Molina Healthcare, Inc. (NYSE:MOH)
January 26, 2012 12:30 pm ET
Joseph W. White - Principal Accounting Officer and Vice President of Accounting
Juan José Orellana -
Terry P. Bayer - Chief Operating Officer
Unknown Executive -
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
Carl R. McDonald - Citigroup Inc, Research Division
Juan José Orellana
Okay, we're going to go ahead and get started. Good afternoon, everyone, and welcome to the Molina Healthcare January Investor Day. My name is Juan José Orellana and I'm the Vice President of Investor Relations for the company. We are pleased to be here presenting for you today and seeing a lot of familiar faces. We're also glad that the weather appears to be cooperating a little bit more. When we were here in January of 2011, New York City got, I think, it was 19 inches of snow. So we're glad to see the weather cooperating but just in case, there are some beach balls in the room and that's to keep you optimistic that spring and summer are just around the corner, so hopefully we'll continue to have a great weather.
Up on the screens right now, you see our agenda for today. And these are just recommended time frames that we have for each of the presentations. We'll start with a business overview by our Chief Executive Officer, Dr. Molina. And he'll talk about several things that are happening in the company right now. We'll also hear from Terry Bayer, our Chief Operating Officer, who will be providing an operations update. And back on the lineup, by popular analyst demand, is Joseph White, providing a discussion on capital adequacy. Again, that is by popular demand. And finally, we'll go ahead and have John make some remarks related to our outlook for 2012.
A press release announcing our outlook for 2012 was issued before the market opened this morning. You can access it by checking out our website. A lot of the information is there. It's also included in the materials that we have here in the room.
I do have to draw your attention to our cautionary statement. And I know it's -- and I'm sure it might be difficult to read, so what I'll do is I'll actually read it for you.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. This slide presentation and our accompanying oral remarks contain forward-looking statements regarding the company's expected results for fiscal year 2012. All of our forward-looking statements are based on our current expectations and assumptions. Actual results could differ materially due to the unexpected failure of our assumptions or due to adverse developments related to numerous risk factors, including but not limited to the following: Uncertainty regarding the effect of our Washington health plan's being named an apparently successful bidder by the Healthcare Authority of Washington in that state's recent managed care procurement; significant budget pressures on state governments which cause them to lower rates unexpectedly or to rescind expected rate increases, or their failure to maintain existing benefit packages or membership eligibility thresholds or criteria; uncertainties regarding the impact of the Patient Protection and Affordable Care Act, including its possible repeal, judicial overturning of the individual insurance mandate or Medicaid expansion, the effect of various implementing regulations, and uncertainties regarding the impact of other federal or state healthcare and insurance reform measures; management of our medical costs, including costs associated with unexpectedly severe or widespread illnesses such as influenza, and rates of utilization that are consistent with our expectations; the success of our efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals in both existing and new states, and our ability to grow our revenues consistent with our expectations; the accurate estimation of incurred but not reported medical costs across our health plans; risks associated with the continued growth in new Medicaid and Medicare enrollees, and in dual eligible members; retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments; the continuation and renewal of the government contracts of both our health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed; the timing of receipt and recognition of revenue and the amortization of expense under the state contracts of Molina Medicaid Solutions in Maine and Idaho; government audits and reviews; changes with respect to our provider contracts and the loss of providers; the establishment, interpretation and implementation of a federal or state medical cost expenditure floor as a percentage of the premiums we receive, administrative cost and profit ceilings and profit-sharing arrangements; the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures; the successful integration of our acquisitions; approvals by state regulators of dividends and distributions by our health plan subsidiaries; changes in funding under our contracts as a result of regulatory changes, programmatic adjustments or other reforms; high dollar claims related to catastrophic illness; the favorable resolution of litigation, arbitration or administrative proceedings, and the costs associated therewith; restrictions and covenants in our credit facility; the availability of financing to fund and capitalize our acquisitions and start-up activities, and to meet our liquidity needs and the costs and fees associated therewith; a state's failure to renew its federal Medicaid waiver; an inadvertent, unauthorized disclosure of protected health information by us or our business associates; changes generally affecting the managed care or Medicaid Management Information System industries; increases in government surcharges, taxes and assessments; changes in general economic conditions; including unemployment rates and numerous other risk factors, including those identified within the slide presentation and/or our accompanying oral remarks and those discussed in our periodic reports and filings with Securities and Exchange Commission.
These reports can be accessed under the Investor Relations tab of our company website or on the SEC's website at sec.gov. Given these risks and uncertainties, we can give no assurances that our forward-looking statements will prove to be accurate or that any other results or events projected or contemplated by our forward-looking statements will in fact occur and we caution investors not to take place undue reliance on these -- not to place, excuse me, undue reliance on these statements. All forward-looking statements in this release represent our judgment as of January 26, 2012, and we disclaim any obligation to update any forward-looking statements to conform the statement to actual results or changes in our expectations. I will now read this in Spanish.
Actually, without further ado, I would like to turn the mic over to Dr. Mario Molina, our Chief Executive Officer.
Joseph Mario Molina
I'd like to thank Jeff Barlow for that cautionary statement and Juan José for reading it because it gave me time for lunch. Next year, we're thinking of doing it in Latin and sign language. I want to talk -- start off, by talking a little bit about 2011, what we have accomplished and how we have executed on our business plan. The health plan business remains stable and our Medicare Special Needs plans continue to grow. Despite a difficult rate environment, we've been able to improve profitability in 2011, and we received certification from CMS on our fiscal agent contract in Maine.
Looking forward to 2012, we're expecting a lot of growth in Texas beginning in March of 2012, and we look forward to the dual eligible care coordination and integration. So in short, we've made solid progress in 2011 in building long-term value. Now, you've all seen this slide many, many times. I think we use it in almost every investor presentation. This shows the states that we're in. In the teal color, you see the health plan states and in the purple, you see the fiscal agent or newly [indiscernible] Medicaid Solutions states. Virginia in yellow is where we operate clinics for the County. And you see our enrollment and the distribution of our membership.
I want to point out a couple of things. First, if you go back probably 6 years, maybe even 8 years ago and look at our early investor presentations, you may recall seeing my pyramid. And that pyramid had a base, a wide base of [indiscernible] patients, patients that have relatively simple healthcare needs, a lot of episodic care, low premiums or relatively low risk. The next year, for the Aged Blind and Disabled patients, more complex, fewer in number. The next year, getting even smaller for the Duals, and the cast on long-term care.
While you may not realize it, we have been talking about and planning for the implementation of the Duals for many, many years. And it's no coincidence that we're in the states that we're in. Florida, Texas and California are the 3 states that stand to grow the most because of the Affordable Care Act, with inclusion of the uninsured into Medicaid. And they also happen to be states with larger number of Duals. In fact, there are roughly 9 million Duals in the United States and about 1.2 million of them live in California. Florida is also a big state for the Duals. So we have been -- we've had a strategy. The board revisits that strategy every year and we revise it every 3 years. We've been executing against that strategy.
This shows our enrollment growth from third quarter of 2007 to the third quarter of 2011. And we've had pretty good growth in most of the states. You'll see that the Missouri, Wisconsin and Florida don't show a growth because they're too new. They weren't around back then. But the growth ranges from 3% in Michigan, up to almost 400% in Texas. And growth has been an important part of our strategic plan, but so is quality. So along the way, we've made sure that all of the health plans have achieved NCQA accreditation. And with the exception of Wisconsin, all of our health plans now have been accredited by NCQA and we expect in the near future that Wisconsin will be accredited as well.
For our company, it's become table stakes. All the health plans must be accredited, that's a given. And what I want to tell you now is that we're going to be raising the bar on that. Because we're expecting our health plans now to do more than just be accredited, we want to see improvement in their HEDIS scores and improvement satisfaction. And over the next couple of years, we're going to be making a real effort to get closer to our members and better understand their needs and their desires.
This slide shows you data from third quarter of 2010 compared to the third quarter of 2011. Enrollment's been growing, enrollment is up over that period about 5%. Revenue is up 15% in the same period, reflecting growth in the ABD population which comes with higher per-member per-month premiums. EBITDA is up 32%, reflecting the improvement in profitability from 2010 to 2011, and net income is up 44%.
Here you see our earnings per share, on a fully [ph] adjusted basis beginning 2007 at $1.35, which coincidentally is where we find ourselves at the end of the third quarter of 2011. And I'm overall happy with the earnings. They haven't grown as much on EPS basis as we would have liked, but it think it's important to reflect on what our real goal is. And for me, the real goal of this company is sustained growth and sustained profitability over the long term.
I'm a large shareholder, so I take a long-term view. And I don't think you measure the success of a health plan in quarter-to-quarter earnings or even year-over-year. Molina Healthcare is entering its fourth decade in serving vulnerable populations served by government programs. So for, me long-term sustainability of growth and profitability is what really matters.
The company is well positioned for growth. And in fact, people have asked me lately, what are my big concerns? My big concern right now is how do we position ourselves for the growth that we're going to see in 2013 and 2014. We've had some good contract wins and we gained some contracts and we've been able to leverage our Special Need Plans. We now have over 30,000 Medicare beneficiaries, starting with 0 a few years ago, and that's all been organic growth.
We're investing company-owned direct delivery. And I'm going to talk more about that later, but we're one of the few companies that really, I think, has ability to go out and serve vulnerable populations and put clinics in areas where there are physician shortages to make sure that those of us, some of our members who are less fortunate than those of us in this room will continue to have access to physicians.
And we're investing in a corporate infrastructure for that growth. We put a new data center in New Mexico. We've got adequate capacity for our systems to grow in New Mexico. We recently purchased the corporate office building in Long Beach. We occupy about 40% of that building, but it gives us more room to grow, and over the next 2 years as you're going to see, we're going to need space.
This shows you the growth in spending and the growth in enrollments in the Medicaid program beginning in 1998. And what you see is it reached a nadir in 2007, it's been growing ever since, especially during the recession. In the last couple of years, it's grown by 8.5% and last year, membership grew by 5.5%. So the Medicaid program, the number of Medicaid beneficiaries continues to growth. It's slowing down a little bit, but notice, it's projected to grow at the rate of 4.1% in 2012.
The other line, the lighter blue line, is total spending. And as you can see, total spending growth beginning about 2009 has been about the same as the growth in enrollment. So what that tells us is that the growth in the Medicaid budget right now is not coming so much from rate increases or increasing payments to providers or even increase in spending. It's really being driven by increasing numbers of beneficiaries.
Well, this creates a problem for states and we've talked about this in the past too. A couple of years ago, we predicted that premium rates would be negative. And we were wrong. We were wrong because the administration bailed out the states by increasing the federal match. But that federal match is now gone, the augmented federal match. And you see in the light pink bars, the deficits, slightly darker pink for 2012, estimated state budget deficits of over $100 million. While that's better than 2010 and better than 2011, without that augmented federal match, states are scrambling to fill the hole, and it's not going to go away right away. Fiscal year '13 still shows the predicted budget deficit. The result of that is that in 2011, we saw rate cuts in 6 of our states. And in 2012 you can see, that only 9 states are projecting managed care rate increases and 19 are projecting managed care rate decreases.
