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Molina Healthcare, Inc. (NYSE:MOH)

September 15, 2011 12:30 pm ET

Executives

Joseph W. White - Principal Accounting Officer and Vice President of Accounting

Terry P. Bayer - Chief Operating Officer

Juan José Orellana - VP, IR

Joseph Mario Molina - Chairman, Chief Executive Officer and President

John C. Molina - Chief Financial Officer, Executive Vice President of Financial Affairs, Treasurer, Director and Member of Compliance Committee

Analysts

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Unknown Analyst -

Juan José Orellana

Hello, everyone and welcome to the Molina Healthcare Investor Day. My name is Juan José Orellana, and I'm the Vice President of Investor Relations of the company. You may see a B affixed to the year there of our Investor Day 2011, and that's really there to identify that this is the second Investor Day that we've had this year. Our first Investor Day was held here in New York in January, and that was when our company first issued our outlook for 2011, as well as an initial look into 2012. Putting together 2 Investor Days a year does take a lot of work, and there's a lot of people who contribute to making these happen. So I just wanted to take a brief moment to thank a few people who helped us with all of the behind-the-scenes activities and that includes Norma, Brita, Rosalyn, Margot and Cole [ph], back at home in Long Beach.

I think for those of us that follow the markets pretty closely, we all agree that the markets over the last several months have been extremely volatile. But I think that one of the things that remains very grounded for us here at Molina Healthcare are both the short-term and the long-term opportunities that are ahead for the company. Those short-term opportunities include everything from expansions and RFPs in new states, expansions to new populations, and obviously in the longer-term, some of the items associated with Health Care Reform.

And to provide you an overview of some of those opportunities and also to highlight some of the things that are happening in our business, we have 3 individuals presenting before you today. We have Dr. Mario Molina, our President and Chief Executive Officer, who will actually be starting the discussion today and closing it. His initial remarks will include a high-level overview of some of the topics and things that are happening in our industry, as well as in our company. We'll follow that up with Terry Bayer, our Chief Operating Officer, who will provide a review of a lot of our health plans and what's happening in each one of the -- of our health plan markets.

We will follow that up with John Molina, our Chief Financial Officer, who will be leading our financial discussion this afternoon. And then, as I mentioned, we'll have Dr. Molina, who will be highlighting one of the biggest opportunities for us in the future, which is the dual eligible.

Despite a myriad of requests to have Joseph White, Chief Accounting Officer, deliver a discussion on an accounting topic, he will not be presenting before you today. But Joe is here with us and he will be available for any questions that you might have.

So with that, I'd just like to remind everyone that the slide presentation, as well as our accompanying oral remarks contain numerous forward-looking statements regarding our business operations, membership levels, RFPs, benefit changes, rates, business expansion opportunities and other matters. All of our forward-looking statements are subject to numerous risks, uncertainties and other factors that could cause our actual results to differ materially. Anyone viewing or listening to this presentation is urged to read the risk factors and cautionary statements found under Item 1A in our 10A annual report on Form 10-K filed on March 8, 2011, our first quarter and second quarter 2011 quarterly reports filed on May 9, 2011, and July 27, 2011, respectively, and the risk factors and cautionary statements found in our other reports and filings with the Securities and Exchange Commission, and available for viewing on its website at sec.gov.

Except to the extent otherwise required by the federal securities laws, we do not undertake to address or update forward-looking statements and future filings or communications regarding our business or operating results.

So with that, I'll go ahead and turn the mic and the podium over to our President and Chief Executive Officer, Dr. Mario Molina.

Joseph Mario Molina

Thank you, Juan José. That's probably the slowest I've ever heard you read that. That was for Jeff Barlow, our Chief Legal Officer. So coming to New York is always a pleasure for me, especially these Investor Days because it's very different from being at home, and what you'll notice is that I'm leading off and I get to finish up. So that means unlike at home, I get to have the last word.

This is an overview of our business. You've seen this slide probably before, if you've followed us. The light blue states represent our health plan states, where we're doing managed care. The lavender states are our MMIS states, where Molina Medicaid Solution runs -- is the fiscal agent. In yellow, you'll see Virginia, where we operate clinics for Fairfax County. Also, you'll note the little stars are indicating the states in which we operate clinics. Currently, we operate primary care clinics in California, Washington and Virginia.

We've enjoyed strong revenue growth over the years. We are a little more than 1.6 million members at the end of the second quarter of 2011. And in the bottom right-hand corner, you'll see the distribution of the membership. 80% are TANF member. These are Medicaid patients who qualify. They're typically a young woman and her children. The average age of our patients in the TANF group is about 14.

Second largest group are the Aged, Blind and Disabled. This is a group that's been growing in our health plans. They now constitute about 10% of our overall membership. Then there's the CHIP program. This is a program that is similar to Medicaid. It's for children who are uninsured, but whose families don't qualify for Medicaid. And then, there's a small sliver of Medicare, which is now growing to about 2% of our overall membership, and most of that are the dual eligibles.

One of the things that we have always emphasized over the years is our commitment to quality. Our Board of Directors made the decision that all of the health plans should be accredited by the National Committee on Quality Assurance, and we have made excellent progress. You see here the states that are currently accredited. In yellow, you see Missouri, which is undergoing its accreditation, and we should know the status of that soon. And then last will be Wisconsin. But because that's a new health plan, it's going to take longer for us to gather enough data to go forward for the accreditation, but we're enormously proud of this. We operate more NCQA-accredited health plans for Medicaid than any other company.

Now Health Care Reform has been on everyone's mind a lot. And one of the thing that I want to emphasize to you is that most of the Medicaid provisions are already in effect, and there's a lot of discussion about will the law be struck down? Will it be repealed? Well, 18 of the 21 provisions that affect Medicaid are already in effect in one form or another. There's a lot of regulations that's going to come out over the next couple of years, but the train has clearly left the station.

As I mentioned, lots and lots of regulations coming out of CMS, and we're monitoring this very closely. We have a group that is looking at the implementation of the exchanges and how we might participate in that. Only 3 of our states have, thus far, put exchanges in place. And a number of states are waiting on the sidelines to see what the results of the Supreme Court decision is going to be. I think that those states that wait too long are going to end up having their exchanges run by the federal government.

One of the other things that's going to be very important about the exchanges is the eligibility portals. These are going to be complex systems to make sure that all the eligible beneficiaries are enrolled and enrolled in the appropriate programs. As you know, there are a number of challenges in the courts, and we're awaiting the Supreme Court decision, which will ultimately decide the fate of the individual mandate.

I think it's likely that the individual mandate will be upheld, but that's just my opinion. But we're monitoring that closely as well, as I'm sure you are, too. This shows Medicaid spending. And what I want you to take away from this slide is the growth in percentage spending in dollars. That's the light blue line, year-over-year, and then below that is the growth in enrollment.

Recently, the growth in enrollment and the growth in spending has been similar. But traditionally, the program has grown, both in terms of the numbers of enrollees and in total dollars, but the total expenditures have grown faster than the membership. And this is another way of looking at it. This shows the growth in the percentage of the states' cost. You see the dip in 2009, which was due to the enhanced FMAP. The enhanced FMAP going away, you see the cost going up again. The average annual growth rate is just under 8%. So this gives you an idea of the states' sort of medical inflation that they have to deal with. And one of the ways that they can deal with this is by moving their patients out of fee-for-service into managed care plans, because it allows them to better budget and fix their costs to capitating the health plans.

State budgets have yet to recover. The poor economic conditions continue, and even when the economy recovers, state budgets tend to lag by a couple of years. Medicaid enrollment has increased tremendously, as has Medicaid spending, and it's growing faster than GDP. And you don't need to be an economist to know that this is a real problem for the states. In fact, states, most states are now spending more on health care than they are on education. So it is a huge issue for the states and how they're going to manage their budgets in the future. However, interestingly enough, Medicaid growth is slower than -- Medicaid cost growth is slower than that of the general medical spend. So we are doing a better job of controlling costs, I think, than the commercial side. And as you know, the enhanced federal matching funds have expired, and I think that's part of what's putting some pressure on state premium rates, because on average, their contribution from the federal government has gone down about 2%.

So as I said, fiscal pressure on the states is intensifying. There's a lot of talk now about what's going to happen with the federal deficit. There's a committee that has been formed by the Congress to address this issue to try and cut spending. Medicaid is on the table. We don't know what they're going to do with Medicaid. We don't know what they're going to do with Medicare. But I think the biggest problem the country faces right now is health care costs.

I was at a meeting recently, and the former governor of New Mexico said, "This is not a country. This is a health plan that maintains a standing army." Now when you look at the amount of money that the United States spends on health care, when you combine Medicaid, Medicare and other government programs, there's a lot of truth in that.

So central to controlling our spending and our budget is going to be doing something about Medicaid and Medicare. There are a number of considerations, one that's very popular with the Republican governors are block grants. There are opportunities to blend or lower federal Medicaid matching rates, combine perhaps the funding for Medicare and Medicaid to the duals. And if this 12-member commission can't come to agreement, and if they can't get something through Congress, there are provisions for automatic rate decreases. So we're hoping that they can come up with something rational. Otherwise, there will be across-the-board cuts to most programs. However, not to Medicaid, and the reason that Medicaid is exempt from all of this is the 1985 law that created this ability for Congress to set up this commission, at that time, exempted Medicaid. And so, they built on that 1985 law, and so, Medicaid remains exempt. But it doesn't mean that the committee won't look at Medicaid. I'm sure they will.

So why is Medicaid a viable solution for the state and federal government to help control costs? First, it gives the states some certainty about their budgets by knowing roughly how many beneficiaries they have to cover and what the per-member-per-month premiums are. It allows them to do a better job in budgeting. Otherwise, Medicaid becomes an open-ended entitlement program.

It also gives the states ways to measure things. It's very difficult to measure quality on the fee-for-service system. However, under managed care, there are lots of measures, and the states can look at the quality of the care the beneficiaries are receiving and get some idea of the value that the state is getting for the money that they're spending.

