Molina Healthcare, Inc. Q4 2009 Earnings Call Transcript

Feb.11.10 | About: Molina Healthcare, (MOH)

Molina Healthcare, Inc. (NYSE:MOH)

Q4 2009 Earnings Call Transcript

February 11, 2010 5:00 pm ET

Executives

Juan José Orellana – VP, IR

Mario Molina – President and CEO

John Molina – CFO

Analysts

Josh Raskin – Barclays Capital

Tom Carroll – Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare’s fourth quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator instructions) As a reminder this conference is being recorded, Thursday February 11, 2010.

I would now like to turn the conference over to Juan José Orellana, Vice President of Investor Relations. Please go ahead, sir.

Juan José Orellana

Thank you, Todd. Hello everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare’s financial results for the fourth quarter and year ended December 31, 2009. The company’s earnings release reporting its results was issued today after the market closed, and it is now posted for viewing on our company website.

On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; Dr. James Howatt, our CMO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions.

Our comments today contain numerous forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act, including statements regarding our earnings, guidance and operations for 2010 and the pending acquisition of the HIM business from Unisys. All of our forward-looking statements are based on current expectations and assumptions which are subject to numerous risks, uncertainties, and other factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission including our previously filed 10-K annual report for 2008 and our 10-K annual report for 2009 to be filed early next month. Our 10-Q quarterly reports are – at end our 8-K current reports. These reports can be accessed under the Investor Relations tab of our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of February 11, 2010, and we disclaim any obligation to update such statements.

This call is being recorded, and a 30-day replay of the conference call will be available over the Internet through the company's website at molinahealthcare.com.

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

Mario Molina

Thank you, Juan José. Good afternoon everyone. Our remarks today will be brief since we provided preliminary estimated results about a month ago, and we also had an opportunity to provide additional information about our company and our results during our Investor Day on January 27.

In the fourth quarter of 2009, we incurred a net loss of $4.5 million or $0.18 per share. For the full year of 2009, we earned net income of approximately $31 million or $1.19 per share. Those are quarterly and yearend results are consistent with the estimates we had provided during our preliminary earnings announcement on January 11, 2010.

The four main factors, which drove our poor fourth quarter financial results, which I’ll discuss in detail were margin compression related to pressures on state budgets, higher medical costs due to widespread flu impact, higher cost associated with substantial enrollment growth, and higher emergency room cost.

First, state tax revenues plunged nearly 21%, the sharpest decline in the last 46 years. With tax revenues down so much, states were less scrambling to somehow fill budget gaps in order to achieve a balanced budget. Some of the states in which we operate responded to this crisis by cutting Medicaid premium rates or by changing the covered benefits on their managed care. For example, our health plans in Michigan, Missouri, Washington and New Mexico all experienced premium rate reductions during 2009. Some of these premium cuts were partially offset by reductions in payments to providers. However, the overall impact was a $14 million reduction in medical margin in 2009.

The second factor affecting our fourth quarter and full year results was the H1N1 flu epidemic. The states of California, Michigan, Ohio and Washington account for little over 75% of our membership. The incidence of flu in each of these four states exceeded the national average. Unlike the seasonal flu which has historically represented a bigger health risk for the elderly, the H1N1 flu appears to have posed a greater health risk for younger people. As a reminder, approximately 87% of all our members are part of the TANF eligibility group which is comprised primarily of young mothers and their children.

States like Washington and California have a higher percentage of these patients because nearly all of our membership in these states is from the 10F group. We believe that our geographic footprints and our patient mix may help explain why our health plans were severely affected by the flu in 2009.

Third, we believe that rising unemployment in 2009 drove higher enrollment at our health plans. In 2009, our enrollment increased by nearly 16% compared to a 9% increase in 2008. Our study shows that new members drive higher medical cost during the first nine months of their enrollment. Finally, higher emergency room costs affected our results. The results were driven by a higher unit cost and increases in utilization. Higher unit costs were the result of provider adoption of billing methodologies that included the use of codes representing higher levels of service. We discussed these factors in greater detail at our Investor Day, approximately two weeks ago.

Also on our Investor Day our guest speaker, Tony Rodgers, a former director of the Arizona Medicaid program, provided a high level overview of the MMIS business in anticipation of our acquisition of the HIM business of Unisys. Joseph White, our Chief Accounting Officer reviewed some of the important accounting difference between the MMIS business and our managed care business. I highly encourage investors that have not heard our Investor Day presentations to listen to these replays on our website at www.molinahealthcare.com. As these presentations captured the challenges as well as the opportunities that we currently face in our business.

I would now like to turn the call over to John.