So the rate decreases that we talked about a couple of years ago are here. They were offset by about 2 years because of the increase in the federal match. But this has important implications for us, both in terms of revenue and growth.
We've talked a lot in the past as have many people about the Affordable Care Act and what that's going to do to Medicaid programs and for us. I want to turn to something that's a little more near term, and that's what's going to happen between now and 2014 when the Affordable Care Act is implemented. And I want to take you into the head of 2 of our customers. One is the fellow who runs the Medicaid Health Plan agencies for the state. What's going through his head? Well, he knows that there's a coming and growing primary care shortage. State regulators are looking more and more towards quality and pay-for-performance. They want to be able to demonstrate that for the enormous amount of money states are paying for the Medicaid program, that they're getting value for those dollars. They're concerned about care management. We're going to see more RFPs coming out. Ohio is issuing an RFP, Georgia is issuing an RFP and more and more of the Aged, Blind and Disabled are being integrated into managed-care programs. They're leaving fee-for-service and being put in to managed care, which makes a lot of sense because these are the patients that can benefit the most from coordinated care.
And finally, the dual eligible integration. This is something that's probably been talked about since the mid-1970s. I can remember when I was a young man and I worked at Scan for a time. And we were talking about it back then and that was probably 1976 or 1977. Well, it's finally here. The federal government has pilot projects and there is a move to integrate the funding for the Duals to combine the Medicaid and the Medicare and place the Duals into managed care plans so that care can be coordinated.
On the other side are the state administrators who run the fiscal agent contracts. These contracts provide business processes that are outsourced to vendors by the states. What's going through this fellow's mind? Well, new fraud and abuse requirements. There's been a lot of talk about that and now we're starting to develop computer systems that will help states to monitor and combat fraud and abuse.
Electronic health records. Electronic health records will help us combat fraud and abuse and will also help us better manage patients. But the systems have to be integrated and they have to talk to one another.
Health information exchanges. While the fiscal agent may not run the exchange, again, there has to be interaction between the systems. And then you've got HIPAA 5010 which is coming and ICD-10 which is coming. Both are going to be huge issues for state computer systems. We at Molina have solutions for these problems. Our health plans operate Medicaid and Medicare. We have a Special Needs Plan in 8 of our 10 states. So we are well positioned to help states deal with these dual integration issues.
On the fiscal agent side, we have a system and health path that was recently certified by the state of Maine. That same system has been reviewed for the state of Idaho and we expect certification on that shortly. It can handle things like ICD-10. It can handle the HIPAA 5010 requirements. So it is a solution. It's available now in a quasi off-the-shelf kind of production. Unlike most of the fiscal agents, our software can be installed quickly and customized to meet a states needs. Most of the other systems are custom built and they take years, anywhere from 2 to 6 years to install.
And we're building out our direct delivery capacity.
We started talking seriously about the Duals last year to introduce this concept because we knew this was coming. And as I mentioned, there are nearly 9 million Medicaid beneficiaries who are Duals. People who are eligible for both Medicare and Medicaid. They're low income seniors and younger persons with disabilities. In fact, if you look at our Special Needs Plan membership, their average age is around 47. If you look at a Medicare plan, their average age is in the 70s. If you look at the Medicare plan, the average beneficiary has one chronic condition. If you look at a Dual, they have 4 to 5. They are sicker patients. They are the most costly patients for the states and for the federal government, bar none.
And while Duals account for only 15% of the overall Medicaid population, they contribute about 40% of Medicaid spending. Medicaid and Medicare spending averages $20,000 per dual beneficiary, roughly 5x where other Medicare beneficiaries cost. And the dual-eligible population is probably the population that will benefit the most from managed care. And I got a slide here later on that will show you which is a very dramatic illustration of what happens when you take the dual population with their complex needs, the fragmented delivery system and the fragmented government programs and combine them, what you can achieve.
As you can see, at the end of 2011, we reached 31,000 members in our Medicare plan, 27,000 of them are Duals. And you can see that our special needs plan grew from 18,000 to 27,000 in the course of the year. And this just sort of reiterates those points that shows you how the Medicare revenue has grown. In 2010, our Medicare revenue was $265 million. At the end of the third quarter of 2011, it was already $282 million. Back in 2008, our Medicare revenue was 3%. Now, with roughly 2% of our enrollment in Medicare, Medicare enrollment accounts for 8% of revenues. And Molina Healthcare's Medicare Plan is the eighth largest Special Needs Plan in the country.
We continue to grow. Our growth has been slow and steady. It's been all organic. It hasn't been through acquisitions. We have been through audits successfully, and I think that we are well positioned to help the states and the federal government with this dual eligible integration.
To put these opportunities in perspective, on this next slide, you see the dual eligible spending in Michigan for 234,000 Duals, it's almost $8 billion. If we combine recent RFPs for the Medicaid program in Louisiana, Kentucky, Hawaii and New Hampshire, you can see that, that's about $9.2 billion. And in fact, this is a little bit of an underestimate because the New Hampshire number is for 1 year not 2. If for 2 years, this will be a little over $10 billion. So 4 RFPs in 4 states, revenue opportunity of a little over $10 billion. In Michigan, a state where we currently operate, the opportunity for the Duals almost equals that. And that's why we have been very selective about the RFPs that we have been responding to.
Now the concept of global integration is a confusing one, so we tried to simplify it a little bit. There are 15 states in the country that have received a $1 million grant from the federal government to work on dual integration. But what I want you to notice about that map is that there are a number of other states on there as well that have submitted letters of intent or interest to the federal government saying that they also want to integrated the Duals even though they didn't get a planning grant. So let's talk about what that looks like.
In some states, we have dual members who are in our health plan and receiving their Medicaid benefits through our health plan, but their Medicare benefits are still received on a fee-for-service basis.
In other states, we have dual eligibles who are enrolled in our Special Needs Plan, who are getting their Medicare benefits through a health plan but their Medicaid benefits may be for fee-for-service. The goal of this integrations is to combine those funding streams into one so the patient will receive their Medicare and their Medicaid benefits with a single card from a single health plan. It will streamline and will put the burden of coordination on us, and it will take it away from the patients.
This is from a recent study that was done looking at Duals who are high utilizers. And you can see in the high-utilizing uncoordinated care patients, the spending was around $15,000 a year. When these patients were placed in coordinated care systems, the spending fell to an average $3,116, that's a dramatic improvement. There's a lot of duplication. There's a lot of waste out there. The right hand doesn't know what the left is doing, and that's why we need to coordinate these services and bring it under the umbrella of a single organization who will take responsibility for coordinating the care of these patients.
Now as George used to say, our roots are in the clinics. 31 years ago, we began with a single clinic in Southern California. We now operate a number of clinics in Northern and Southern California, in Washington and in Virginia. So the question is, why build clinics at all? Why are we expanding our clinics?
Well, first, it's to augment our network in areas where providers are scarce. And there was a study done in the New England Journal of Medicine which Steve Odel likes to talk that looked at provider scarcity. But it was on a very macro level. You really have to look at networks on a small scale. You have to look at neighborhoods. You have to look at census tracks. You can't just look at the state and say, oh, there are plenty of doctors. There are plenty of doctors but they're often in the wrong place and they often don't take Medicaid patients or they don't want to deal with Duals. And so it's important for us to put clinics in areas where we see a need.
We want to supplement our provider network. We have found that our clinics produce better scores in things like HEDIS and better quality outcomes. And as states continue to cut rates, it's going to be more difficult to find providers who are willing to accept Medicaid patients and there are certain benefits of scale. Our clinics do large volumes of similar patients. And so we benefit in that way.
It nurtures patient loyalty. We did some focus groups, and it was startling to listen to patients who have been on plan for 7, 8, 9, 10 years. We had one woman who selected the plan because she had been on the plan as a child. And now that she was a young mother, she selected us to be her providers for herself and her family. It helps to build brand awareness. So the question then, if they do these great things, why not build more?
One of my favorite quotes comes from John Wooden, famous basketball coach at UCLA. And John Wooden said, if you don't have time to do it right, when will you have time to do it over? So the last bullet point out here I think is one of the most important. It's important to do it right. And other organizations that have tried expand quickly into provider space have had difficulty, they have failed. We want to do it right from the beginning, which means that we will grow slowly. We're going to augment, not replace our provider network because we don't want to be perceived as competing with the primary care doctors who have been serving our patients and have been loyal to our plan for years.
It's important to identify the right locations. It's not as easy as it sounds. You've got to be the right place for the patients to access. And we've got to hire the right doctors. It's important, to the extent we can, to get bilingual physicians, nurse practitioners and PAs. But more important than that, these people who share our commitment to serving this population. And I think that as a mission-driven company, what you see over and over again is the people who come to us and stay with us are people who believe in the mission, and that's what we want.
As we grow, we're looking at big growth in 2013 and 2014. It's going to be important for us to hire people and train people, but it's going to be important to hire and train the right people who share our philosophy and mission. So on this slide, it shows you some of the places where we'll be expanding over the course of the next year. We have 4 plans that we plan the -- 4 locations we plan to open up in California, Utah, New Mexico, Texas, Florida and Ohio. And while it's not on here, the county in Virginia has also been talking to us about opening another clinic there as well. So we have 15 perhaps as many as 17 new clinics opening in 2012.
In some respect, it sounds like a lot because it's a lot of work to build and hire and equip those clinics. On the other hand, it's relatively slow growth when you look at what you can do with acquisitions. But I think it's important to do it right because this is a specific population with specific needs. And you can't take a commercial medical group and convert it into a Medicaid group.
What are some of the features about our direct delivery that make it special? One of the things that I think is really unique is our ability to dispense medications in the office. There was a survey done and roughly 31% of patients did not get their prescriptions filled. That's a real problem, because if you don't get your prescription filled, you end up in the emergency room or you end up in the hospital. Or you have to make another visit.
So to the extent that we can get people the medications they need in their hands when they leave the office, we improve compliance and we improve outcomes. We have these InstaMed machines, like a giant vending machine, and you can store medications in there. But the offices are now moving to computerized electronic medical records. The doctor can enter the prescription, it's transferred electronically, the machine fills the prescription and dispenses the medication to the patients as they leave the clinic. We're putting these in and it's been tremendously successful.
Now it's not going to replace our pharmacies in our network. These are for certain acute medications. So if your child has an infection, like an ear infection, we want that child to leave with the antibiotics. So they typically have about maybe 50 drugs in them. Commonly prescribed things that our doctors use and that we want the patients to get right away and get started on.
Transportation is a problem of Medicaid patients and it seems to be getting worse. So we have begun operating shuttle service. Now our shuttle service is a little bit different than a van or a taxi. It doesn't take you from point A to point B. It has a route. We have done this to integrate ourselves into the community. So we go to community centers, we go to the grocery store, we go to the laundromat, we go to the hospital, we go to the clinic. So it makes it more valuable for the patients than just a shuttle that goes from a particular point in the community like their home or community center to the clinic. And it's been very successful, we have 2 and we're looking at starting up a third.
