	615		687.38		563		628.98		91.5		52
Puerto Rico	0.6	117		209.25		102		182.53		87.2		15
South Carolina	0.4	151		379.20		138		347.23		91.6		13
Texas	0.7	592		912.76		540		833.51		91.3		52
Washington	2.3	643		269.52		570		238.55		88.5		73
Other ^{(1) (2)}	0.6	311		437.60		242		341.29		78.0		69
	9.2	$	3,727	$	402.76	$	3,269	$	353.31	87.7	%	$	458