There are all kinds of quality initiatives. States are moving more and more towards requiring health plans to be accredited. They have incorporated CAHPS and HEDIS scores and pay per performance for health plans, and they're encouraging pay-per-performance programs for the providers that will be put together by the health plans. And we have a number of those where we're trying to provide incentives to get the doctors and the hospitals to do the right thing.

So we continue to believe that the best solution for the Medicaid program and Medicare, which I'm going to talk about later, is managed care.

Any quick questions, before we move on?

There's one thing I want to talk about. I want to address sort of at the outset because it's come up recently, and that has been hospital utilization. There have been reports from a couple of the public hospital companies that they are seeing an increase in Medicaid. We have reported this year that our hospital utilization is down relative to last year, and what I want to tell you is that, that trend extends throughout this year. We have not seen a change in the trend in hospital utilization. So I'm not sure what Tenet and HCA are referring to when they say that their Medicaid numbers are up, but it's not coming from us. And it may be due to state contracts they have, it may be on the fee-for-service side, but we continue to see a trend of lower utilization in 2011 as compared to 2010.

Any questions? Very nice, We can move on.

Juan José Orellana

Okay. Since there are no questions on this section, we'll go ahead and move on to our next section. Next is Terry Bayer, our Chief Operating Officer. And I'll turn it over to Terry.

Terry P. Bayer

Thank you, Juan José, and good afternoon, everyone. Following Mario giving us the kind of the macro view of Medicaid, I'm going to zero in and be a little bit more micro and talk about our state health plan operations and really what's going on short-term. We're going to wrap up at the end today with the vision going forward related to the dual eligibles. But for now, as we go through this section, you'll have a chance to get an update on the existing health plans.

What I'm going to do is kind of take it in segments. The first thing I'll discuss with you are our 4 largest health plans, how they're doing, what they're results are, short term, and what's some of our key initiatives are. Then I'm going to focus in on a couple of our health plans that have been struggling with profitability and share with you an update on the plans and results we're beginning to see there. We'll spend some time talking about Texas and the other RFPs that are now out in the market. So with that, I'll go ahead and start with California.

California continues to perform well. As you can see, if you look of the enrollment slide, you'll see some drop-off between 2009 and 2010. And if you recall, we made a very aggressive effort to terminate bad contracts, we exited some markets, we exited some of the products that we're not as profitable. But I'm pleased to share with you that you'll see that enrollment uptick again, and this is driven primarily by the new population of the Special Persons with Disabilities, the California term for ABD, that's been going on since June. So we see that growth. Over time, we've consolidated a lot of providers, we've redirected, and again, we're very pleased with the results.

The FPD population began to roll in by their birth month, so by birthday, between June and the end of the year. These FPD members in California are being assigned to health plans. Our growth is on track with what we shared with you when we put together our outlook for 2011.

You see on the lower left, how we've been able to maintain and improve MCR, but as is always true in California, rate cuts are on our horizon. And you are aware probably that our state budget has included a purely significant rate cut to providers. That is not final, but we are preparing for that and for the amount that we will be able to pass through to our providers.

I do want to say that, at this point in the year, we are not projecting losses in our California market. That may be something you're hearing from others, but we are not projecting that. And again, we are preparing for the rate cuts. Those rate cuts, should they be approved and be finalized, will be retroactive to July 1 for the California market. So that's the California story. We have challenges ahead of us, there is rate pressure, there are continuing to be provider pressures, but we'll keep moving forward. And again, we're very pleased compared to where we were several years ago before we were really able to dig deeply and turn that market around.

To take a quick look at Washington, another stable plan for us. We've maintained significant market share in the state of Washington over many years. And we, despite rate pressures in the recent few years, although you've seen our MCR climb, we are satisfied with that performance, as the state began to recalibrate the rating structure. The big opportunity in Washington is the re-procurement. And of course, when I put the slide together, it had not been released. But since we built the deck, the Washington re-procurement has been released, and those responses are due in to the state on December 2, and in mid-January, they're expecting to announce the awardees.

We have a very strong position in Washington, not only because of our size and our longevity, but because of our relationship with the state. We have been very responsive to the state of Washington at any request for a pilot or a new program or something innovative. We've been ready to support them and partner with them. So based on our relationship, the pilots we've been able to do and our market position, we look forward to participating in the re-procurement.

Ohio, after California, love to get up here and brag about Ohio, because for years, we were struggling in the Ohio market. But our commitment, our long-term commitment has really played out and our performance continues to be excellent. If you recall, about 18 months ago, the pharmacy benefit was carved out, and it is now going to be carved back in on October 1. As a reminder, our position is that we want the pharmacy carve in. We want pharmacy carve in, we want behavioral health carve in. In fact, we'd like as much included in the benefit package for us to manage as possible. We feel it's the most effective way for us to deliver coordinated patient care.

So again, you see strong enrollment position, you see a very good cost control, there's been extensive re-contracting in the state of Ohio as well, and what you hear me say every time I'm here, there's really not much magic in this. There's a formula by which we look at the contracts, continue to re-contract, continue to increase our utilization management control, our coordinated care efforts and we've been getting results.

The big news for Ohio is another pending re-procurement, and the latest we've heard is that any day now, that re-procurement for Ohio, which will be statewide, will be released. And I have a slide at the end of the deck focusing on the Washington and California RFPs. So I'll save my comments for that.

So again, short-term, you can see these very solid results in California, Washington and Ohio. And finally, Michigan. Another state that's been performing for us. You'll notice on the left that there's been an erosion to a small degree in the enrollment. I want to point out that, that's been primarily in our TANF population and our Aged, Blind and Disabled membership has maintained. We're not losing enrollment there. And of course, that is a much significantly higher premium than the TANF population. We're very pleased to announce that we have returned to our "excellent" NCQA accreditation, and I guess the most important thing about this market going forward is that we currently have 6,500 Medicare SNP members.

There are 5 SNPs in the lower peninsula in Michigan. We are, by far, the largest. We have 6,500 members. The other, all combined, have about 3,500. So we feel very well-positioned with our experience to handle the dual populations going forward, and again, you'll hear more about that in terms of the future.

So for now, again, Michigan, a very solid performer on the medical cost and size side. Something in Michigan that's really helped us control the cost and it's -- a program that we're expanding to other markets is related to hospital admissions. And what we've done in Michigan is focused on getting as many observation one-day stays as we can to keep people out of the hospital. When a patient comes in through the emergency room, there's a period of time while they're being triaged and diagnosed, and it's often too easy for that to turn into a hospital admission before the diagnosis has been confirmed. And with our concurrent review and interactions with the hospitals, we are limiting those to one-day observations where the patient can be released instead of converting to an admission. We've been very successful in the Michigan market, and you'll see that coming through in these numbers. And again, our leadership in Michigan has presented that to our other states.

Okay. Leaving the 4 large health plans with a very strong short-term performance that is solid, let's turn to a couple of our challenging health plans. The first is Florida. And again, I've talk to you about this on several Investor Days before. Part of what we've learned is that with size and longevity, seems to come better performance. That it's logical that when we first enter a market and we don't really have the size, it's tougher for us to negotiate provider markets.

Our moving to Florida has always been with a long-term strategic positioning in mind. We're still a rather small health plan in the Molina portfolio. So we haven't yet been able to really benefit from size. But some good things are going on in the Florida market. We have a very strong local leadership team who, like the other states, has put in place a medical cost reduction plan that is very comprehensive.

So again, when we're looking at medical costs, we're looking at unit costs, we're looking at utilization, we're looking at new programs, we're looking at any way we can to impact that MCR. And successfully in Florida, we've been able to do several significant renegotiations in the area of laboratory and behavioral health, and both of those went into effect on July 1. So they haven't historically been -- those improvements are not yet reflected in the numbers, but you should be seeing those changes come through as we go forward. We've also, over time, since we entered the market, had significant reductions in the pharmacy cost per member per month. This, like many markets, when you first enter, there's a period of transition when you really can't change the prescription. There's a transition period where the members are allowed to continue with whatever pharmacy benefit they've had and with whatever drugs they've been taking. But over time, we work with both the members and providers to make sure that generics are being used and that the appropriate pharmacy regimen is being followed.

So in South Florida, particularly, and throughout the state, we've seen a significant reduction, as we've managed it. So that's what we're doing. Now the biggest challenge we have there is rates, and this is -- you saw this in Mario's slide in terms of the state budget problems not going away. We have rate pressure there. We are in the middle of a negotiation with the state of Florida, as with other plans, for the reform and non-reform counties, and although we'd like to have rates today to discuss, those negotiations are taking a bit longer. But in the next few weeks, Florida will reach closure on its rates once it gets its hospital rates in order. So in the next few weeks, we'll be able to share with you publicly when we have our rates formalized and in writing, and we are hopeful that we'll have some improvement there.

And the second biggest challenge for us in addition to premium rates is still contract negotiation. Again, when we're small, we don't have the market leverage we would like. So we've been working diligently on many of the large providers. And again, that's what we'll all add up. So as we grow, we do expect to see improvement in Florida. We'll talk about Florida a little bit later in terms of the potential for expansion, but consider it now that it is a foundation, and we're managing it, continuing to improve.

And finally, let's turn to Texas, which again, short-term, is a challenge for us on the performance side, but we're extremely pleased with where we're headed with the Texas market. So let's take a look at Texas. Small health plan for a long time, finally growing, driven this year, earlier in February, by the expansion of the STAR+PLUS in the Dallas market. More recently, on September 1, new membership in the Jefferson County area, which is down near Houston contiguous. So we're getting some growth in that market.

Like Florida, we have a medical cost reduction plan in place, similar to what we did in Ohio and California in prior years, really tackling all of the provider issues, utilization, unit cost and really growing into our market presence there. So there's a very strong and quite ambitious cost management program in Texas right now.

When I talk in greater detail now about the recent expansions, and the first to just frame the conversation, we did have an expansion on September 1, and that was where Texas and existing service areas did enroll additional members. But the big expansion in the RFP win, which is a separate expansion, goes into place on March 1. So let's take a look in detail about what this means for Molina.