What do these clinics look like? I don't think any of you have ever been in one of our clinics. They're small. They're meant to be like community positioned offices. They're not meant to be large medical centers. They're in the neighborhood of 4,000 square feet, although we are starting to build some larger centers because as we get into the Duals, we want to have some places where seniors can come and be evaluated, maybe get their meals, things like that. So some of them will be a little larger in the future to accommodate the seniors.
They have a handful of employees, 1 or 2 doctors. It's really meant to be like a community doctors office. We don't have laboratory work except for a few simple things like urinalysis and a few simple blood tests. We don't do x-rays in the office. These are things that we find not a lot of use for in a typical primary care office. We're not going to have orthopedics, so we don't need the x-rays. We don't have specialty services, although in some of the offices I think in the future we'll be incorporating obstetrics and maybe some things like dermatology.
Somebody asked me before I did the presentation, "How are you going to handle this growth?" Well, a big part of what we're doing in 2013 is building infrastructure to handle the growth. One of the things we did is we acquired a corporate office building from the Sweet family, formerly known as the Arco Towers. They're 2 14-story towers that are connected, about 460,000 square feet. It's a Class A building in downtown Long Beach. It's a very nice building. We bought it for $81 million. We initially announced the price of $83 million, it actually came in a little less than that.
As I mentioned, we already occupy 40% of this facility, but it gives us room to grow without having to spread out. We can keep people in one place and we really are committed to keeping our people together in downtown Long Beach. And we took advantage of a good real estate market. A similar building, built by one of our competitors cost roughly twice this much. So we think this was real bargain.
And I just want to kind of give a little summary. These are some areas that in recent days have people have been asking about. RFP pipeline and retention of existing business. We had some big wins in Texas you'll see that, that's going to be an area of tremendous growth for us in 2012. We successfully competed for the Washington contract. And we will be selective, as I mentioned, in looking at RFPs in the future. We're not going to apply for every RFP that comes out. We established a presence in key growth states, California, Florida and Texas. The fiscal agent business continues to stabilize. Maine has been certified. Idaho will be shortly. And we've got $40 million in up-sells to those contracts from additional services that we will provide under those contracts.
Patient mix. You've seen that we're moving towards a more complex patient population. It also comes with higher premiums, revenues are going up as we get more Aged, Blind and Disabled and more patients in our Special Needs Plan. Carve-ins of Ohio and Texas pharmacy benefits will increase revenues. And medical cost reduction plans are taking hold in Florida and Texas, and you'll hear more about that from Terry. We've rightsized our credit facility, $170 million and John is going to talk about, maybe it's Joe. Joe? You're going to hear about your credit facility later. And our subsidiaries are well capitalized as you'll see from Joe's presentation. Juan José?
Juan José Orellana
Okay, we'll go ahead and take some questions from the audience for Dr. Molina.
Yes, I was intrigued by your Slide 19, the cost of uncoordinated care, because it look like an unbelievably big drop between the uncoordinated and the coordinated care plans going down from $15,000 to $3,000. And the $15,000 figure was less than the average cost for the Duals. So I was just trying to understand that slide better. Are you suggesting that this is how much savings per member on average you could achieve as a company? Or does this include a shift in payment from Medicaid, for example, to Medicare. So does some of this shift reflect Medicare?
Joseph Mario Molina
No. This is not our study. These are not our patients. This is an independent group that did this study. I'm not saying that in every case, you're going to see these kinds of savings. The point that I wanted to make was that when you take a complex population with multiple chronic diseases; diabetes, hypertension, renal failure, arthritis, who are seeing multiple specialists, visiting multiple emergency rooms, getting duplicate prescriptions and having unnecessary hospitalizations, there's tremendous opportunity for improvement. And people have known about this for a long time. It's just finally gotten to the point where people in Washington now recognize that if we're going to control the budget deficit, we've got to control healthcare spending. And it's not really going to be through the Affordable Care Act that we control spending, it's going to be by attacking entitlement programs like Medicare and Medicaid and bringing down unnecessary costs.
One of the things that our father used to say is always err on the side of the patient. We do want to reduce medical costs, but we don't want to do it in a way that's going to hurt anyone. So we will bring down cost but I don't want to see people denied medically appropriate services. What we want to do is remove the duplication, the unnecessary testing, the duplicate prescriptions, the unfilled prescriptions which leads to emergency room visits and so forth.
Quality care saves money and this is a very compelling example. But when you take to an aggregate level, can you give us a sense for the lives that you have, about what percent have you been able to save on the medical cost? And where are some of the places that these cost savings come from?
Joseph Mario Molina
I'm not sure I can give you a number but I can tell you where some of the cost savings come from: number one, is by reducing emergency room visits; number two, is by coordinating pharmacy benefits; and number three, I would say is high-cost radiology services, many which are unnecessary or that are duplicated. I mean, I told you, the right hand doesn't know what the left is doing often. A patient will see one specialist who will order test. That patient independently has seen another doctor who is ordering tests. There is an incentive in the Medicare program to hospitalized patients. Patients go from nursing homes to hospitals and back. They're shuttled back and forth for really economic reasons that could be curtailed or decreased. Home visits. It's amazing what you're [indiscernible] when you visit someone's home. And I've told this story many times but I'll tell it again. It's one of my favorites. Years ago in Michigan, we provided a wheelchair for a patient, an electric wheelchair. It cost about $4,000, but we did it. Two weeks later, we get a call, patient needs a second wheelchair. What? It's only been 2 weeks, what happened? Well the wheelchair is on the porch, it doesn't fit through the front door, so I need an indoor wheelchair and an outdoor wheelchair. What we learned is before you give someone a $4,000 electric wheelchair, you go out to the house and you make sure that it can fit through the door and if there's a ramp and it's going to meet the patient's needs. And with the ABDs and the Duals, we are doing a lot of in-home visits to figure out what they need, what their problems are and how we can be helpful.
Quick question on the clinic build out. I was just curious on the [indiscernible} with the 3 in Ohio with that being re-procured. Is that just a confidence in your ability in the re-procurement or it just struck me a little bit.
Joseph Mario Molina
It is. I think I would feel rather foolish if we built 3 clinics and didn't get a contract. On the other hand, those clinics are going to be in the eastern part of the state where there's a real need. And we think it will be a valuable addition to the network.
Also on the clinics, as you guys spend money in build these out across your various markets, do you have a sense in mind or maybe a longer-term number in terms of how much medical expense of Molina's you'd like flowing through that at the end of the day? Or is it more just kind of what's -- kind of do what's right for the population at this point in time?
Joseph Mario Molina
We don't have a target number. I think it's really more about looking where the needs are, talking to the people in the plans, where are the gaps, where are they having trouble finding providers. When we looked at Ohio, the initial thought was to put it in the Columbus area. A lot of patients in Columbus. It turned out the real need was in Cincinnati. And so that's why we're building there rather than in Columbus, Ohio. It really reflects the needs and the network.
I was wondering if you can give us some context on how to think about the IT side of the business. Because it seems like you have line insight to at least double your top line over the next few years in these businesses, in the core businesses. How much importance should we be placing on it? I mean, it almost seems like it's going to be inconsequential in terms of everything else going on, so I wonder how -- we want to know how your team came about it strategically?
Joseph Mario Molina
What I would say was a few years ago, our Medicare business was inconsequential. It's now approaching 10% of revenues. I think that this is important from a strategic standpoint in terms of diversifying our revenue stream by staying close to the customer, which is the Medicaid agency that we know best and leveraging our capabilities. So it's kind of a synergistic diversification. You wouldn't put it in a context that's going -- you wouldn't need to be all that relevant in terms of the earnings -- the other earnings opportunities we're talking about, though.
Joseph Mario Molina
I think it will provide some stability in earnings. It's not going to give you as much top line growth as the health plan business. But because it comes with higher margins, it will disproportionally contribute to earnings.
Can you see it, though? I mean is it going to even get its way to being -- the options you laid out, we're talking doubles, triples or something like that. I mean, it wouldn't even be -- you're getting to that level, it's not going to be 5% of earnings when you're looking on that.
The challenge with that is with the implementation of the Duals, that's just such a big financial game changer. And it's going to be hard for that business to really grow to 10% of revenue because the Duals is just going to be so big. It does provide us with, as Mario said, some diversification and also provides [indiscernible] with a potential avenue to take care of the Duals in those states that don't go capitated managed care. There's really 2 models out there that CMS is talking about: One is the capitated model, which is where health plans come into play, but CMS is also talking about what they're calling managed fee-for-service model. Now in states like Maine, Idaho, Wyoming, we're really not going to have health plans or providers who want to take risk on this. That's where we can access that because we are already working with the states. They know us, they know our capabilities to administer the program. What we would be doing is wrapping that around with care management services. So that gives us another way to serve the state that we're already in. It's a nice add-on.
Is there an exchange opportunity though on this also? In terms of if we start looking at exchanges that you can keep out those kinds of opportunities in that business?
Joseph Mario Molina
We're not thinking about operating exchanges, if that's what you mean.
Even on the Medicaid side of it?
Joseph Mario Molina
Well, I think that if Medicaid beneficiaries go into the exchanges, we want to be there as a health plan provider, not as an IT vendor.
Thanks. Of the states that have submitted LOIs to CMS for dual integration but didn't actually get CMS grants, I count several where you guys already have operations. Can you just, I guess, just give us an update on how those discussions, if any, are progressing? Are those states further -- much further behind than the other ones that actually received grants?
Joseph Mario Molina
The states that are probably just -- that are working on this the most that did not get a grant, I believe Ohio is. They had a lot of discussions in the legislature about a program for the Duals.
Florida is another one. I think those are 2 that are the farthest.
Just again on the Duals. Obviously of the 15 states that everybody is focused on. But can you help us better understand sort of when the rubber is going to meet the road here? When is this going to -- and I know it's going to evolve over time, but when we'll we actually see large chunks of this revenue come into the system? I mean, it's clear that it's a massive revenue opportunity over time, but is it a 2014 event, 2015 event?
Joseph Mario Molina
Well, we're going to continue to try to grow special needs plan this year. And as you've seen, we've had reasonable success. I think the large scale growth will come in 2013, in places like California and Michigan. And the way this was going to roll out, I believe, based on what I know about the plans coming out of CMS, is they will integrate the funding for the Duals; that the contractors will be selected by the state agencies, not by the federal government. So basically, they'll have to run this and they're going to look for people that have experience in doing this that are well capitalized, that have been audited and then there will be an opt-out provision. So beneficiaries will be passively enrolled with the ability to opt-out to fee-for-services if they choose. Some will, but we think that many of them will not. And based on our experiences with the Duals, once you get them into a coordinated care system, most of them are pretty happy because they're now getting services they didn't get before and they have assistance. When you're Dual, there is no one to call for help. You need to call Sacramento and you're not going to get any help from Sacramento. It's just not there.