John Molina

Thank you, Mario. Premium revenue for the quarter was $962 million, up $153 million or approximately 19% from the fourth quarter in 2008. For all of 2009, premium revenues increased by $569 million or 18% to $3.7 billion compared to premiums in 2008 of $3 billion. Investment income for 2009 was down nearly $12 million when compared to 2008. This decline was primarily due to lower interest rates throughout 2009.

As Mario pointed out, net losses for the quarter ended December 31, 2009 were $4.5 million or $0.18 per share compared with earnings of $15 million or $0.55 per diluted share for the same period last year. Net income for the full year was $31 million or $1.19 per share compared with net income of $60 million or $2.15 per share for 2008.

Medical costs remained elevated. Our medical care ratio increased to 87.5% in the fourth quarter of 2009 compared to 84.7% in the fourth quarter of 2008. Sequentially, our medical care ratio increased by 80 basis points over the pervious quarter.

During the fourth quarter, hospitals continue to cover emergency room visits at higher levels than they did in the fourth quarter of 2008 which resulted in higher costs per visit. For all of 2009, the cost per visit was up 9% for emergency services, when compared to 2008, and utilization was also up by 8% year-over-year. The impact of the flu decreased earnings per share by $0.47 in the fourth quarter of 2009 compared to the fourth quarter of 2008, and decreased our earnings per share for all of 2009 by $0.83 per share. Excluding costs associated with the flu, the impact of higher emergency room costs decreased our earnings by $0.15 in the fourth quarter of 2009 compared to the fourth quarter of 2008 and increased our earnings for all of 2009 by $0.77 compared to last year.

Our membership at year end stood at 1.45 million members, up 16% from a year ago. The membership growth contributed to the increase in our premium revenues. It had also contributed to the increase in our medical costs. Our study showed that on average medical costs associated with new membership are highest during the first nine months of enrollment. However, enrollment grew steadily throughout 2009 with a continuous monthly influx of new patients diluting the cost decline anticipated from patients who have been enrolled with us for 10 months or more.

We expect to see slower enrollment growth in 2010, which we expect will help bring down our medical costs. General and administrative expenses, including premium taxes were $116 million for the fourth quarter of 2009, representing 12% of total revenue as compared with $92 million or 11.3% of total revenue for the fourth quarter of 2008.

Premium taxes were the largest contributor to a higher G&A expenses, increasing sequentially by nearly $10 million. Our premium tax increased to $39 million or 4% of revenue in the fourth quarter of 2009, up from 3.2% of revenue in the third quarter. This was due to an increase in the Ohio premium tax from 5.5% to 7.7% or about $5 million, and the California premium tax retroactive from January 1 to September 30th of about $5 million, and Washington had a retroactive business tax of about $2 million.

Core G&A or G&A less premium taxes decreased to 8% in the fourth quarter of 2009 as compared with 8.1% in the fourth quarter of 2008. However, on a sequential basis, core G&A increased by approximately 50 basis points. The upward creep of our core G&A ratio was due to frontloading Medicare marketing expenditures, which occur in the fourth quarter as part of the program’s open enrollment period. Network development cost associated with our new chip contract in Texas, which is scheduled to be implemented in September of 2010, and the move of our data center from California to New Mexico.

Days in claims payables for the fourth quarter were 37 days, which was flat on a sequential basis compared to the third quarter. The company remains consistent in its reserving methodology. I would also like to point out, as we mentioned at our Investor Day that we received approximately 2 million more claims in 2009 than we did in 2008, and yet still ended the year with claims in inventory levels similar to the end of 2008.

Positive cash flow for the fourth quarter was $25 million. Our cash flow from operating activities for all of 2009 was $155 million compared with $40 million in 2008, an increase of $115 million. Contributors to this increase included a $114 million increase in deferred revenue primarily in Ohio and a $43 million increase in medical claims and benefit payable associated with enrollment growth across the company’s health plans. Excluding restricted investments, the company had cash and investments of approximately $704 million. The parent company had free cash and investments of approximately $46 million, including auction rate securities with a fair value of $17 million.

Now let me spend a moment reviewing our 2010 guidance. We are re-affirming our guidance discussed at our Investor Day on January 27, 2010. Please bear in mind that all of these figures are approximations. Premium revenues, $3.9 billion; Investment income, $9 million; Medical care ratio 86%; G&A ratio 11%; Core G&A ratio or G&A ratio excluding premium tax 7.6%. Depreciation and amortization $42.6 million; Interest expense $13.8 million; Net income, $39 million; Diluted EPS, $1.50; Diluted shares outstanding, 26 million.