The first thing I thought we'd start with is today. So what does Molina Healthcare of Texas look like today? Where are our markets? So this is effective 9/1, because you'll see the Jefferson expansion is already included. The light orange is the CHIP Rural Service Area agreement, and we've been in that business for about a year now. That was a successful bid, and we've been very pleased with the market share we've been able to obtain in the CHIP RSA. The burnt orange represents the markets that we've been in for a number of years. The Bexar County, STAR+PLUS program, the Harris County and Jefferson and the other new program, which is the most northern burnt orange, which is Dallas, and that's been since February. So this is today's business. And now, let's take a look at what the expansion means in terms of the win, the recent announcement and award by the state of Texas.

Again, to follow this, what we to tried to do was now superimpose the new markets and give you the product detail. It can be rather confusing because it is not all products and all markets. So if you'll focus on this, you'll see -- let's start on the most western part of Texas, the El Paso service area. That is a brand new service area for us. There are about 180,000 total lives that are up for enrollment in that market, and we'll be there effective in March 2012. That will be for the STAR+PLUS program, the Aged, Blind and Disabled where we have been delivering home and community-based services. That's having people served at home instead of in a long-term care facility, and we've been in that business since we entered this state. In addition, the STAR population or the TANF group. That's El Paso.

Now moving further down, one of the -- all the way to the foot, let's call it the Hidalgo service area, the Rio Grande Valley. You may hear of this referred to as the Valley, an area that's very, very important to the state of Texas. It's not been in managed care, many, many underserved patients. And honestly, we're thrilled to have the opportunity to go in and work on this very significant problem in partnership with the state.

Down in the Hidalgo service area, there are 400,000 lives. So this is a huge market opportunity, and we are moving rapidly to install ourselves in offices, get folks hired, so that we will be prepared for the enrollment in about 6 months. So although we had some modest CHIP rural service area participation there, the big growth going forward will be in STAR+PLUS and the STAR program. So then as you come back up, the Bexar service area for STAR+PLUS, that's San Antonio, and you say that "bear", hopefully, you've learned that, it's not "Bex-ar". So that's the Bexar service area, and we remain there. We have over 9,200 lives currently enrolled. And then the Harris service area, which is greater Houston, and is contiguous to Jefferson. You can see that we've been in the Harris service area for a while, but we again have obtained it in the award and added 2 of the new products in Jefferson.

Up at Dallas, STAR will be new to us, and the CHIP will be new. And the STAR+PLUS, again, we have had -- we have 31,000 currently enrolled in the Dallas service area. The opportunity in Dallas is 373,000 lives up for enrollment. And in the Harris service area, which is Houston, it's 800,000. So try to give you just an overview of the markets, the new adds, and as you can imagine, this is -- we're working very, very diligently. This is the #1 current short-term project in the company, to be sure that we are ready for our readiness reviews in February and March for the state, and we're optimistic about the state of Texas. As we see in a moment, projected to be our largest health plan shortly.

So let's go back to January, when we shared our projection with you, and let's compare it to minor adjustments we're going to make. As we look back, it looks like we're pretty good at predicting. No change in the covered population and the number up for bid, or the effective date. You can see we thought we'd be going into it with 125,000 members, but because we've done better in the current expansions, we're setting it at a 150 projection now and we've maintained our projection for additional membership. So you see a slight uptick in where we expect the membership to get to at 370,000 instead of the old 345,000, with an increase in revenue to $660 million annually versus $663 million. So good predicting, because we did that in January months before we had the award.

So with that good news on the RP, let's take a look -- again, I'm going to revisit a slide we showed you in January about RFPs on the horizon and our market interest. And we shared this with you as we looked out for the first time going to the 2012 projections. Florida, we remain interested. I shared with you previously that our footprint in that market is very important to us. We are going to stay, we're going to work our way through our medical cost issues, work on getting -- in partnership with the state to improve rates, and be positioned for the expansion, which will come sometime after 2012. We don't have any detail now in our RFP process. We do expect the long-term care expansion to come sooner, and we're working up to prepare for that RFP.

Georgia, we've said we have an interest in that state. And again, no change in our interest. Since we've seen you -- and showed this slide for the first time, and you are aware that there was a delay in the Georgia RFP. There was a change in administration, but from all of our intelligence, that will still move forward. But it was a year delay. And again, we are working conscientiously to position ourselves in Georgia.

Illinois, we continue to have an interest in that market as things evolve. Our goal is to be positioned to have our network in place, to have our licensure in place, so that we can thoughtfully pursue that business. And here, what we have you is the populations that are available.

Now the 2 on the right, Ohio and Washington are very important, because they are current markets that we are operating in. I talked briefly about them, but let's look at them side by side here. In Ohio, the total covered population that will be up is at 1.8 million for July 2012 effective date, again, expecting RFP any day. And to our knowledge, this is marked potential, to our knowledge, the Aged, Blind and Disabled children will be added. We've been serving Aged, Blind and Disabled adults, but the children will be added. So more detail as that becomes real. At this point, it's just conjecture on our part.

Now Washington, we've gotten a little more information since we built the slides. So there are between 700,000 and 800,000 eligibles in the Washington RFP. It remains effective for July 2012. The process has been unveiled. The RFP is released, with a submission date of December 2, and we projected that the ABD will be included. What is included are the non-dual, and you will be hearing this. So not ABD who are also Medicare, but ABDs -- this is similar to Michigan where, for many years, the ABDs have been in managed care, but not the dually eligible. And that is predicted to be about 100,000 to 110,000, and we'll be getting some more numbers from the state in the coming weeks after the letters of intent are submitted. So that is a program expansion, and it is relatively short term with an effective date of next July.

So that's the overview, and now let's kind of share with you, where we are in our larger plans, where we are with our plans that have some challenges and where we are in the RFPs. One other thing just to highlight, and I mentioned it earlier, is this idea of a carve-in and carve-out and the back-and-forth. And again, our position is to carve in as much as possible. But 2 things with short-term impact for the company are the Rx carve-in in Ohio and no impact really or minimal impact this year, but significantly going forward. Again, remember because in the integration period, there won't be many changes to the drug usage patterns, but we will then employ our pharmacy programs and improve that.

And Texas, and this is a significant change, in our STAR+PLUS program and STAR -- or in STAR+PLUS, we have not had in-patient responsibility. So with that being carved in, come next March, that is a significant change in that program as well.

So that concludes my health plan update. And Juan José, do you want me to take questions?

Juan José Orellana

[indiscernible]

Terry P. Bayer

Okay.

Juan José Orellana

[indiscernible] questions [indiscernible]

Terry P. Bayer

Unless there's something relevant there.

Juan José Orellana

We're going to do a switch up here on the agenda, and we're actually going to have John present since there might be some questions in his section that can be answered related to Terry's, and then we'll go ahead and open it for Q&A for both of those discussions. So here's John Molina, our Chief Financial Officer.

John C. Molina

Thank you, Juan José. I'm going to spend a little time going over the financial results, thus far, year-to-date, and also talk a little bit about what we're seeing on the MMS side. I know a lot of folks are focused on the rate environment. If you recall back in January, and then again when we had our quarterly calls, we've been reminding everyone the rate environment is challenging and we expect the overall rates to be flat to slightly down. So I'm going to go state-by-state and go through the update.

In California, we're looking at about 6% cut to the rates that's being driven by the legislature's decision to cut the provider rates by 10%. You may recall a couple of years ago, we went through a similar exercise, that was blocked by the courts, but the state tried it again, and they have submitted the rate cuts to CMS for approval.

If CMS upholds the rate cut, it will be retroactive to July 1, and we think this will result in about a 6% cut to our revenue rates, some of which we can pass on to the providers. The providers who are on a fee-for-service contract, the cut will automatically go through because the fee-for-service schedule is being cut by 10%. And we'll have to work with our capitated groups to pass on a cut to them.

The challenge for us, as I've said is, if this is approved by CMS, it's retroactive to July 1. So what we have done for the third quarter, as we're closing the books, is we are internally making a provision for reduced revenue, so that we can be as conservative as possible.

In Florida, as Terry said, the rates are due to come out or due to be effective September 1. That was 2 weeks ago. We have preliminary rates, but they're not finalized yet. And again, a lot of what's happening in Florida is tied to some decisions the legislature made with respect to inpatient hospital rates, and how those flow through. We hope to have better visibility in the next couple of weeks.

Let me go back to California for a second, because there's a little bit of a wrinkle there. We are also expecting rates in a couple of counties effective October 1. California, normally, the rate cycle is October 1 for certain counties, and January 1 for others. The rate cut that was effective July 1 triggered a special adjustment to the rates. It hasn't happened yet, as I said, but it could, if CMS approves the rates. So we're expecting additional rates in October, and then again additional rate changes in January.

Michigan has a 10/1 rate year. We have not seen any preliminary rates from Michigan yet, but we would expect it again flat to down. We did get some good news in Missouri. We were able to achieve a 5% rate increase, effective July 1.

In New Mexico, in Texas, in Utah, again, down slightly, and those are July and September. I believe that Texas is still a preliminary rate. Joe, is that correct? That's preliminary, but we think it's a pretty good estimate there. And then, Washington, we don't know what the rate will be. My understanding from Washington is that they're trying to fix their budget as many states are. So they're looking at a full rate year squeezed basically into 9 months. And then, Wisconsin and Ohio are January rates, and we don't know those yet. So again, we think that the rates are going to be flat to down. As we said, that's where it's coming out to be.

I want to take a second and go through the financial results, Q2 of 2011 compared to Q2 of 2010. As Mario said, we've always had good success in growing enrollment and growing revenue. Premium revenue grew 12.5% year-over-year, and our service revenue coming from our MMS subsidiary grew 76%. So strong top line growth. Medical costs came in better than they did the previous year at 84.1% versus 86%. And on service costs, again the MMS business, and if you note, the service costs were $39 million as compared to service revenue of $37 million, and we've discussed this on the second quarter call.

There was a $7 million adjustment in Idaho. $4 million of that was an expense of cost that we had previously capitalized, and $3 million was an adjustment to our revenue line. So we think that, that's going to help going to smooth out Idaho on a go-forward basis. I want to point out a couple of other things, EBITDA of almost $48 million as compared to $35 million for the previous year.