So California is a good example. Have you seen any change in the competitive dynamics given the 2013 is really right around the corner, obviously. So have you seen people, nontraditional sort of Medicaid players increasing their infrastructure, sort of laying the groundwork to participate in this that -- again sort of non-traditional new entrants that you would say, okay, this guy is creeping up. He hasn't normally been in sort of our competitive landscape here?
Joseph Mario Molina
No. What I see is the more traditional Medicaid providers are scrambling to figure out how they are going to fit into this. Some of them are embracing it, some of them are afraid of it. I think the fact that we've been doing this for 5 or 6 years on the SNP side helps us a lot because we have built systems. And it's been a slow, painful process at times but I think that it will turn out to have been a good investment.
Let me add to that, Chris. As Mario said, it's the Medicaid agency that's going to be selecting the plans. And so for a new entrant that's not familiar with the Medicaid agency and they're not familiar with the new entrant, it's going to be tough.
Joseph Mario Molina
Yes. I mean, in California, there were a number of hearings and one of the things the state said is, they're not going to contract with someone who's not an existing Medicaid contract in California. And that's just the way it is. Because there were groups that wanted to get in, the state said no.
Dr. Molina, you started answering my question a moment ago and I was curious if you could venture a guess for what the participation rate might ultimately be, in terms of the opt-out provisions? Maybe based on some of your experiences. I can't recall if the WMIP program in Washington was some sort of opt-out. And then a second question, how much of the benefits or the dollars do you think will be carved in to these programs versus what might be left out in fee-for-service?
Joseph Mario Molina
Well, I really can't give you much of an answer as to what the opt-out is going to be like. We're seeing good retention on our Duals, so I don't think it's going to be large. But I can't give you a specific number. And again because we don't really have a lot of opt-out. A lot of our people right now are voluntary enrollees. On the -- in California, the ABDs are being enrolled and I think some of the Duals -- California or one of the states is converting their Duals too. So I mean, we'll have some more information over the course this next year.
In terms of the benefits, we've always pushed to have as many benefits included as possible. The more that we can coordinate care, the easier it is for us, the better it is for the patient. Behavioral health is a classic example. It's very difficult, especially with the Duals to deal with another vendor who is managing behavioral health, and so we have been moving to bring our behavioral health in-house. The same is true with pharmacy benefits. Pharmacy benefits are a big part of the Duals' care and you've got to have control of those pharmacy benefits so you can adequately manage the patient.
My sense is that caring for the Duals is going to have to be a lot more proactive, so in-home assessments, things like that. Could you give us a sense -- if California said this afternoon, we're going to give you 25,000 Duals, how long would it take you to get a case manager into their house, and then secondarily -- so how do you build that capacity? Is this something you do internally or is that something you can contract with?
Joseph Mario Molina
That's a really good question, and actually maybe Terry you can talk about that because this is exactly what's happening in Texas. And maybe when you talk about Texas, you can talk about that Terry because we are in the process of trying to get people in and the State kind of assumes that you flip a switch and you put the Duals in there and everything happens overnight. It takes time. You can only visit so many people per day and we can hire more nurses, but again, it does take time. You want to comment, Terry?
Terry P. Bayer
I will talk about it when I talk about Texas, but the quick answer is, in Texas we have a requirement for getting these in-home assessments done. So it's a combination of telephonic support, getting community health workers and extenders in, getting nurses in, bringing resources from around the company and having backup contractors as needed. So it's a challenge, but we're doing it now for Texas.
Joseph Mario Molina
Okay. Any other questions? Because we're running short on time, I will not be telling you all a joke today, but I did notice those who are always in the back room, you can see me after the meeting.
Juan José Orellana
So next, we'll hear from Terry Bayer. We'll go ahead and take a break after Terry's section to give you enough time to prep for Joe's presentation.
Terry P. Bayer
Good afternoon. Nice to see you all in New York. Let me give you an overview of what I'm going to discuss. I know -- kind of frame the discussion because I've got a wide kind of range here of topics. The first thing I'm going to do is highlight some of the key health plans, I know you have tremendous interest in this. We do this at every Investor Day. Today, we'll be talking about: Florida in terms of our profitability improvement; Texas in terms of our profitability improvement plans and our expansion; Ohio, a little bit about the RFA that was released that we are responding to; and then Washington, where I know you have tremendous interest and we will apprise you of our current status of being a successful bidder and what next steps are there. And then I'm going to switch and build on what Dr. Molina has been talking about, and be more specific about the dual eligible opportunity. I can share with you information where we have been actively involved and things are proceeding in both Michigan and California as 2 examples. And then I'm going to mention briefly the carve-in trend. Again, we started to talk about that a moment ago in terms of our desire to have responsibility for as many of the services as possible. And we see states carving out and then carving back in, in pharmacy, in-patient, behavioral and areas like these. And finally, I will wrap up with some comments about the MMS business. Again, of some interest to you, and our status of certification in Maine.
So let's start with Florida, and I'm pleased to be in front of you. I used to talk about problems in Ohio and then I had the pleasure of showing you how our discipline and programs worked to turn around that profitability, similarly for California. And now, here we are in Florida. So over time, we've had a challenge in Florida. As Joe often walks you through a slide that talks about startups, small health plans, getting into business when you don't have as much market power on the network, and we often -- it takes a while for us to hit our stride and really start to deliver consistent results.
So for the last few years in Florida, although we've been growing and you see we grew by the end of the third quarter to 67,000 members. You see in 2009 and 2010, you're familiar with a medical cost ratio that was not acceptable. I'm very pleased to show you that for the third quarter of 2011, we have brought that down. So let's talk about why and I think this gets to some of the earlier comments. When you ask the question about how will you coordinate care? How will you make a difference for the dual eligibles?
Let's start out by thinking about applying the same principles that we've been applying in the Managed Care business and our other -- for our other populations. We're going to heighten our activity because these are more complex patients and we'll have a larger degree of care coordination. But I have a very simple story and I tell it to you over and over. Our business is not that complicated. Our medical costs are driven by the unit costs we pay and utilization improvement. Florida is a good example. The team did a fantastic job reducing their unit costs in lab, in pharmacy, in behavioral health and on their inpatient costs. And with disciplined effort, renegotiation of contracts, direction of services, they've really made a significant dent in their MCR. But it's not unit cost alone, the utilization, management efforts that they had to reduce inpatient admissions and to pay much closer attention, the Rx reductions we've seen had primarily come from doing a better job managing complex patients with high pharmacy costs. So this team has again done a really good job in Florida
Now alone, without support of the right rate, it's tough to make it work as well. So we also pride ourselves on the relationship we can develop with the state and with the state actuaries to bring data, to help them understand what the cost trends really are in the market, and we did receive a rate increase in September for Florida. So what you will see now going forward is the positive impact of all of these legs of the stool. So that's my basic lesson as I go to the states. It's not much of a different story, it may be more of behavioral health cost containment in one state or more emphasis on pharmacy or inpatient. The contract may be tougher in one area or another, but each of our local teams takes a comprehensive approach to managing their medical cost.
So on that, let's go to Texas, and Texas has a couple of themes. First, as a smaller health plan in our system, as a startup in the early years, not really growing much. Last year, in February, we had a significant increase in enrollment that came from our expansion in the Dallas service area, in taking on the STAR+PLUS members. And again, along Joe's theme, when you get a new population, when you're getting your sea legs really and managing it, costs can be high. So for most of 2011, we've been carefully monitoring and struggling to really understand and improve our profitability in Texas. So not only is the plan in place, the activity is underway. Again, similarly, as in Florida. Dallas is a new service area, required getting a good understanding of the cost drivers in that market, what was really driving rates and seeking appropriate ratings from the state.
Now the care coordination comes into play, and I just gave you an answer about the new service areas, but the same thing applied in the Dallas service area. We acquired 15,000 Aged, Blind and Disabled members in the STAR+PLUS program in February 2011, and were given 90 days to do a health risk assessment, getting out to the member's home and revalidating services that they are receiving, including their home care services. So our experience this year in the Texas market has proved very valuable as we plan for an expansion that is even larger in service areas coming up in March. The utilization management program in Texas has been underway, but if you recall, we have not had financial responsibility for inpatient care.
In March 2012, responsibility for inpatient and pharmacy will come in and this will be a driver of the revenue uptick in 2012 that you'll hear more about later as well. We took a look at our unit cost contracting. Again, same principles: utilization, unit costs, rates. Very important that we have our arms around the profitability in Texas because it's not very helpful to go through tremendous growth if you don't have a good understanding of your cost structure. So as we look ahead to March, I will just review for you what we shared with you at the last Investor Day because we had news of our win in Texas at that time.
If you look at the map, yellow is our existing Molina footprint. So those are our service areas in Dallas, San Antonio, Houston and the Rural Service Area. Remember we had significant membership in the rural areas of the state. The blue are the new service areas. They're primarily the greater El Paso area, what is referred to as Hidalgo Service Area. You'll also hear us refer to it as the Rio Grande or the Valley. This is an area in Texas that has not had managed care. So the early stages, when you're going into a market similar in Ohio that had not had managed care for a number of years, it will take a while for us to get our arms around the patient needs, the provider network, et cetera. This is a big commitment on the part of the State of Texas, for us and the other managed care companies that are going in. And third, the Jefferson service area. Now because the products also vary in Texas, it gets a little more complicated. You see that it's STAR and STAR+PLUS in El Paso and Hidalgo and then the CHIP program added on in the Jefferson Service Area.
So we're gearing up for March. We have done a lot of hiring. To Carl's earlier question, we are early embedded in detailed operating plans so that we can hit all these new service areas at once, while maintaining our existing business and getting the staff out. Now the interesting thing for us, as you heard Dr. Mario discuss as well, we want to be closer to our patients. So while the state might have a requirement for you to get out and do an assessment, we don't see it as simply a regulatory requirement. It's our opportunity to get in front of the patient and get in the home and really do a good job of understanding their needs. Our care model is, over time, the home care workers and the skilled nursing visits that occur for that patient in the home are just an extension of our care team.
So our philosophy has really migrated to more of a high touch, more in front of the patient and less telephonic intervention. And again, this is a theme you will hear from us, and we think it is a critical difference in taking care of the more complex patients. So that's Texas.
Now we'll go to Ohio. Because we've had improved financial performance for a while, I don't have to spend as much time on that. But we've had, again, a very good year in Ohio. And for those of you who've been around a few years, it wasn't always that way. I had the opportunity to come up in front of you and talk about Ohio as I talked about Florida today. Keep in mind, results in Ohio have been complemented by a rate increase that's in effect throughout 2011. Our utilization management effort and care coordination efforts continue and we continue to renegotiate our contracts. I'm often asked the question, is there a certain date when the unit cost contracting results kick in? And I always answer it the same way: We are on an ongoing basis evaluating our unit cost, on an ongoing basis looking at various vendors. And I think Ohio is an example where we suffered from very high unit cost when we first entered the market on the inpatient side with the hospitals. Understandably, they weren't that happy about managed care coming in, there'd been a period of time without managed care and we had to pay the cost of entry, like we had to get our ticket to the dance before we could really manage that piece of it.