Not included in our 2010 guidance are the following items

The anticipation dilution from the HIM acquisition; Any savings from our medical cost initiatives; Any rate increases or rate decreases other than those that we know about in California, Ohio, Utah and Washington. An important factor to keep in mind while building your models is our earnings seasonality. We expect to see 30% of our annual earnings in the first half of 2010 and 70% of our earnings in the second half. Also as it relates to seasonality, please take into consideration that our medical care ratio has historically been the highest in the first quarter.

This concludes our prepared remarks. Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Josh Raskin from Barclays Capital. Please proceed with your question.

Josh Raskin – Barclays Capital

Hi, thanks. Just a first question. What is the normal total dollars or total cost of a flu season for you, maybe – I don’t know how you guys think about it as the fourth quarter or first quarter, I’m just trying to – what is the normal flu '08 number than versus the incremental in 2009?

John Molina

Well, Josh, I guess the first thing is we don’t know what a normal flu season is. Each year comes out a little bit differently. What we do – what we have been able to determine is the impact of the flu on this year over 2008. The total dollar – the total per share amount was $0.83, so I guess if you give me a minute I can back it into a dollar figure.

Mario Molina

The other thing to remember, Josh, is that typically in the past, the flu season for us has occurred in December, January and February. And we saw three flu seasons in 2009. The winter flu season, the H1N1 flu season around April and then another flu season in the fourth quarter. So it was a big impact.

Josh Raskin – Barclays Capital

What I was looking for is the $0.83 incremental, so does that mean that the total costs were $1.00 per share and it was $0.17 end of the year [ph]?

Mario Molina

I guess we’d have to go back and figure out what the flu impact was for 2008, Josh?

Josh Raskin – Barclays Capital

Okay, we can (inaudible) some of the states the membership numbers moved around a little bit. I guess, California was down a little bit I was little surprised by that, and then conversely I guess, Michigan and Texas were a little bit higher than we were looking for. Was there, sort of, any program changes or anything we should know about there?

Mario Molina

Well, actually Josh, in California if you go back to our third quarter call one of the things that we talked about was getting out of areas or cutting our providers that were not profitable for us, and so the strategy in California has taken hold now. In Michigan, I think two things happened. One, there was a re-date of the RSP, we got a few new counties, but also we moved up the scale in terms of the algorithm. The algorithm in Michigan is based on a number of quality factors and we were able to move up higher than the peers, and saw that more membership. And in Texas, it was – we did a small acquisition in Laredo of some ship members, which will help set a stage for our expansion which is going to come later this year.

Josh Raskin – Barclays Capital

Okay, that's preparations. Okay, thanks.

Operator

(Operator instructions) Our next question comes from the line of Tom Carroll with Stifel Nicolaus. Please proceed with your question.

Tom Carroll – Stifel Nicolaus

Hi, good evening. Can you hear me okay?

Mario Molina

Yep.

Tom Carroll – Stifel Nicolaus

Very good. I guess a couple of things, the medical loss ratio is 4% to 97%, I guess this stuck me as being a bit high, especially after having kind of a critical math remembers what 50,000 ended the year at. And I think you have been operating there since December of '08. So, I guess what do you think that will improve to in 2010?

And then secondly in Florida, do you believe the state is serious this time around in migrating PCCM beneficiaries over the managed care companies? I feel like that's something we’ve heard about in Florida for going on seven or eight years now?

Mario Molina

Tom, let's take the second question first. We don’t know, as you said the state of Florida continues to look at moving the PCCM members into managed care, and it always comes down to a political battle. So, we don’t have a particular view on that. The reason that the Florida medical costs were high, we did get, let's talk about a 15% increase in membership in Florida during the fourth quarter. One of the things that we know, we may have discussed this before. If we got to honor the pharmacy regimen in that the patients are getting when they come on the plan for at least 90 days.

So when the patients come on they have very high pharmacy cost until we are able to get them under our formulary and bring them down. We don’t really disclose MCR targets by state, but I would – it's safe to say that we think that we can get the cost down in Florida from 97%.

Tom Carroll – Stifel Nicolaus

Okay. And then as a second question. You made a lot of comments in your press release about flat in-patient cost despite higher utilization. What help to support that, was that your re-contracting efforts in the last couple of years?

Mario Molina

Yes, the unit costs have come down as a result of our contracting efforts.

Tom Carroll – Stifel Nicolaus

So that’s the pricing – it’s a new contract was the primary reason, okay. Thank you.

Operator

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

Mario Molina

Well, thank you, everyone. We will see you at our next quarterly earnings release.

Operator

Ladies and gentlemen, this does concludes the conference call for today. We thank you for your participation. Nancy, please disconnect your lines. Have a great rest of the day, everyone.

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