We're really focused on EBITDA as opposed to EPS. A lot of it has to do with the way that the MMS is accounted for and the fact that we do a lot more in terms of noncash amortization. So we really focused on EBITDA. Our EBITDA goal is to have a 5% EBITDA margin. We were at 3.5% in second quarter of 2010, and we're up to 4% second quarter of 2011. So the margin is improving, and we're getting closer to our 5%. And I'm going to go through a few other things that gives me optimism that we will be able to reach that goal.

I'm going to pause here, so you can take this in. We are, at this point, this is the guidance that we gave at our last quarterly call, $1.55 per share, and what drives that? We've been having strong performance from our established health plans and our established or our legacy MMS businesses. And I'm going to show you how strong in just a minute. Utilization improvements caught on earlier than expected, which has helped drive the medical care ratio done pretty sooner than we had projected in January, and then improvement in the fiscal agent business, which we're expecting in the second half.

The drags on our anticipated earnings for the year, premium rate reductions, which I've just discussed in hopefully enough detail, and then the cost challenges in Texas and Florida that Terry touched on will still be a bit of a drag, although I think Terry has pointed we're making some improvements in Texas and in Florida.

We entered into a new credit facility recently. We downsized our facility a little bit, put -- as we said, we rightsized it. We went with more pure commercial banks, and I think that sets us up for growth in the future very well. We had very favorable terms and good cash management positions.

I want to take a second and remind everyone why we got into the fiscal agent business. Someone asked me last night at dinner, "If you could do it over again, would you have done the transaction?" And the answer is, "Absolutely, yes. We would have done it." All of the reasons that made us go after that business in the first place are still there. It's a business that's focused on a government patient base, just like we do in our health plans. We use the same platform. We were able to leverage the platform we have for our health plans to the MMS business and it is -- the technology is adjudged state-of-the-art, some of the best systems out there is what we've got.

And we can bootstrap this, we can leverage this opportunity to provide medical management services in those states where there's no managed care. So all the reasons we went into this business are still there. We have struggled a bit getting Idaho and Maine certified. And I think a lot of the focus has been lost on the bigger picture as to why we're doing this, as we focus on the struggles of Idaho and Maine. I'm happy to report that as we get closer to certification for Idaho and Maine, I think a lot of the noise will simply go away, and we can focus on other bigger and better things for this business.

Experience matters. And Terry talked about this as well, in terms of the small plans, new plans, versus the more established plans. In the MMS business, Louisiana, New Jersey and West Virginia have generated $22 million of EBITDA for the first 6 months. That's pretty good margin, pretty good business. Unfortunately, Idaho and Maine, have lost $14 million in EBITDA in the same time period. And when you put those together, you'll lose sight of how well Louisiana, New Jersey and West Virginia are doing. And I think again, this underscores, once we get through the certification process, things for Idaho and Maine will begin to start looking like Louisiana, New Jersey and West Virginia. Likewise, our health plans, are doing very, very well, with the exception of Wisconsin, Florida and Texas. Now when we talk at our earnings calls, we tend to focus on Florida, Texas, Wisconsin. And we don't really stop and say, "Gee, things are going swimmingly well in the other states." But I think that Terry has given us a very good path for Texas and Florida and Wisconsin, as to how we're going to get those from red to blue.

I also want you to go back and take a look at our conference calls and our Investor Days in 2008. California was a big problem. People ask us, "Why are you in California?" You've seen from what Terry showed today, California's turned around. In 2007, Ohio, big drag. Ohio is now producing very well. And then Michigan in 2005. We as a company, when we focus on the issues and it'll come up. This is why Mario told us -- told you, "We're going to diversify in terms of our strategy, because you can't expect every state to perform very, very well all the time." States will go up, and states will go down. It's a portfolio theory. So now we're focusing on Texas and Florida, and we'll get them turned around.

So when you put everything together what you see is the legacy states, whether they're MMS or the health plans, are doing very well. $132 million in EBITDA, being offset somewhat by the new states. So let's talk a little bit about MMS. Hopefully, we're getting to the point of closure on this by talking about $3 million here, $4 million there, and we can put this behind us, because we are in the process of working with the states to seek and get certification for these systems. And as challenging as we feel it’s been, our implementations in Idaho and Maine have actually gone better than many, many other states that struggle. It's just that we've shined a light on this. So we're "out of the pilot" status in Idaho. And what does that mean? Means, we're going to start getting DDI payments. It's about $10 million, that we'll get in the third quarter. It's not going to affect P&L, but it's still nice to have $10 million of cash in the bank. We're also going to start getting our operating income -- operating revenue. That's $1.3 million per month, going back 15 months. So now imagine that, for 15 months, we've done DDI work with no cash from the state. And 15 months worth of operations, no cash from the state. And so we'll start receiving that cash that's another $19.5 million, again starting in the third quarter.

And then, we did reach the agreement on the operational revenue side and said to the state, "keep $3 million of it." In Maine, we have a CMS certification visit scheduled for September. And so we'll be working with the state of Maine and CMS to get that system certified. Maine has not had a certified system for over 5 years. The previous vendor was in there trying to install a system, and they could never get it to operate. And so the state put out a new RFP and selected us to come in and replace the system. And what does that mean for the state of Maine? Normally, a DDI is 90% federal dollars, and 10% state dollars. Maine hasn't had that. So Maine's having to fund this with a lot more state dollars. So this is very important to the state of Maine, and we're very happy that we are beginning to see the final destination. We have got our key stabilization metrics in place. And Maine has $2.5 million per month of operating revenue. That's being held up for the last 8 months, that's $20 million of cash that the state of Maine is holding. And they have determined that they will release that money when the system gets certified. So again, it's not going to affect the P&L per se, but it is going to be cash that can be easily upstreamed. This again is one of the reasons why went into this business. The cash can be upstreamed without getting regulatory approval as opposed to the health plans. So what I've just described is approximately $50 million in cash that hopefully will come in to us in the next 6 to 9 months.

So again, we've talked a lot about the challenges of getting Maine and Idaho set up. Once they're through the certification phase, then there's a lot more that we can do. And here's what we've done in West Virginia and Louisiana. And here's the big difference between being in that DDI and then being in the operational phase. It's what we call upsells. Additional services that we can tack on to the existing contracts. Generally speaking, those have higher margins, because you've already got a lot of things in place. In West Virginia and Louisiana this year alone, we've had $40 million of upsells. Now you're not going to see that in the P&L just yet, because they've got to be implemented first. But generally speaking, the timeframes and the cost to implement these upsells are much less than there are in installing a new system. So in West Virginia, we've got the Provider Incentive Payments put in place. We're doing an enrollment application and then 5010. In Louisiana, we've put in InterQual and then we're doing 5010 and ICD-10 for Louisiana. This is the kind of thing that we're going to be talking to the states of Idaho and Maine about, once we get through the certification. And then you'll see those 2 states migrate from that negative red, up into the blue.

So now we'll take questions, for both Terry and myself. Josh?

Question-and-Answer Session

Joshua R. Raskin - Barclays Capital, Research Division

Two questions. Just the first on this California revenue provision. So I guess I'm a little confused to this. It says July 1 impact, July 1, '11 impact. So it would be a third quarter event. So if you're just -- you're booking the actual revenues and then you're going to book some sort of liability or how should we think about the P&L?

John C. Molina

No. The challenge is we don't exactly have the rates yet. So what we're trying to do is estimate what the revenue impact would be. So what we don't want to do is record the full amount of the capitation payment we're getting now, only to have to go back and reverse that, when we finally do get the rates. So we're trying to be conservative and are booking a lower revenue under the assumption that some of it will have to go back to the state in the future.

Joshua R. Raskin - Barclays Capital, Research Division

And then you'll have on your balance sheet just sort of -- on revenues for that, right? Did you consider that?

John C. Molina

I didn't want Joe to go a day without an accounting entry, right Joe?

Joseph W. White

That's correct Josh. We'll essentially have -- we'll have a reserve for the money we have to pay back to the state. So revenue will be reduced with a payable back to the state.

Joshua R. Raskin - Barclays Capital, Research Division

But there'll be P&L -- there'll be a net income impact from...

Joseph W. White

Absolutely.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. So that's the first question. And then just the second thing, any insight in -- and maybe a question for Terry, just the Texas membership that's coming on over the next 9 months or so, or 6 months or so. Any insight into the algorithms? Do you guys know where you're scoring was? Or how do we think about -- just because some of the states have actually come out with initial estimates in their membership, and there's been a pretty big deviation between the top and the bottom plans. So I'm just curious if you guys have a sense in terms of the total eligibles, where you stand in some of the bigger counties and how do you think about it?

Terry P. Bayer

Well, I'm going to just -- is this on? Yes. I'm going to respond about the choice. Because you're focused on the algorithm, and I'll focus on choice because as we are getting into these markets, we've got extensive community and provider outreach. So that the Molina name is known, so that folks will select us. I don't have the information in front of me now, and I don't even know if we are aware of it -- about the final algorithm. But historically in Texas, there was an even distribution to bring plans up to a certain level and then...

Joshua R. Raskin - Barclays Capital, Research Division

What percentage of members do you think will actually choose a plan? Or what's historical? I don't know...

Terry P. Bayer

Some of these are brand new markets.

John C. Molina

Yes. I'd probably put the choice rate probably around 40% to 50%. Let me just also add one thing Josh that you didn't say, or didn't ask that's probably on everybody's mind. And that's how are we going to book medical cost for this new population? Really there's 2 populations. There is the Hidalgo service area, which is Brownsville and Laredo, et cetera. Those folks are transitioning from fee-for-service into managed care. The other service areas that we won, there is existing managed care and we're either a new entrant or we replaced someone, something of that nature. Our experience in populations where it's been managed care and we're getting a transition is that medical costs don't tend to spike up because there wasn't the sort of the pent-up demand that there is for a new area, such as the Hidalgo service area. So in that service area, where we're likely to book a higher MCR until we get sufficient claims that we can start seeing cost trends. And then, with respect to the member choice, if you look at our experience in the rural CHIP RSA, and in Dallas with the STAR+PLUS recently, we've actually done a little bit better than our pro rata share.