And with a long-term strategy over yearly renegotiations, we've been able to have our cost much more in line. So that is an ongoing project for the teams in the field. The good news is, we have a very solid foundation in Ohio. So as we are trying to build up in Texas to take on the influx of new enrollment, our Ohio foundation should hold us in very good stead to be successful in the new re-procurement. I'm going to talk a little bit more about that. That re-procurement has been released and there is a new population, although we have cared for the Aged, Blind and Disabled, the children now will be included.
So here's more detail on specifically what the Ohio proposal looks like. It's a complete statewide rebid. All populations and now an expansion of ABD. The estimation of the entire value of the statewide program is $5.1 billion. The implementation date for this is January 1, 2013. So you're beginning to get the theme of how busy 2012 will be for us, as I continue to go through my deck. The way it breaks down, $1.5 million for what Ohio calls they're TANF program, covered families and children, 125,000 in the ABD program and 37,000 children with disabilities. These are statewide numbers. Bringing the children into managed care, again, is a change for Ohio.
So you also see here the theme of how the states are migrating to moving the sicker patients in. Often, groups have been excluded because they've been a challenge to move into managed care. There's been resistance from advocacy groups, from patients and from providers. But the cost pressures that the states find themselves under in terms of their budgets and the importance of the healthcare expenditure in meeting -- in addressing in terms of meeting their budgets has really forced states to be more aggressive in moving populations in.
I'm going to have a map for you in a moment, but there has been a change in Ohio where they have divided the state into 3 distinct service areas. I'll give you that in a moment. The bids are due March 19. It is not a rate bid. Washington had a strong rate component to it. In this case, 60% of the bid is going to be driven by other factors. So here's to give you a visual now of what I just reviewed with you. On the left, the multicolored map, is the Ohio managed care program today. There are 8 regions. The middle map is our current Molina Service Area, so it's all blue. We are in 4 of the 8 service areas. So we operate in the Central region, the West Central region, the Southwest region and the East Central -- I'm sorry, Southeast.
If you look at -- you can see how they've now carved the map, but we have significant coverage moving from 3 service areas to 8. So now look at the right, and this is the way the new regions work. So new for us is in the northwest area part and the northeast part of the state. That gives you an idea, and we will be looking on a statewide program.
Now finally, let me close this section that's more state specific with Washington, and what I'm prepared to do is share with you what we know today because these results came out last week and there are follow-up meetings. We're only in a position to share with you what we know and have been formally told by the state, but this will give you an idea of the process.
The RFP results were announced on January 17, and 5 health plans, and I'm using the state language here, apparently successful bidders. So if you're a an apparently successful bidder, the short answer is you've won, you're in. But what your service areas are and how the counties are divided has not been revealed. The next step is for the state to hold individual meetings with each of the apparently successful bidders and go into greater detail to provide feedback on the proposal, on the scoring, et cetera. We don't know whether it will be in that meeting that we will learn about the counties. If you read the wording of the entire RFP process in the State of Washington, it's clear that they had a couple of goals. They were interested in bringing more players to the market. They were interested overall in bringing some rating pressure and saving some money doing better than they had been doing in the past and they also gave themselves the leeway to make the final determination to consider scoring, to consider the bid, to consider the counties, the needs, the existing plans and really reserved the right to make those decisions.
So not much clarity we can provide, but we certainly will inform you as we are notified by the State of Washington. The big news there is that although the market will likely be more divided among more players, 100,000 SSI members will be coming into the plan and that's July 1. The SSI population is the ABD population. Again, previously excluded from managed care in Washington. The only members we served in this category were part of our WMIP program, the Medicaid Integration Product -- Project that Washington did with the Feds. I call that program the pre-SNP SNP. So there have been some Duals in only a county or 2 in Washington.
Now the state, again, as we saw in Ohio adding [ph] populations and as we move towards the Dual being included, has added 100,000 members, and you know from the earlier discussion what that means in terms of revenue and complexity of care. The other thing we can share with you are our number of health plans will no longer be participating and that takes 123,000 of the existing members that are assigned and puts them into play. That's what I have to say about Washington.
So now let's move to the section on Duals specifically, and I'm going to zero in on Michigan and California and share with you again exactly what we know. Now I think to frame the discussion, you know and it was mentioned earlier that a number of states were given planning grants. Then last summer, CMS came out with a very bold strategy to enroll and indicated to all of us that they were going to enroll capitated or managed care programs with Duals and establish fee-for-service programs. CMS has begun to issue direction on how those capitated agreements are going to work. They call it a 3-part contract with the managed care entity, the state entity and CMS. Their goal at CMS is to have a lot of this happen this year. So the overall timeframe from CMS is by April to get letters of intent formal, letters of intent in and to award contracts by the fall for January 2013 enrollment.
So earlier question about when will this happen, at least the plan is for January 1, 2013. We all know that there's often delays in start dates in these programs. But certainly, the intent of CMS right now and the intent of the states that are pursuing it aggressively is to reach closure and be operational in January 2013.
The other general comments I'll make before I go into Michigan and California is if you're familiar with the Medicare bidding system or the way Medicare works. It looks like the dual eligible rollout will follow a very similar timeframe. What's beneficial there is because of our experience as a Special Needs Plan, the timeframe that's proposed is no different from the timeframe we operate every year with CMS for Medicare. You submit your networks in February, you work on your bid in April and May, in June, you get your contract award, you negotiate it. By the fall, they move into open enrollment for the following year. So it's that very same timeframe, which really means if you're not down the road with your network and ready to go really right now, it's too late to start for 2013.
We do all of our planning over a year in advance when we look at expansions of service areas in Medicare. And at least now, it looks like that's the timeframe, so I hope that helps you just kind of frame it.
So now let's look at Michigan. The first thing Michigan's already done with something in their own control. They, like Washington and California, previously did not -- well, at least Washington, California was a little different and I'll explain why, did not have dual eligibles in Medicaid. So we've been operating in Michigan and the Duals were not in managed care. Did we have ABD? Yes. Do we have a Special Needs Plan? Yes. But we were not responsible for the Medicaid portion directly from the state. Effective December, they began enrolling the dual eligibles into Medicaid managed care. And I'm going to stay with this point for a moment. They enrolled people in Medicaid, many of them were already our SNP members, but we were not receiving direct payment from the State of Michigan. So there's an evolution that these states have to go through. The same was true for Washington. They never had their Duals even allowed to be in managed care. They were excluded. So if you remember Mario's slide with the different enrollment cards, one of the options was they might be in managed care for their Medicare piece and they might be in fee-for-service for their Medicaid, and that's what we had in Michigan.
Step one is being taken. They will now be in managed care under the current structure. The next step would be a 3-part contract with the Feds. So I hope that you follow that progression. We actually, because it varies so much by each state who's enrolled in the Duals and how this is going to fit, it's pretty complicated. But directionally, it's moving to all one program. They've been working in Michigan on what they call their dual eligible integrated care plan. They've been working on this all year. We are involved as others are in stakeholder meetings. They've targeted to submit the CMS in April and implementation in January. So this is the mirror for what CMS is looking to do in their program with their demonstrations. So there's no guarantee but Michigan has been moving in that direction, so has California.
The slide here is going to summarize for you what the governor has proposed in his budget. So first to frame that, they way California works, they don't always have a budget when the fiscal year begins. I'm sure you're familiar with that. The governor proposes a budget and then the process from the May revise occurs and we get closer and then we work with our legislator to ultimately have an approved budget. So today, we'll talk about what the governor's proposed. But before I go to that, I want to mention that California has been doing just what Michigan's been doing. They've been preparing to enroll the Duals. They've been having stakeholder meetings. They've been working on their selection of managed care companies, as Mario and John both referred. That part has been left from CMS to each of the states. The state will decide who's participating. In California, they've already said, you have to have a Medicaid contract to be in this program. So that's been moving along. The state's been looking at doing the pilot in 4 counties. But while that process is going on, the governor issued this budget. And to cut to the chase is, simply, we've got to move quicker, we've got to move faster, we've got to put more people into the program. So it's a proposal on top of effort that the state agencies will -- already embarked on.
What is proposed here is that the Medi-Cal benefits would transition immediately and Medicare over a number of years, that all the transition of managed care would occur by 2014, '15 and you can see this. Open enrollment in a lock-in period would occur. A little bit about the tax. It also included a Medi-Cal rate, that's on the Medi-Cal side. There's been some proposals for Healthy Families in California as well, that the Health Families or CHIP program be moved into Medi-Cal. That has a financial impact because the rate is lower in Medi-Cal and that all those members would be transferred over a 9-month period. It also eliminates the MRMIB Board which was the governing board for the Healthy Families program. I think the takeaway here, and I think this is a slide, I believe that Dr. Molina used it at another investor conference is simply to say things are fluid. You can definitely see directionally we're in this as in the case of the State of California, they now are moving and we're aligned. We are working internally and working with them very closely so that we are full participants going forward.
So you've heard about our profitability efforts, you've heard about the 2 on the Duals. Now let me say a word about carve-ins. For those of you in the room, I have a correction. Ohio pharmacy was carved back in, in October, so the slide in front of you is correct, but in your handout, please correct that to October. And for those of you listening to the webcast, the information is correct. The comments on carve-in, and we talked about it a little, is philosophically the pieces of the healthcare puzzle need to be managed together. It doesn't do you any good to manage the hospital piece and not manage the pharmacy. It doesn't do any good to try to coordinate care and then have the patients not get their prescriptions.
So even where pharmacy has been carved out, we've always taken a position that we needed the data and information. But Ohio is a good example. We had the responsibility for pharmacy. They carved it out in February 2010, it's back in as of October 2011. Now there are some big numbers in Ohio pharmacy and Joe will go over that as well as John because it's a driver of the revenue increase when you see a full year of it coming in Ohio in 2012.
Texas. We've not had responsibility for pharmacy. That's coming in in March and the same thing for the inpatient side. Now these are major dollar drivers. So, while we've been in Texas for a while, we've only been managing a piece of the healthcare dollar. So not only are we getting the expansion in the number of members, we're getting an expansion in the number of dollars that we will be managing.
Let me switch now to the MMIS business. Maine is certified. To again refresh your memory in this business, we embarked upon a contract called a DDI: design; develop; implement. It's a multiyear process by which a state embarks upon changing its claims processing system, its IT system. And then seek certification from CMS, and that's a major driver in the revenue match that they can get from the federal government.
Behind this, and Joe has talked about it before and can again, are the accounting practices that are associated with the DDI phase and then the operational phase of these contracts as well. So we reached a significant landmark in the main operation by achieving certification. Now to really frame why it's significant, you have to remember that Maine had uncertified system for 5 years. They embarked down this road before with another vendor, things did not go well, they went so poorly that they walked away from that vendor, did another contract and that was won by Unisys, the predecessor company, from which we acquired the MMS division, then we worked on the DDI, first under Unisys and then under Molina, and then were successful in getting the certification. So for the State of Maine, this is a huge thing. Huge thing.