Unknown Analyst -

In California, along with the rate cut, the state also implemented some interesting changes in provider benefits, co-pays, even a limitation on the number of doctor visits in the year. How valuable is that and it looks likely to be sticking points with CMS?

John C. Molina

I think those are sticking points with CMS because they are broad and they're high. I think it's $50 for ER; $100, $200 per inpatient services. So we don't know if CMS is going to approve those or not. And we're waiting to see what the state's actuaries will factor in. We know that the state's actuary will look at this and say these co-pays will have the impact of driving utilization down, so we would expect rate cuts further and to the extent the state's actuary is correct, our utilization should go down for the same reason. Chris?

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I just want to confirm, the retroactive or potential retroactive adjustment in California, is that in the $1.55 of EPS?

Joseph W. White

Yes.

John C. Molina

Everything that we know about right now is in $1.55 EPS.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then on the inpatient carve-in in Texas, is that in the $660 million?

John C. Molina

No. The pharmacy and the inpatient additional revenue that we're going to get, I think that's in 2012. We don't know what those rates will be, so we have not put it in.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then last question on the MMS. The $50 million, I think you said $50 million, correct? Or did you say $15 million, in terms of cash flow?

John C. Molina

I'm estimating 5-0, $30 million from Idaho and $20 from Maine, Joe? Did I calculate correct?

Joseph W. White

Yes.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

And that will come in over the next 12 months, you think?

Joseph W. White

The main receipt is contingent on certification. And there's obviously a billing process and everything that's associated with that. So certainly within 12 months on that, the Idaho money even sooner. The Idaho DDI in dollar.

John C. Molina

We've got that in July. Tom?

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

A question for Terry. You said California, you're not expecting losses, and I presume that means this year. Given the rate change that you're looking at, maybe give us a sense of what your thoughts are for next year?

Terry P. Bayer

We haven't worked on the 2012 numbers because you've got rates coming in and out on the various on the GMC and the 2 plans. You've got the rate cuts. So we haven't taken a look at that yet.

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

So you have no sense of whether it'll be up, down, flat?

John C. Molina

It will be one of those.

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

That sounds great. And then, just on the -- the Texas one I already got. Just to confirm John, when you talk about rates, the basis of those rates are what you're going to get paid and are exclusive of any kind of initiatives that Molina puts in place to offset the pressure? Is that correct?

John C. Molina

That's correct. That's just the top-line impact.

Unknown Analyst -

Two questions. First in Florida, the improvement in behavioral health, is that just lower cost you're paying to your outsourced vendor or you bringing that in-house?

Terry P. Bayer

First -- right now, it's lower unit cost from a change in vendor.

Unknown Analyst -

From a change in vendor?

Terry P. Bayer

Yes.

Unknown Analyst -

Okay. And then, secondly, how should we think about the SG&A on new business in Texas, for example. Is that coming on at very low SG&A because you already have a footprint in the state or is the state so big that it's kind of like you're entering new regions with normal company level SG&A?

John C. Molina

I think it's going to come in more along the lines that you first described. There's a lot that we can leverage. We will put some offices in some of the regional areas, but these are not expensive buildouts.

Unknown Analyst -

So when we think about -- if the medical cost ratio in the new markets are 90 or maybe a little bit up there as managed care before, is the SG&A like 3 or 4 there or is it -- how do we think about that when you think about profitability in those new markets?

John C. Molina

Well Molina [ph] hasn't yet started talking about profitability for Texas because a lot of that's 2012. But as we've discussed in the past, the marginal cost to bring on an incremental member in the existing state tends to be much lower than the average. Charles?

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Sorry if I missed this at the beginning, but at the last Investor Day earlier this year, you put up a slide on 2012 with some broad numbers. Did you comment on whether you would be or wouldn't be updating those initial forecast for us?

John C. Molina

We're not going to update that today. We're going to update that in January. As you recall, when we talked about coming out with sort of, one-year guidance, second-year guide, I suppose. There are a lot of factors in that second year, and we said we didn't want to be fine tuning that all of the time. I think we've explained there's a lot of moving parts, the additional membership in Texas, the changes in the benefit packages in Texas and Ohio, RFP in Washington, so we'll take care of that in January, when we have little bit better visibility.

Charles Andrew Boorady - Crédit Suisse AG, Research Division

In general when you look at all these moving parts that we've received since then, is there anything in those moving parts that would make your margin assumptions biased towards the upside because some of them would bias them towards the downside, like the new entry cost, booking the higher MLRs, the rate pressures, et cetera. So should we just initially think about the EBITDA projections being more towards the lower end or below what you'd said initially?

John C. Molina

You know, I haven't put those all together and the parts are still moving. So I don't think there's anything we can take away today about 2012.

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Okay. And then, on California, just you mentioned that it's included in the guidance for this year. Was that just the revenue impact or is the earnings impact to that also included in -- roughly what is the earnings impact from the 6% revenue cut? I assume a lot of that is passed through to providers?

John C. Molina

On the revenue side right now, it's about $2 million, $2.5 million a month. We are getting additional -- SPD in California or ABD membership, which is helping to offset that, because those come in at a higher rate. And the medical performances in California has been running better than we anticipated. So again, those things combined, give us confidence in our 2011 numbers.

Joseph W. White

If I could just add to that, the guidance we've put out in July essentially assumed very little pass-through of those cuts to providers. They'll take a little while before we can pass that on to the providers, renegotiate contracts and that kind of stuff. So there isn't a whole lot of benefit, shall we say, from provider cuts cooked in to the 2011 numbers.

John C. Molina

Yes, sir.

Unknown Analyst -

One follow-up question from actually what Josh initially asked. On Texas, I understand what you're kind of saying between markets that you're already in that you may not expect that MLR surge or uptick versus kind of new markets. How do you guys internally model that? Obviously, Texas' MLR has kind of been bouncing around with the recent new additions. But how should we think about modeling kind of 2012 and beyond for kind of the existing markets where you're going to be expanding as well as separately, I'm sure It would look differently, how they would model for the new markets that you're entering.

John C. Molina

Well, I think for the balance of this year, since the new populations are going to come on, it's really sort of steady as she goes. And we'll talk about -- at the next quarterly call how some of the medical management change that Terry talked about gained some tractions or they haven't gained tractions. For next year, again, we haven't really given a lot of guidance. General parameters for 2012, but not specifically. I'd go back and say that the Hidalgo service area, which is the southern part there, it's about 400,000 potential beneficiaries. So -- I think there's 3 plans. Right, so It's going to be a material increase, something we get a pro rata share, and we do assume that those medical costs are going to be higher than normal.

Unknown Analyst -

I mean, kind of like an MLR of something 90 to 100-ish.

John C. Molina

We tend to look at 90, until we get enough claims data in, that we can start really seeing some claims trends.

Unknown Analyst -

Okay. And then secondly, just shifting gears on to Florida, if you could hone in. I think in the last commentary, during the second quarter earnings call, you guys had talked a little bit about just -- the difficulties and challenges there and if you just couldn't come to an agreement one way or another about pulling out, has your account changed about possibly thinking about leaving certain areas, I think specifically you may have said Broward County. And then obviously, you're making some of those changes with I think the lab and behavioral health. How much of again, an impact, are we going to see that this year? I think you said those are effective July 1. Is that going to really move the MLR much this year? Is that more of a next year kind of event and magnitude-wise how large is that?

John C. Molina

We're hoping -- let me answer your first question. Has our position changed? No. If we're not able to get to a point where we think that counties that are not profitable can be profitable, we will exit. We have put in place a plan that were executing on. That we believe will give us better MCR in Florida. And a key point is going to be the rates, which we don't know yet on a final basis. But also, let me remind everybody of one thing: Florida is 66,000 members out of 1.65 million. It's not a huge part of our operations yet. Florida's going to come out next year with a number of RFPs. They're going to try and enroll a lot more patients into managed care. We're using this opportunity right now to understand the market, understand the providers and get it right. So that when the big volume of members comes in and Florida does become very material to our financials, we've got it right.

Unknown Analyst -

I just wanted to go back to Texas for a minute and then I had a question on the RFP update slide. So when I look at Texas, I know we talked about the Hidalgo service area as being new and then possibly having a higher cost trend initially, because it's an expansion market. But when I look across the geography here, there are a number of other geographic areas where there's a new, indicated in parenthesis, and I just wanted to make sure that I'm clear about -- of the 3.4 million eligibles, what percentage of those lines are new versus what percentage was the reprocurement population?

John C. Molina

I couldn't say Valerie [ph], maybe you'd know, Terry?

Terry P. Bayer

Yes. We used to -- I don't have that at my fingertips, but Harris is not a new service area. Bexar is not, Dallas is not.

John C. Molina

El Paso is new for us.

Unknown Analyst -

What portions of Dallas?

Terry P. Bayer

So when we said new, that's new to Molina.

Unknown Analyst -

New to Molina, not newly...

Terry P. Bayer

Not new to the state.

Unknown Analyst -

Okay. So not conversions from fee-for-service to managed care? I thought so.

John C. Molina

Valerie [ph], the biggest piece of brand new fee-for-service membership converting to managed care, Hidalgo was about 400,000, and then the RSA, well, we haven't goaled [ph] There, we do the -- we're the CHIP contractor, that -- the Medicaid fee-for-service went into managed care, that's about another 400,000. Now we didn't get the contract in those areas, someone else did. But that 800,000 is the big bulk of what is new and the rest of it, I think, the vast majority of that is existing. They're rolling in. There are probably a few counties in and around Harris or Jefferson that are brand new, but they're not large populations.

Unknown Analyst -

Okay. So roughly 800,000 of the 3.4 million is new -- new to managed care?

John C. Molina

I believe so. Yes.

Unknown Analyst -

Okay. And then, also on Page 25 with the RFP update, I just want to make sure that I'm interpreting what's written accurately. So when I look at the total covered population as an example, let's just look at Georgia of 1.8 million, and the population up for bid of 1.5 million. Is that a rebid or is that an expansion of the Medicaid managed care population? Are those new to managed care?

John C. Molina

Our best estimate, because Georgia hasn't put out an RFP yet. So we don't exactly know. But the indications from Georgia are, that they're going to have both the TANF members and the non-dual ABDs enrolled into managed care. My understanding is that currently the non-dual ABDs are not in managed care. So there's a component of both, new populations but also a rebid.

Unknown Analyst -

Oh, so those numbers across that row are all a combination of those two? It's lumped together?

John C. Molina

Yes. That's correct. And really this slide, in part is to give you an idea of what are the short-term opportunities and I say short term, those that will come up probably in the next 12 months. Both in those states we targeted and in existing markets.

Unknown Analyst -

Okay. So not all of it would be incremental members. Okay. Thank you.

John C. Molina

Yes, sir.

Unknown Analyst -

Can you comment about the Washington RFP relative to your expectations. And if you can you talk about the price component of that RFP and what your thinking is on that?

John C. Molina

I would say -- relative to the price component, we'd look at the price components of any RFP very carefully. We have a lot of confidence in the Washington actuaries, Milliman has been the actuary since we started the program. And it worked pretty well with them. So we don't think it's going to be a race to the bottom type of situation. We fully expect that a lot of new entrants will apply to get into Washington, but we're very comfortable in our performance and in our network and in our management team. So we would expect to continue operations there. And with the ABD patients coming in, to the extent that we may lose some TANF membership from a financial perspective, meaning access to those ABD members should allow us to offset any revenue or profit loss on the TANF side.

Unknown Analyst -

John mentioned the [indiscernible].

John C. Molina

You want to comment on that Terry?

Terry P. Bayer

Sure. There are couple of pricing methodologies in the Washington bid. What they're looking at in the Medicaid population versus the basic health or low-income health plan, is a rate band so they'll -- they're going to issue minimum and maximum rates and you have to be -- come in between obviously. If you don't, you're excluded, that seems obvious. But then points will be awarded. So where you are in relation to that will accumulate in points and pricing is going to be a factor in the bid. And that's all posted online. There's a lot of detail. We don't have those numbers yet, but we have the concept of the banding and how we'll bid.

John C. Molina

And if I'm not mistaken, for the TANF population, you're not allowed to bid below the minimum and for the ABD population, you can bid below, but you've got to provide ample justification and data [ph] , as to why you think that that's the case.

Unknown Analyst -

And then, in terms of the pharmacy and inpatient carve-ins in Texas, can you describe -- do you have an idea of sort of the PMPM impact of that and then also, what do you think the MLR impact will be in those carve-ins, general direction?

John C. Molina

I don't have those yet. What I would say on the pharmacy, we've done them -- generally speaking, we do pretty well on the pharmacy. We have systems in place that really promote generic utilization, and so we like the carve-in, we can make a margin on the pharmacy piece, but also for the patients, it's a lot better if we can sort of see the whole package. But right now we just don't have visibility.

Unknown Analyst -

Anything specific you can give us about how much MLR improvements you could get out of that?

John C. Molina

No, sorry. Okay, do we take a break JJ?

Juan José Orellana

Any other questions? Okay then, we'll go ahead and take a 5 to 10-minute break right now, and then we'll pick up for the final portion with Dr. Molina.

[Break]

Juan José Orellana

And we are moving ahead of schedule, so that's a -- it's a good thing. So that folks can get back to their office. So I will now turn it over to our President and Chief Executive Officer, Dr. Mario Molina, again, who'll be talking about the opportunity with the dual eligibles.

Joseph Mario Molina

Okay. Before I get started, I just want to kind of recap a few points from the first part of the presentation. Because the energy level seemed pretty low. And that disturbs me a little bit because I think we have good fundamentals. We had a very strong first 2 quarters of the year. The utilization trends that we're seeing on hospital are lower year-over-year compared to 2010. That's very positive for us. The RFP in Texas was very positive for us. We're going to see a lot of growth. We're seeing some of it this year, but more of it next year. There is some expansion that has to be done. There's going to be some hiring that has to be done, but there's also a lot of opportunity to leverage because we do have overlap with some of the existing service areas right now. For example, we are in the Rio Grande service area already with the CHIP program. We have a new service area in El Paso Texas, but we're already using El Paso because of the spillover from our New Mexico contracts. Some of the patients in Las Cruces actually are going into New Mexico to get their care. So it's not going to be quite as rough a transition as you might think. I am cautiously optimistic about Florida. We have some preliminary rates. We're not prepared to discuss them, but I think that, that in combination with the things that the management team in Florida has done. Florida's beginning to turn around. You saw that the legacy health plans and the legacy MMS states are doing well. I think MMS is beginning to stabilize. We have the Idaho and Maine contracts, which are going up for certification by CMS. I think it's a very positive step for us. We could get those 2 things certified. That's a huge win for us, to have 2 MMIS systems certified in the same year. Especially since Maine hasn't had a certified MMIS system for 5 years. So I do think those things are beginning to straighten out. We tend, as John says, to focus on the negatives. In our calls, we tend to talk about the 3 or 4 plans that aren't going well and ignore what's going well. But overall, health plan operations are performing as well or better than expected. We provided you with guidance at the last investor -- last earnings call, and we're not making any changes to guidance at this time. So there's nothing at this point that makes us think that the results are going to deteriorate materially from what we have presented at the last quarter's call.

Now I want to talk about the dual eligible opportunity. We focused a lot on the health plans and for the most part, on TANF patients. 80% of our members are TANF. We've talked a little bit about the ABDs and that's growing, and we're happy with that. But -- and there's been a lot of talk about RFPs. What's the potential? Is it $40 billion? Is it $60 billion? But what I'm going to show you is that it kind of doesn't matter, that the market opportunity is huge, and we have barely scratched the surface. There are nearly 9 million Medicaid beneficiaries that are dual eligibles, low-income seniors and younger persons with disabilities who are enrolled in both Medicaid and Medicare. This is a different population, although, they are on Medicare, it is a different population than the Medicare population you'd traditionally think of. They are younger. They are less than 65 years old. There have multiple chronic medical conditions, and they tend to have a lot of behavioral health problems. So it's a different population. And I don't necessarily think that success in Medicare automatically translates into success with the duals. And that's sort of what we're finding. They are distinct different populations. The duals account for approximately 15% of Medicaid enrollees, but contribute almost 40% of the cost. And that's why they're getting so much attention right now in state capitals and in Washington. At a time when budgets are constrained, the thing to do is to attack the costliest patients. And up till now it hasn't been done. Medicare and Medicaid spending averages $20,000 per dual individual per year, 5 times greater than for the Medicare beneficiaries. And this is the population that will most benefit from managed care. The healthcare system in this country is extremely fragmented. And you have dual eligibles who are the sickest of the sick, who have the most problems and who are poor. And layer on [ph] All the transportation and social issues that they have. And you say, "Go figure it out for yourself." And there's no wonder that there is so much over utilization in this population. This is the population that will benefit the most from managed care. Now 15, $1 million grants have been awarded by CMS to design programs to integrate the care of these beneficiaries. This is a little bit misleading because there are more states that are involved in this kind of planning and looking at what they're going to do with their duals, than got the 15 grants. In fact, there are 20 submissions to CMS from states that want to somehow combine the funding and manage the care of the duals. It's like all of a sudden, the light went on. And this is something that I think is going to get a lot of play in Washington. And part of the recognition for this comes from this new office of duals that was created at CMS. There is recognition at CMS at the federal level, that these people are different. They don't fit into the traditional Medicare. They don't fit into traditional Medicaid. And therefore, it was necessary to create a special office within CMS to try and coordinate their care.

So this shows you, again, 8.7 million duals, throughout nearly $300 billion in spending. So you know, we can talk about different state Medicaid RFPs, $2 billion, $3 billion, $4 billion. But this is a $300 billion opportunity, and it is virtually untapped. CMS wants to move $1 million of the duals into managed care in the next year.

And again, this is another slide that shows you the spending, the duals account for, an inordinate amount of spending, and this shows you where the money is going. On the Medicaid side, it is mostly for long-term care, and on the Medicare side, it's largely for inpatient care. These patients frequently bounce from facility to facility, they go in and out of nursing homes, and they're frequently users of the emergency room, all because the care is fragmented and uncoordinated. So there are just huge opportunities to improve the care of these patients.

87% have more than one chronic condition, and 70% of Medicaid spending for the duals is on long-term care services. We have some experience with this. We have been thinking about this, talking about this, working on this probably for about 5 years now. Because it's been relatively small part of the overall revenue, it hasn't gotten a lot of attention. We've been in the WMIP program since 2005. This is the only program for the ABD patients in Washington right now. And we combine the medical and the behavioral health benefits. We have created special clinics. We have 2 right now. We're looking at opening a third clinic in Washington to provide care to this patient population. It has been tremendously successful. There was a study that was done, and this was ranked as 1 of the 10 programs that the government should replicate in other markets.

We've been in STAR+PLUS since 2008. That gives us some experience, again, with this sort of long-term care management. And we are the 8th largest specialty needs plan for dual eligibles in the country and growing. And we have made a big commitment to this. We have been through a CMS audit. We came through without any sanctions. It was difficult, and I will tell you that it is a very different program. CMS expects board level involvement. We have a board level -- a committee that oversees this product, this project. And when we got into this, I think we didn't realize what we were doing. And people said to us, "Are you sure you want to do this?" And it's a little bit like some of the things we've done like when they said, "Are you sure you want to get a Knox-Keene license? We said, sure, we'll get a health plan license. And then we made that transition from a medical group to a health plan. And I think that back in 1994, if we had known how difficult it was going to be, we might not have done it. But we were too ignorant, so we went forward. And I think there was some of that here. We've learned some hard lessons. It's been difficult. But we have now built a very strong, very seasoned management team focused on the duals.

Long-term care. You hear about long-term care, and I think a lot of us think about nursing homes, skilled nursing facilities. But long-term care is a much broader term. It includes patients with chronic mental illness, spinal cord injuries, severe chronic illnesses, debilitating arthritis -- those kinds of things. It does include nursing home care. But it also includes a big component of home healthcare. And there was a decision a number of years ago called the Olmstead decision. And basically what it said is that states could not warehouse these patients in skilled nursing facilities. And so it was a landmark case because it shifted the way we think about these patients from a nursing home program to in-home care that will keep them out of the hospital and out of the nursing home. And that involves a lot of things like assisted living, adult day healthcare, respite care, meal preparation, all these kind of things that will allow people with disabilities and the elderly to remain at home. It's better for their quality of life, and it actually is lower cost in the end for the payors.