They now can get a higher level of federal reimbursement. And again, we were successful in getting this retroactive to the go live date. Again, these are MMS terms. Although we underwent the certification in September and October of 2011, the system went live in September of 2010. So when you're getting certification, you don't want it going forward only, you really want to get it from the day of system go live and that's what happened for the State of Maine.
We are on a similar track in Idaho. CMS has already had their site visit and we have no reason to believe that won't go well. We're in direct communication with Idaho and CMS. And when Idaho reaches that milestone, we will certainly announce it.
As an industry, these DDIs take many, many, many years and although our experience is limited, we can compare how long it's taken us to get to certification and we feel pretty good about what we've been able to accomplish with the teams that we brought over from Unisys.
Dr. Molina also mentioned the upsell in the MMS business. So I believe we have showed you this before, and you might look at it and say, gee, well, you sold that in 2011. But notice the asterisk, the top bold, it talks about $40 million in additional sales and then we just footnoted because that revenue will be recognized over a number of years. In each of these, although the sale occurs, there's a DDI type phase, it's not a pure DDI because it's not a new system, but there is a period of time where it's sold, it's under development before it becomes operational and the cash flow is related to the various stages of that project. So here, you see a quick summary of what we have been able to upsell.
So again, when you think about this business, it's not simply the DDI and then the certification of the operation, it's the upsell with everything else that the state needs to be sure their system is capable of in order to stay current with things like 5010 and ICD-10 with changes in provider incentive plans, et cetera.
That concludes my remarks, and I will take questions. Correct?
Terry P. Bayer
Valerie? I mean, I think, Maggie and anyone who wants to join me is welcome.
I just had questions about the financial incentives of the state versus CMS when it comes to dual eligibles because it has a significant opportunity for cost savings, but how do they determine, basically who gets the benefit from those savings and how does that impact do you think the pace at which the dual eligibles will be included in the...
Terry P. Bayer
I'll make a comment and then perhaps Dr. Molina can add. First of all, don't forget that CMS runs the Medicaid and the Medicare program. So when we look at what has to happen with dual eligibles and costs, it's really a national problem. This is a cost driver with the federal government as well as the state. One of the reasons the lack of coordination has occurred is because historically there've been business incentives for the programs to work together. So we are looking to the CMS guidance. Some preliminary direction has come out and this looks like they are really proposing ways to adopt pieces of Medicaid and pieces of Medicare and bring it together. And clearly, those savings will have to be shared for this to be successful and will not inure totally to the state nor will it be able [ph] to the Feds. But that has not been worked out yet. Dr. Molina?
Joseph Mario Molina
Yes. I agree what Terry said. The draft documents that we have seen will allow the states to share in a portion of the savings, and that's been the critical issue to get the states to move forward with adopting these programs. So I think you'll see that in the future, both Medicare and Medicaid have a stake in funding and a stake in sharing in the decreases in the cost.
I had a question about the California Dual opportunity. I think a large portion of the Duals are in L.A. County. Could you review your partnership arrangements with HealthNet? Are you going to automatically get a certain percentage of the Duals in L.A. County that shift to this coordinated care plan?
Terry P. Bayer
Well, the first thing is the state has not made its decisions on where it's implementing the program. And we do know that they require a contract, which we do hold in a number of counties under a number of programs. So we don't have a specific answer to that, but we are clearly telling the state, we are eager to participate, not only in Los Angeles County but in as many counties as we are able. So we don't know.
So if L.A. County was selected, you would apply on your own and not through HealthNet? Is that a way to...
Joseph Mario Molina
I think what Terry is telling you is we're not exactly sure what the form of the contract is going to look like. If it rolls out under the 2-plan model, it's possible that because of our relationship with HealthNet we would get a share of the members that flow through the HealthNet contract. If they decide to change the structure of the contract for the Duals, we might contract directly with the state. We just don't know yet.
Okay. And is the state proceeding as if the budget proposal which had a more aggressive implementation is actually going to pass or...
Terry P. Bayer
I mean, administratively, they're proceeding. I don't know how to -- I don't think they'll stop because they can't. This is just the governor's proposal. So they are proceeding with their meetings and with their planning.
Joseph Mario Molina
The issue is not will the Duals roll into managed care in California. It's going to be how many, how fast, which counties. But it's coming, and there was an initial proposal that I think would have brought in -- I forget exactly how many -- but the governor's increased it to 800,000, but there will be Duals and managed care in some form in 2013.
Just question on Washington. You mentioned the rate pressures from the RFP and I think on the third quarter call, you talked about a 1% overall decline that the state gave you. I'm just wondering if you can sort of size the magnitude of the PMPM decline we should be expecting going forward?
John C. Molina
Do we have a slide on that?
Joseph Mario Molina
Yes, let me do it. John...
Terry P. Bayer
John, we'll cover that. Also look for -- to John, but also keep in mind because the mix is going to change because of the SSI population coming in and then the counties have different medical costs. But can we just look for that. We'll then make assumptions. I think you'll get it out of the assumptions for the 2012 guidance.
Terry P. Bayer
Carl R. McDonald - Citigroup Inc, Research Division
Let's say you're not an existing Medicaid plan in California, you're Medicaid elsewhere -- or excuse me, in Michigan or you're a Medicare plan that doesn't have a presence in Michigan? Can you walk through what you see is the difficulties of getting into the Dual population?
Terry P. Bayer
I mean, I'll just say that we don't have definitive guidance from either of those states about who is in, who is out and how we do have the statement California made that you must be an existing contractor.
Joseph Mario Molina
Yes. In California, there were some hearings in the legislator and the state -- the administration said that they were not going to contract with anyone who is not already an existing Medi-Cal contractor. So there were some organizations, some medical groups for example that wanted to enter into risk contract or have an ACO-type model, and they said no. If you don't have an existing Medi-Cal contract with us now, you're not under consideration. Part of that has to do with the speed with which they want to move the program forward and the fact that they've already done their due diligence on their existing contractors. They've been audited, they know them very well, they know what their networks look like and so forth. So to bring in a new plan, or a new ACO would be difficult for them and they just said they're not going to do it. I don't know about Michigan. I mean, in Michigan, I suspect it's going to be somewhere along the same lines, that they're going to go with existing Michigan plans that have the relationship with the state and that probably have a Medicare contract and are able to handle Duals
And so I guess from your perspective, as you look into some other states, do you think that limits you or prevents you from being a Dual provider in states where you don't have a Medicaid presence today? Or is your argument that it's up again to Michigan only from a timing perspective?
Joseph Mario Molina
Well, I think they've told you earlier, there are reasons for the states that we're in. There's a strategy behind all this. There's going to be tremendous growth and I think you need to pick your battles. And so we have picked specific states where we want to pursue the Medicaid and Medicare programs. We're not going to be all things for all people. And the issue for us, I think, is going to be how well can we handle what looks to be tremendous growth in 2013 and 2014.
Terry P. Bayer
I'll just add to that, your question -- your line of questioning is focused on the Medicaid and the contracts, but what CMS has just begun to show us is at least for the managed care side, you have to be a Special Needs Plan because there's a -- like the state who isn't interested in picking out additional plans because of the due diligence or the monitoring burden, et cetera, the federal government finds themselves in the same place. So you -- at least for the capitated side, you would need to pursue being a Medicare plan, being a Special Needs Plan to participate. Now that doesn't have as many barriers to entry, although it depends because CMS traditionally has required you to have a state Medicaid contract for SNP. So some of these things may change over time with the aggressiveness with which they want to move. The other comment I would make is we've talked a lot about the managed care piece and part of the CMS strategy is on the fee-for-service side. So moving to states where this conversation about managed care plans and Medicaid is not relevant. The states are going to look for a solution to bring in tools and managed care tools to manage it in a fee-for-service setting. So there are many questions still sitting out there.
Can you give us an idea of how many Duals you expect and how many states did you send out contracts in this initial period for a demonstration program? What's the sort of right number to think about in terms of numbers scheduled [ph] into California and Michigan? Or do you think in many more states? Or do you see a couple more states? What do you think the...
Terry P. Bayer
John will cover this in his section, and I'm just going to say to you, there are so many unknowns yet about how the states are going to approach this. That's a difficult question, but John will cover it in his part.
Yes, a question here. So as I'm understanding -- as I'm understanding what you're saying is you need to be in a SNPs plan as well as you need to be in the state with the Medicaid contract. So given that and you're certainly part of that, [indiscernible] United is there as well. Which other plans have this capability across the board? Is there enough capacity in the system to manage the 6 million additional or even the 3 million that will go private at some point?
Terry P. Bayer
I don't know about the other plans, I just want to frame that. Although that's the initial requirement from CMS, that would be for this moment, people can start SNP plans and people can win contracts going forward. And also keep in mind what I just said, CMS feels very strongly that there's a fee-for-service program in this as well, that it's a fee-for-service and managed care solution. And particularly because states have to step up and partner and drive this. And every state is not in the same place on its managed care evolution, but every state has the problem with the high cost of the Duals.
Joseph Mario Molina
So let me answer that a little bit differently too. In California, we have the 2-plan model system and the number of counties where there is a local initiative that is owned or operated by the county. They will probably be participants. The 2-plan model contract is on the commercial side, which are Anthem Blue Cross, HealthNet and Molina. And then there are the organized health systems where the counties are entirely responsible for all the benefits. There are several of those, and then there's the GMC Program. And in the GMC Program, it's going to be HealthNet, Molina, perhaps Kaiser, Blue Cross and Community Health Group. Those are the plans that are really going to be involved in this. In Michigan, there are probably 4 or 5 plans that are probably prepared to handle the Duals in that state. Beyond that, it's hard to know. There are hundreds of Special Needs Plans, but there are very few companies that are doing both the Dual -- the Medicaid and the Medicare Duals.
Can you talk a little bit about the margin opportunity on this revenue growth? I mean, as this is -- I mean, Medicare tends to have a higher margin than the Medicaid does. Is there a view that you'd be able to make a Medicare margin on the Medicaid piece -- the Medicare piece or Medicaid margin on a Medicaid piece or maybe just some sort of hybrid margin?
Terry P. Bayer
I don't have any answer for you, unless John does or Joe.
Okay. Well then, maybe can you talk a little bit about on your core business, your Medicare business has gotten to be a bigger piece of the pie from a revenue perspective. Any -- directionally, is it a similar percentage of the profitability or is there margin differential on your own business?
John C. Molina
I don't think we're breaking out Medicare separately, are we, Joe? I'm not going to comment.
I have a couple questions on rates. Number one, how do you foresee rates being established for the Duals, there would be a bidding process for the states to determine -- the federal government determining...
Joseph Mario Molina
I think it's probably not going to be a bid. I think it's going to look a lot more like Medicaid where the government is going to establish what the rates are on an actuarially sound basis.
Like Medicare Advantage in other words?
Joseph Mario Molina
No more like traditional Medicaid.
Okay. And then in terms of the state bids, I know that Ohio is not a rate bid. We saw a few states go towards adopting more of a rate bid or increasing the weighting of the rates. Where do you see these trends in that regard? Do states start to increase the weighting on rate bids, do you think? Or decrease the weighting on that going forward?
Joseph Mario Molina
In the past, we said when you've seen one state Medicaid program, you've seen one state Medicaid program. I think when you've seen one RFP, you've seen one RFP. Each one of the states is going to do something different and it's very difficult to predict how much of this is going to be rate bids. What I can say is that even in those states where there have been rate bids, they typically have been with some sort of a band, some sort of expectation. And this goes back to what happened years ago in Michigan where a couple of the traditional health plans bid very low, thinking that they could capture market share and then go back and renegotiate with the state and what happened is they went into bankruptcy. So states don't want to see that kind of disruption. They don't want to see reckless bids. And so even when there is a price component, they are putting bands around it to keep people from doing things that are reckless or trying to buy the business as a loss leader and come back later. They want stability more than anything else.
Juan José Orellana
Okay. If there's no more questions, we'll go ahead and take a break and then wrap up with the financial discussion from Joseph White and John Molina.
Terry P. Bayer
How long? When are we coming back?
Juan José Orellana
Look's like about 5 minutes.
Juan José Orellana
Okay, we're going to get started now on the last portion of our program. You may recognize our next speaker from riveting discussions on MMS accounting, MCR requirements. Now, Joseph White will be talking to you about capital adequacy, which is actually a topic that has come up particularly given some of the growth that we're expecting. So without further ado, I'll turn it over to Joe.
Joseph W. White
Great. I'll try to keep my remarks within 45 minutes so John has enough time. I think that was a good Q&A at the end of Terry's presentation, kind of lead into what I want to talk about. Obviously, the Dual opportunity, ACA, everything else that's happening, integration of ABDs. This is all exciting stuff from a growth perspective. Obviously though, if we get the kind of growth we believe we're going to get, although we can't quantify it yet, it's going to be substantial. That's a great opportunity for Molina, for us, all of us in the space. Obviously, the first financial impact of that kind of growth is going to be to push our revenue up. Again a great opportunity, but I think everybody here is sophisticated enough to know that with that kind of growth, it's going to become some pretty substantial capital needs.
So what I want to talk about today is just the framework for which we are evaluating our capital needs. I don't have a number. We don't have a number. The developments that we just alluded to in the last Q&A session, we're going to need to see those developments before we know how big this opportunity is. And from that, we'll flow our capital needs. But again, I want to share with you, in general, the framework with which we're looking at it.
I think the first slide where I want to put things in perspective here is that it's worth noting 2 things, really. Number one, this company has been growing rapidly for a long time, maybe not at the pace that some people are expecting, that we're hoping for going forward. But nevertheless since 2006, we've had a CAGR on revenue of north of 15%. So we have some experience managing growth. We've had missteps, we've had successes overall. We're proud of our record. I think in general, though, we feel that we've got to experience managing growth. And the second thing I wanted to point out is the pie chart on the left. This is fundamental, this is basic. Everybody here in the room knows it, but it's worth repeating over and over. For any company, your most important source of capital for growth is going to come from earnings.
As you can see in our case, you can see in our case, again, that 15% CAGR, 50% of that growth since 2006 was supported by earnings. So the margins we have on our business are going to be critical in how we grow. You can also see, less significant here, but still worth mentioning, you can see in the past, at least, we've had a bias toward equity or a convertible debt financing. With the purchase of the building in December, we took out about $49 million of long-term debt on the building in Long Beach. That's really the first permanent debt we've taken at least since I've been with the company, which is since we went public. But again, this slide, 2 points. We've been growing rapidly in the past and the criticality of earnings in order to fund that growth.
This slide here talks a little bit about how it is we invest our money. What this slide really tells us in simplest terms is if you take out a few opportunistic share repurchases over the last few years, since 2006, we basically split our capital deployment 1/3, 1/3, 1/3 between acquisitions, funding of subsidiaries which could either be growth in subsidiary that already existed or startups. This get back to 2006, so this would include a lot of Ohio and Texas activity.
And then third, the other 1/3, 29% on this slide being CapEx. Somebody alluded to earlier about growing out infrastructure and all of that. Obviously, the CapEx requirements for a variety of items are significant as we grow.
This is a nice -- just a little timeline just for a refresher sake that looks to our acquisitions over the years. Again, I think this speaks to the fact that we do have experience in managing growth and it's one reason why we can look a little bit more calmly about what we've got in front of us here as we grow, but long history of acquisitions in this company.
Terry had just mentioned in passing capitalizations of our subsidiaries, existing subsidiaries. This is why -- where we start in terms of our analytical framework for capital needs, is what are the needs of our existing subsidiaries?
A couple of caveats on this slide. This is estimated as of December 31, 2011. We haven't fully closed our books for 2011, so these numbers could change both in terms of capital requirements and the individual subs network, but this is easily close enough for this discussion.
And again, what you can see here is that our subsidiaries are all very well-capitalized. Ohio, with their earnings in the last couple of years, very richly capitalized. Washington, as you can see, the older, more established larger health plans, more richly capitalized than the others. But again, we've got excess capacity from an equity position in all of our subsidiaries.
So again, this is where we start in looking at capital needs. What is it that's urgent right now? As you can see, there's really nothing urgent right now. We're very well-capitalized.
We've take taken an effort here on the slide to try and turn that excess capital and portray it to you as additional revenue, we can support at our existing health plans without adding capital. Now again, the usual caveats apply here, probably the most significant, that we can't look into the future and see how a capital requirement, a minimum network requirement of a state may change.
But as things stand now, again, we've got the -- across all of our health plans, we've got enough excess regulatory capital to nearly double our health plan revenue. So I think where this leaves [ph] us as a company, as we said again, and look at these capital needs, we're very confident we're well-funded at the our existing subsidiaries.
That leads us to new health plans, new MMS projects, startup operations in general. This is where it gets a little bit more complicated predicting what it is we're going to have to -- the capital we're going to need and how we're going to deploy it. We like to look at this, and this shouldn't come as a surprise to anybody in this room, but I'll just take a minute to review it.
We like to look at these capital needs, and just the categories as I've listed here. Obviously, regulatory capital, what I just talked about, what's the minimum network the state is going -- the right program it's going to require us to participate. Systems development and configuration costs, essentially what does it take to get our system set up, our infrastructure set up, to support a new health plan. Then also startup costs and more importantly, the initial operating cost of a health plan. We saw in Ohio and, again, I hate to keep bringing Ohio up, but again it's such a good example of so much about what our business is like. We had some pretty substantial losses at the outset. And while we develop the economies of scale, while we got our provider network in place, while we brought the population into managed-care, you can run some losses until you do that. So again, that's another capital demand.
Direct delivery setup costs are not large, but I'm going to talk a little bit about them. And then lastly, with an MMS contract, again there can be substantial development costs. Now much of that is funded in the DDI stage through progress payments by the states but there's still cost involved in that.
So the first slide here to talk about is looking to a new state, trying to -- as we look at the new state, we would try to understand what the regulatory capital needs are going to be. Now every state will be different, a state might look at risk base capital as a regulatory requirement. If they do that, they might want to 200% of RBC, they may want 300%, it can vary. A state might not be -- look to RBC to set minimum net worth, they might look to a percent of revenue. They might look to a percent of costs which are not guaranteed in some way, what are called "uncovered liabilities."
But we're now operating in 10 states with a variety of net worth requirements. So we kind of feel that, again, while each new state is going to be different, we kind of feel we can look to our 10 existing states as a benchmark. And what we found is if you look over time for those states, all of our states combined, and look at what the requirements were year by year, we think it's -- we can expect a requirement for minimum net worth in a state that runs 7% to 8% of revenue.
Now obviously, that's going to -- that can be a bit front loaded, as the state starts up. But again, we feel like that's a good -- 7% to 8%, is just a good measure of the regulatory net worth we're going to have to fund in a new state.
So again, this is just the example of Ohio, and this is probably the biggest uncertainty in capital requirements. And you can see here on Ohio, we've made $105 million in the last 3 years. Prior to that though, we had to, I'm doing the math in my head, $17 million, $19 million, $38 million, forgive me if I didn't do that right. Thank you, $38 million in operating losses in order to get there.
Now, Ohio, we'd like to think we learned something from Ohio. Certainly, the subsequent performance suggests we have. But again, this is probably the greatest uncertainty we face as we try to assess capital needs.
Talked about system development cost, just to give you some benchmarks here. It costs us about $2 million to set up the managed-care platform for a new HMO state. So essentially, what this involves is setting up an eligibility claims, med management database, programming that database, configuring it, this is everything from analyzing state requirements, to documenting business requirements, to bringing up a functioning database.
So that's a good rule of thumb. It can vary -- it has varied by state, but that's a good rule of thumb.
Direct delivery, as you can see, clinic costs are not that great but we get asked a lot. And the more we look at it, the more it looks like the cost of a typical clinic, in terms of setting up that clinic, goes about $750,000. That's a combination of leasehold improvements, medical equipment that may be in the clinic, variety of communication equipment, computer equipment all of that. So that's not operating costs, that's essentially your funded startup costs for a clinic.
Once the clinic goes, it gets going and it can vary by clinic, but we think about $50,000 a month is probably typical clinic operating expense. Again, not a substantial number, but people have asked us in the past, so we wanted to get it out there.
Once we've used that framework to assess capital needs, we obviously then need to talk -- we need to look at where we're going to get that capital. Again, I can't emphasize enough, we, like any company, look to earnings to fund growth. It's our first source always.
With that said, I mentioned earlier that we have until the recent -- until the ARCO building transaction, we had not taken on permanent long-term debt other than our convert. So that bias towards equity and convertible debt has left us with a little bit of room on [indiscernible] the relationship banks. So again, the remains untapped.
So that's about all I had. I wonder -- are we going take questions now or move straight to John?
Juan José Orellana
Yes. We're going to go ahead and move to John's section and then take questions on the whole financial section at the end, because we're making good progress on time. So next is our Chief Financial Officer, John Molina.
John C. Molina
Here it is our cautionary statement. Again, I'm not going to read it, but I will make one observation. When this first thing -- when this first popped up on the screen, I was in the back. And I thought, my gosh, I'm getting old. I can't read it. Then I realized, it's really, really small print. And then my brother said, the company is starting its fourth decade of service. And since I'm one of the very first employees, it occurred to me that I am getting old.
We're going to go over a lot of forward-looking statements in this guidance section, and I just want to remind everybody. As you can see there, there's a lot of things that could possibly go wrong. And so as you're making your investment decisions, we want you to be fully aware of all of the risks.
Our guidance as we shared with the public this morning is $1.80 per share for 2012. There are number of factors that are going to help shape that guidance. The re-procurements in Washington that Terry talked about, as well as Missouri. I believe the Missouri RFP is going to be submitted sometime in the spring. Was it submitted already? So March we'll get the results of that. Missouri is a relatively small but profitable state for us.
There are benefit carve-ins in Texas and Ohio. And Texas starting in March, the inpatient and pharmacy risk will be ours. Ohio, the pharmacy risk was carved back in October of last year, but now, we got a full year of that revenue benefit.