This is the demographics. Slightly more women than men, again, not surprising. They tend to be -- well, 37% are under aged 65. Now if you look at the overall Medicare program, it's about, I think, 85% are over the age of 65. So this population tends to be a little bit younger. The other thing I want you to look at is poverty. 75% of them live at 125% or below of FPL. That's poor. That's somebody with multiple chronic medical illnesses living on $8,000, $9,000, $10,000, $12,000 a year. So not only do they have problems, but they don't have the financial resources to help themselves. If you look at our Medicare Advantage product, it is geared towards people under 200% of poverty. And in fact, about 83% of our members in the Medicare program are duals. So we have gradually shifted away from the traditional Medicare into the duals. This shows you just our states and what the populations look like. California, 1.16 million duals. Florida, over 0.5 million duals. Michigan, 257,000 duals. And look at the spending per person; it's much, much higher for the duals. So this follows Sutton's Law. This is where the money is. And if you're going to make an impact, and you're going to try and do something about the cost of healthcare, these are the people you have to deal with. And in most of these states, we already have a special needs plan contract with Medicare to serve duals.

Now this is another interesting slide. All duals are ABDs. Not all ABDs are duals. And it all can be confusing. In California, the ABDs are moving into managed care. This is what's known as SPD in California. Everything has to have a different acronym in California. The duals are in managed care, and we have a special needs plan, and we are enrolling the duals. Now on the Medicare side, they have to enroll voluntarily. On the Medicaid side, the state can mandate that they must be in a health plan. And that's true across the board. Then you get into other areas. Michigan. The ABDs are in managed care, but the duals are not yet in managed care. So this represents an opportunity for us for expansion in that market. Ohio, ABDs are in managed care, but the duals are not. We have a special needs plan there as well.

So there's a lot of upside potential as the duals come in to managed care and as we begin to enroll more and more of them. In Washington, the ABDs are not yet in managed care. The only place we have the duals is the WMIP in Snohomish County, and we are serving them with special needs plan there.

As I said earlier, extremely fragmented. The right hand literally does not know what the left is doing in this. Even under managed care, it's fragmented, because we don't have programs that really coordinate the care. The state is responsible for the Medicaid portion, the federal government is responsible for the Medicare portion. And I can tell you from meetings that I've had in the past with CMS, that in the past, the 2 sides of the agency did not talk to one another. And that's why this special Office of the Duals was created. Because you need people that understand both, and there is a sort of the holy grail of public programs, and that is the idea of the money following the person. And that is to take all the various programs and all the money that's available for these patients and bring it together because people in these programs are not getting the care they need and they're not getting the benefits that they're entitled to, simply because the programs are too fragmented and not coordinated.

Our goal, and I think the goal of the federal government, certainly, is to streamline and simplify these programs, and there are a number of committees and reports out that recommend that the best way to deal with the duals is to put them in managed care. Exactly how that's going to be done, we don't know yet. But that is -- and here you see some of them. But it's -- I mean, it seems to be widely acknowledged. There's not a lot of debate about what needs to be done. The question is how do we get there? So when we were preparing this talk, we were sitting around, and John started scribbling on a piece of paper, trying to understand the program. And on the left, you see a rather simplified diagrammatic scheme that shows you what the program looks like today. Ideally, in the future, what we'd like to see is the situation on the right-hand side. Medicare and Medicaid would fund health plans to coordinate the care of these patients and be responsible for physician services, hospital services, prescription drug services and so on. I mean, they're crazy rules. For example, right now, a lot of times for a provider to get paid for a service that's not covered, you have to first bill Medicaid or Medicare and get denials. So you can't bill one program until the other program has denied the claim. It's extremely cumbersome. It's frustrating. It's time-consuming. The providers don't like it. So if we can bring this all under one umbrella and streamline this, I think we'll get better responses from the providers. They're taking care a lot of these patients anyway, but if we can make their lives a little easier by coordinating and streamlining the care, I think we'll get greater efficiency. So that's our goal, that's what we envision in the future, and that's what we're working toward.

And I think this pretty dramatically speaks for itself. Remember, I told you that keeping people at home, in their homes, when possible, is lower cost. And here it is. $60,000 for a patient in a skilled nursing facility versus about $25,000 for that patient outside of a skilled nursing facility, living at home. And it can be done, and we are doing it. But this shows you the magnitude of the issue.

Here's my pyramid. We created this pyramid years and years ago. And it's been a long, long time coming. We started out just with TANF patients. They are the simplest patients to deal with. Their care is primarily episodic, they tend to be young, their problems tend to be acute and they go away.

There's a higher churn on these patients. They come in and out of the program. The next level are the ABDs. These are patients with chronic problems, often disabled, sometimes elderly, more complex, stickier. They tend to not turn over very much, and they're not as seasonal. TANF patients are much more seasonal. Then you've got the duals. The duals are really sticky. Once they're in a plan, they're really not going to go anywhere. They generally are happy once we -- I mean, I don't want to pat myself on the back too much, but many of these people have never had anyone to help them, and when they start getting call from our case managers, where they get the welcome calls, while we're doing the outreach to identify what the problems are, we literally have had people break down and cry because nobody ever explained to them what their benefits are. Nobody ever told them how to get the care that they need. They have been left to drift. So I mean, it's really an amazing program. And then, finally the long-term care, and these are people that are potentially institutionalized -- maybe they don't need to be.

Again, as we talk about the benefits of managed care, one of the benefits of managed care for the duals is if you've got a very costly open-ended entitlement program that you now can get your arms around. You know what the costs are going to be because the state and the federal government can come up with capitated arrangements with health plans. There's a lot of administrative simplification that can be done. Bringing everything together into one agency, if you will, rather than 14 different government programs that are spread out and don't talk to one another. It requires a different kind of care. This is much more hands-on. We're making home visits, we're sending people out to look at the house to see what needs to be done, to find out what kind of problems the patients have and what their needs are, and then figuring out what they really need.

And I told you that a lot of these patients aren't getting what they need. And that's true. A lot of them are getting things they don't need. And that's the other side of the coin. So going back to that managed care concept, we want to be sure that patients are getting the right care in the right setting from the right provider at the right time. And you can see when you're talking about $60,000 a year to care for one of these patients, there's a lot of opportunity there.

This shows you the top 10 special needs plans for dual eligibles in the country by enrollment. And we just moved up from 9 to 8, and before long, we'll be #7. We're making a real commitment to this. We're focused on this. We're growing slowly but steadily. One of the things about the special needs plan is you're allowed to enroll all year long, so you don't have to just have an open enrollment period, where you kind of blitz people with advertising. This is very much a community-based grassroots effort. You need to work with the people in the community who know who these patients are and get them to help you identify and enroll the patients. You can't just put up a billboard or send out mailers. It doesn't work with this population. So the marketing is fundamentally different than I think what you see in the traditional Medicare program.

So there are a little under 240,000 eligible duals in Michigan, virtually none of whom are enrolled in managed care. This is a huge opportunity. It's an opportunity for us to integrate the funding streams to coordinate the benefits, and as you see, there's a slight increase. The duals don't vary that much with the economy. We see expansion in the TANF population in a bad economy, but the duals are steady. They're always there, because it's less about their financial needs than it is about their medical needs that cause them to qualify.

And you see a timeline for the implementation of this with an April 12 implementation date. But this is what I was talking about. We talked about RFPs for the Medicaid program. Louisiana, $2.2 billion. We've got a lot of attention. Kentucky, $4 billion dollars. That is for roughly 1.6 million eligibles.

In the state of Michigan where we operate special needs plans for dual eligibles, for 234,000 potential enrollees, it is about $8 billion. One state, no expansion, layering this in over our existing infrastructure.

This is why I say we have just barely scratched the surface of the opportunity. And it's not just Molina. I think all health plans, this could be said for. Most of the duals are still in fee-for-service.

So, investment highlights. You've heard these before. This is an attractive sector. I think a lot more health plans are looking at Medicaid as an opportunity for growth. There's a report that just came out from the Kaiser Family Foundation, and what they found was that disproportionately, the pure play Medicaid plans are doing better in the RFPs than the non-pure play. Why? It's focus. We are more focused, we know this business better, and we don't have the competing priorities. We have a flexible healthcare services portfolio. Another thing that we have tried to do over the years is to diversify, and we've done that by moving into additional states. We now offer health plans in 10 states. We have layered into that the ABDs, and now we've layered on the Medicare Special Needs Plan.

In addition, to that, we have bought an MMS. This is a fiscal agent. It is for the most part, fee based, non-risk business, but it's the same customer. So now we're now operating in 16 states, and there are some synergy there. We're learning a lot more about the Medicaid program, we're learning a lot more about how our customer, the Medicaid Agency, thinks because we're seeing it from a different perspective. And frankly, the MMS states are much more closely integrated with the state agencies. On the health plan side, we like competition. Because in order for a state to go to mandatory enrollment, there have to be at least 2 health plans. So the health plans kind of -- they're collegial -- we get along. And we're at sort of arm's length with the state. We're a vendor. On the MMS side, there's only one contract. And we are an integral part of the state's program. We work very, very closely with the state personnel. So on the one hand, you're an arm's length vendor; on the other side, you're an integral partner.

We diversify geographically. We cover the 4 corners of the country. We're in California, Washington, Maine and Florida and a number of states in between. We remained focused on government programs for low income persons, and that is going to be our focus, and we think that that's part of what gives us some strategic advantage. We are a seasoned management team. I think we have one of the most stable, one of the most experienced, if not the most experienced management team, in this business. And I think that that's true on the Medicare side because the people that we have doing the special needs plans have deep experience.

On the Medicaid health plan side, we've been dealing with Medicaid patients for 31 years. I mean, I have my whole medical career in one way or another, starting out when I was a college student, working as an orderly, whose been dealing with Medicaid patients. John, same thing, spent his whole career looking at this. Terry, and I always tell people Terry looks like a really nice, normal person. But you wouldn't know that she's got a master's degree in public health from Berkeley. She's a radical. And over 30 years of experience doing this, I think that we're really well positioned to take advantage of the opportunities before us. And we talked in the first part of this program about the immediate short-term operational issues.

We have talked in the past about what the Affordable Care Act means in terms of expanding the Medicaid population. I don't know what's going to happen with that. I personally think that it will probably go forward much the way it is. Even if the Republicans can pick up seats in the Senate, even if they can take over the White House, I'm not sure they can stop the program entirely. As I said, much of it is already in the process of being implemented. I don't think they'll be able to repeal it, because I don't think they are going to have enough votes in the Senate to do that. Their best hope is try and de-fund some of implementation steps. I also mentioned earlier, I think that the Supreme Court is going to uphold this because there is a precedent that says that the federal government can't force you to buy insurance. So I don't see a whole lot of risk.

But regardless, if we take those 16 million Medicaid beneficiaries that are going to come on in 2014 and just set them aside, between now and then, there are lots of opportunities because of the economic constraints that the federal and state government faces, lots of growth opportunities for us. And a lot of this is going to dovetail on the things that we're doing, expansions in Texas, expansions in Florida, the duals. So, I think apart from healthcare reform, there is huge opportunity in the fact even if it were repealed, you've got the duals, they're not going away. The single, in my opinion, the single biggest problem this country faces is the affordability of healthcare. And we're on our way to 20% of GDP, I think.

And we've been saying for many, many years that this kind of growth in healthcare spending is unsustainable. But we haven't reached the crisis point yet. I think we're going to get there pretty soon. And those people that can offer solutions to provide high-quality healthcare at a low cost are going to benefit in this environment.

Thank you for joining us today. I want to open it for questions.

Unknown Analyst -

A lot of the larger health plans have started down the path with more vertical integration. Given the company's history, starting off as a clinic, why haven't we seen more of that from you?

Joseph Mario Molina

Well, you know, we started out as a health plan -- as a provider organization. Our clinics are growing. We've expanded into Washington. We're looking at a number of other states. What we do best is to provide primary care services, and that's what we're going to continue to do. So I think that we're going to expand our primary care clinics into a number of states. It augments our network. We don't have the capital to completely internalize this, because right now we are already serving 1.6 million members. It would be very, very difficult to have a truly integrated delivery system. On top of which, there are constraints. For example, in New Mexico, we have to cover every county, every ZIP code. And there's no way that a fully integrated health system could do that. But I agree with you. I think the pendulum is swinging back towards smaller, more tightly integrated networks, and you will see in the future, an expansion of our medical group.

Unknown Analyst -

Just a quick follow-up on the duals presentation. Will you have duals plans in all of your markets in 2012 to fill some of the holes there, or did the slide you just put up with Missouri and Wisconsin, I don't think you have one?

Joseph Mario Molina

No, we don't. This is something that takes a couple of years to implement. So we have it in most of the markets. We don't have it in all markets.

Unknown Analyst -

In 2012?

Joseph Mario Molina

Right.

Unknown Analyst -

And then secondly just more of a contextual question. As the duals become more integrated, the program gets more integrated. Who ultimately has jurisdiction for them, for lack of a better term? States have no money, federal governments are going to cut the deficit, ultimately, what's your opinion on who's going to have the ultimate rulebook and you ultimately take your charge from?

Joseph Mario Molina

I don't know yet, and it has to do with these proposals that states are making to CMS. But -- we actually sort of do know. I mean, it really is CMS. CMS is driving this. It is a federal program, the bulk of the money is coming from the federal government. And as my father used to say, he who pays the piper calls the tune. So I think ultimately the federal government will have the majority of the influence. Even if they were to say to states, we'll give you the money, there's going to be a lot of federal oversight. I mean, the oversight by the federal government in the Medicare program is much more stringent than most state oversight. So I think that the disproportionate influence will be from the Feds.

Unknown Analyst -

So in the near term, the special needs plan model is probably going to be the one that offers the best opportunity for companies like yours over the next, what, 5, 6, 7, 10 years?

Joseph Mario Molina

Yes, I think so. I mean, one of the things we have not talked about is there may be opportunities to do a fee-for-service type of model as well. And I think in some of the states perhaps where we're a fiscal agent, we might be able to layer on fee-for-service programs to serve the duals in some of the smaller states, where you are going to have a hard time putting together Medicare Advantage health plans.

Unknown Analyst -

Can you talk about how much capital you estimate is required to support a new dual member and then a long-term care member as compared to, let's say a traditional TANF member?

Joseph Mario Molina

John, you want to answer that? Remember you're talking to the guy who thinks that IBNR is an asset. So...

John C. Molina

[indiscernible] is 8% of revenue.

John C. Molina

8% of revenue.

Unknown Analyst -

And will that be comparable across all 3 of those product lines?

Joseph Mario Molina

Yes. John?

Unknown Analyst -

So as you've been meeting with individuals in Washington, what do you think the appetite is as we go into the steps for committee process for there to be a more mandatory component to moving duals? And so it happens faster. I mean, it's going to happen one way or another, but you would get a big score. And so my question is, do you think there's an appetite that this Congress and administration could actually mandate managed care in the Medicare product like this, or is that just not going to happen as you talk to these guys?

Joseph Mario Molina

Well, I think ultimately, it's going to come to that. And I think the first group of Medicare beneficiaries who will be mandated to enroll will be the duals. Whether it's going to come next year or not, I don't know. But I think that is the direction we're moving.

Unknown Analyst -

I mean, you have these conversations with Congress people, I assume...

Joseph Mario Molina

Not so much Congress people, but I mean, we showed you a slide. There are a number of proposals out there, people -- I mean, Senator Domenici. This is basically what he said. He's no longer in the Senate. But this is a guy that chaired the budget committee for 28 years or something. He knows a lot about the federal government's finances. And that's what he thinks needs to be done.

Unknown Analyst -

I mean, are you even pitching this? I mean, you could cover a lot of that $1.5 trillion score [indiscernible] ...

Joseph Mario Molina

We are going to go back and have some meetings, but yes, I think that this is -- and John and I were talking about this last night. We think the federal government right now underestimates the savings.

Unknown Analyst -

Just to dovetail on that. I want to congratulate you for focusing on the dual opportunity. $300 billion is far in excess of the $40 billion to $60 billion people talk about, but I think the reason we don't hear the number talked about a lot is because the federal government really doesn't seem to recognize or appreciate the savings that you can achieve. And in your presentation, that didn't include examples of how much in savings you can achieve and we're a financial crowd so it seems like there's a bit of a disconnect there. I wanted to explore specifically, the Simpson-Bowles proposal from December '10, which would be a great starting point for this super committee and when the President has endorsed, estimated about $5 billion in savings from moving duals into the Medicaid HMO.

Joseph Mario Molina

We think we could do that in our sleep with one hand tied behind our back. It's a gross underestimate, we agree.

Unknown Analyst -

It's 0.2% of the dual spending in that 10-year period. 0.2% which you should be able to -- so where is the disconnect? You feel that you're not well represented in Washington. Where is the communication gap between what you believe you can do and what Washington believes you can do, and what are you doing to address it?

Joseph Mario Molina

I think it's a huge educational effort that needs to be undertaken. I don't think Washington really understands the problem. I mean we still go to Congress and talk to members of Congress who can't keep the differences between Medicare and Medicaid straight. So for many people, this is -- some guys have been operating the dry cleaning store and now he gets elected to Congress, and he supposed to know all about healthcare. His experience with healthcare is maybe for his employees. A lot of people in Congress don't understand this. There are a few, there's like a small core group, I think, that really does understand this. But for most members of Congress, it's kind of peripheral. And the sad thing is, this is where the big money is. This is where the big opportunity for savings and this is what's got to be addressed. And yet healthcare is, for many of these guys, not on their radar screen. Or when they think about healthcare, they think that the great thing about the Affordable Care Act is that it's made healthcare more affordable. It hasn't. It's going to make it more available, but it's also going to increase costs. And I think that, that hasn't been recognized. It's beginning to be recognized. I don't think this whole healthcare reform think is over. I think this is just the first inning that we've seen, and the next big issue is going to be, how do we get a handle on controlling health-care costs because they are just unconstrained right now.

Unknown Analyst -

I think I want to applaud you on that; I agree with everything you've said. But getting back to my question on, there is that knowledge gap between what you know and what Washington knows or wants to believe. And I'm wondering what specifically will change. The duals issue has been out there for a while. Simpson-Bowles put a lot of effort with people who knew something about healthcare into coming up with these proposals. It came up with a $5 billion number. How could your industry let that happen and what are you doing to have them come to a better conclusion on what you're going to actually say to them? Because as John mentioned, the super committee, these 12 people are looking for easy savings right now. This would seem to be easy savings, but they don't believe that you can achieve it.

Joseph Mario Molina

I thank you for giving me such credit for being such an industry leader, that you think that I can control what the industry thinks and does. We have, I think, good relationships with a number of people in the committee, and we need to go talk to them. The committee has good representation from Michigan. We've got good representation from California. There are some smart people on that committee. They need the right support, and we need to get beyond the politics. And that's going to be the hardest part. Are they're going to get serious about fixing this or are they going to continue to point fingers and try to blame the other party and play politics. I don't know the answer to that yet. I'm hoping, and I'm an optimist, that they will realize that this is a critical problem. They need to solve it, and if they don't address it, then they're going to see some draconian cuts that are going to be made automatically, and the area that's going to see the biggest cut is Defense. And I don't think that they want to see hundreds and millions of dollars just whacked from the Defense budget. So hopefully they will take it seriously and try to come up with a bipartisan solution. There are people, I mean -- we've spoken to Senator Domenici, who's no longer there. We've spoken to Senator Daschle who's no longer there. But there are reasonable people, or at least there have been reasonable people in the Congress in the past, who have the ability to think these things through, and I hope that people who would've been left behind in Congress can pick up where they left off.

Juan José Orellana

Is that it? On that sobering note, thank you for joining us.

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Source: Molina Healthcare Inc. - Analyst/Investor Day

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