We're also seeing a greater enrollment of the Aged, Blind or Disabled members in California, we call them SPDs, which are Seniors and Persons with Disabilities. In Texas, they fall under the STAR+PLUS program and in Washington, we've got the ABD's. That enrollment should grow faster than our TANF enrollment. And so, there'll be a shift in mix which will increase the PMPM overall revenues.
Terry talked about the Texas expansion that's starting in March of 2012. And I've got some more slides on that. But that's obviously going to have a big impact on 2012.
Continuing rate pressures. As Mario shared with you, state budgets have not recovered yet. They are better than 2011, but they're still bad and that's causing a lot of rate pressure in our states. And then lastly, we're going to continue to build our infrastructure to prepare for the Duals and for other state expansions, and that includes the Molina Center.
So as Mario said, we currently occupy about 40% of the space, 460,000 square feet is the space, we're 40% of it. It's about 90% leased right now. So we've got revenue coming in. But as we have more needs, we're going to have to move tenants out, which is going to be less revenue coming in on the rental income side and more of our space.
We've also got ICD-10, which is a big issue both for our health plans but also for our MMS states. And that goes into effect -- currently, it goes in effect in October of 2013. So 2012 was when we will do a lot of the IT work to prepare for that, as well as working with our providers in training. It's not just an IT project, it's also making sure that our trading partners can share information with us and the providers are ready. We're also getting ready for Healthcare Reform. And then at 15 clinics in 2012, as Mario and Joe talked about, $750,000 per clinic plus some operating losses probably not material, but still people's time and efforts to build those things out.
This is a little more detail, more granularity on the earnings. We're expecting $5.9 billion of premium revenue. We're expecting MMS to generate $185 million in service revenue, and investment income about $6 million, leading to total revenue of $6.1 billion.
We are expecting medical costs to be $5.1 billion, which leads us to a medical care ratio of 86%. Now that is higher than what we have projected for 2011. And I'll get in some more detail, but really it's coming from 2 places. It's coming from rate pressure. We're not anticipating significant rate increases in any of the states in which we operate and then Texas. And we think that the big startup in the new markets in Texas will, as normally happens, increase costs. Our service costs, that's MMS, $158 million for a service revenue ratio of 85%.
Now, through 3 quarters of 2011, the service ratio was 94%, so you're seeing some improvement now in MMS. A G&A expense of $476 million or G&A ratio of 7.8%, that's down from this year that's really leveraging the invested admin expense across a higher revenue base.
Premium tax expense of almost $170 million. Depreciation $35 million; amortization, $17 million; and interest expense of $17 million. So we're looking at net income before tax of $137 million or net income of $85 million. That's a diluted EPS of $1.80 on 47.3 million shares. And EBITDA is a number we track very closely because we believe, at the end of the day, it's all about cash and EBITDA is a pretty good approximation for cash and cash flow. And we're looking at that, of about $220 million, with an effective tax rate of 38%.
And I've broken out the guidance into 2 segments. Just got a couple of comments here. If you look at, again, our medical care ratio of 86%, let's talk about that. On the MMS side, there was a question earlier, is MMS ever going to be impactful to the bottom line?
What you can see is we're projecting $11 million net income in 2012. If we were able to double that over the next couple of years to $22 million, that's about $0.50 EPS, I would say that, that's pretty impactful. It's more than rounding error.
Here's a slide that discusses our outlook for rates for the coming year. And as you can see, with the exception of California, which had a small rate increase in July 2011, which is going to carryforward until July 2012, we are expecting that rates will either be flat or down in every single market. And that's really just a function of where the state budgets are this year.
Let's talk about the Texas expansion for a little bit. It's going to start in March. So right now, there's a lot of activity going on Texas to make sure that we're staffed, to make sure that the providers know who we are. We are doing some brand advertisements in Texas, so the patients, especially in the Rio Grande Valley, are familiar with us. We currently have about 155,000 patients in Texas, and we are expecting to get another 170,000.
So we anticipate that by the time enrollment is finalized, it's all rolled out, we'll have about 325,000 members in Texas, which is about a 10% market share. But we expect those 170,000 new members to bring in incremental revenue of $900 million. And this is the impact on revenue in terms of the various programs.
We are expecting that the STAR membership will increase substantially, and that the rates will go up. And this is really a function of bringing in the pharmacy component. On CHIP, we expect it to be basically flat. We're going to get some CHIP membership in some of the new areas. The rates there are going up, that's really, again, because we're carving in additional benefits. And for the STAR+PLUS, we do expect to get about 50% more STAR+PLUS membership that carries significantly larger PMPM premium. And again, that is because the carving in the pharmacy and the inpatient. Even though our revenue on a PMPM basis is going up quite a bit, we do see that there's going to be tremendous cost pressures in Texas.
The state, when they modeled their rates, expected that managed-care plans could reduce utilization by about 30% for various services. They expected that 30% reduction in utilization to happen on day 1. And then the state said, "If you have patients who are members, who are enrolled, who are under care, you cannot change the care. There is a continuity of care provision for 6 months."
So achieving a 30% utilization reduction when you've got to continue care in certain instances will be a challenge for us. So you'll note that our guidance assumes that for the entire State of Texas, not just the 155 -- not just 170,000 new members, but also there was 155,000 existing. So the entire State of Texas, we are going to book at 90% MCR. And this is one of the major reasons why we believe that the medical costs will up and the margins will be pressured in 2012.
In Washington, Terry talked about the RFP in Washington. And what we saw, because it was a rate bid, even though there were bands, the PMPM rates are going down. In the TANF, they're going from $160 to about $155 PMPM. It's about flat on the ABD, down in CHIP.
The other thing I want to point out here is based on what we know today, we're anticipating that our enrollment will decline, and that's because the algorithm the state is proposing benefits new entrants. Now, if you recall the slide that Terry had, there were about 4 or 5 health plans that are no longer going to be participating, unless they are able to protest or want to protest and stay in.
But those were Kaiser, which hasn't had a huge presence in Medicaid; Group Health, which had a very small presence in Medicaid; CUP, which is believe is Clark United Providers, which served one county; and Regence, which is the Blue Shield plan. So you're taking out very small, not Medicaid-focused players and you're replacing them with United, Amerigroup and Sentin [ph] . So we think the competition is going to be pretty formidable. And while this is our best estimate as of today, it's really a challenge to know what's going to happen in the future.
So what could affect the $1.80? And really, what are the risks to that $1.80? First, is the premium rates could be lower than what we are projecting. If you recall, there's a slide on the premium rates. And in a number of states while we've projected a decline, many states we have no change. If those states go down, rates -- the overall revenue will be pressured as will our margins, as will our EPS number.
Second is the Texas cost and utilization. I explained to you that the state has tied our hand in some respects to get the savings we need initially. And we believe that over time, we can get the costs under control, but that is a big risk for us right now, as it is for probably all the health plans getting new business in Texas.
If we have less than anticipated enrollment in Texas, because Texas is going to be such a large driver of revenue this year, that could put our EPS at risk. On the other hand, to balance it out, if Texas is not making as much money as we like or the margins are less than we anticipated, maybe having lower enrollment, it wouldn't be a bad thing for this year. But we firmly believe, and I think we've proven it in every state in which we've done business, that over the long-term, we will get the medical costs under control. So we're going to have more members in Texas than less. Still, it is a risk.
We could have a greater loss of enrollment in Washington than we were projecting. And as I said, we're facing some very stiff competition in Washington. They're going to be very aggressive in terms of recruiting providers and recruiting members. And Washington is a health plan that has traditionally generated an outsized portion of our profits.
If utilization for the ABD is greater in Washington than we anticipate, right now we're expecting the Washington MCR to be about 86%, which is up a little bit from 2011. But we're also looking at a population in the ABD that's going from fee-for-service into managed-care and what do we know about that, we know that, generally, there's pent-up demand. And so, if the utilization is higher than we anticipate, that could put some pressure on earnings.
The Missouri RFP. We've had pretty good success in the last few RFPs, we haven't been bounced out of any states yet. There's nothing that says that it couldn't happen in Missouri or we couldn't have a smaller service area than we currently have.
Revenue and cost pressures remain in Idaho. We've talked a lot about the DDIs in Maine and Idaho and how really, the fact is that, we had to put more money to get the DDIs completed than anticipated when we purchased the business. And that may have some accounting issues if we can't get the cost under control. We're very happy that Maine was certified. That was a big thing for us. And we expect Idaho to be certified shortly. The real payoff to the MMS really comes when the initial contract expires and then is renewed.
If you look at the performance of West Virginia and New Jersey and Louisiana, the margins there are much better than they are in Idaho and Maine. So if we're not able to control the cost, there maybe additional write downs. I'm not saying that there is, but that is a possibility.
And then lastly, this is a strange one. But we have that convert out there, and the strike price is $31.29. So when our share price exceeds $31.29, there's going to be equity dilution. If there's more equity, EPS goes down. Now, Mario mentioned he's a large shareholder, I'm a large shareholder. I would be happy to take the trade-off between the higher share price and a little bit lower EPS, if this is why.
What could affect our numbers to be positive? We could get rate increases in those markets or any market, frankly, because right now, we're expecting flat to down everywhere.
And as you call, Terry had a slide on the governor's budget in California. Right now, that budget shows a 3.5% increase for managed-care rates. We not put that in the guidance. We would rather be happily surprised than to disappoint you by putting it in the guidance and it doesn't come through.
Cost and utilization improvement in Texas. If we are able to get those costs in line faster, that will be a tremendous help. Now we're not sitting on our hands just waiting for March. In our existing service areas, we're working a lot with the hospitals and some of the providers that had bad contracts and trying to renegotiate those contracts. And one of issues for us was the personal attendance services in Dallas. And we've done a lot to bring those things under control. And so hopefully, that momentum will carry us into the first and second quarters of 2012. But if we're able to get better improvements, it will be pick-up.
And lastly, if we do get better than we anticipate enrollment in Texas or Washington or California for the ABDs that will also raise the revenue and raise earnings commensurate.
Now last year, at this time, we talked about guidance 2 years out. We've got a lot of questions about are you going to talk about 2013 guidance? Are you going to put something out? And we've kicked this around quite a bit. And ultimately we decided that there's just too many moving pieces to give meaningful numeric guidance for 2013. But we didn't want to leave folks without anything -- any previews for 2013. So we compromised. And I'm going talk to you about what are the things that are happening in 2013, which might affect our financial performance.
The first is the Supreme Court decision on the individual mandate in Medicaid expansion. Now really the impact on 2013 will be twofold. The first is a lot of the work that we've been doing around Healthcare Reform is not expanding [ph] . And if the Supreme Court rules against the individual mandate, and throws out the Accountable Care Act, we don't need to work on Healthcare Reform in its presence form. Same thing with the Medicaid expansion.
Now the Medicaid expansion is interesting. Because the way the law is written right now, primary care rates paid to Medicaid providers go up to the Medicare rate January 1, 2013. If the Supreme Court throws out the Medicaid pieces of the Act, then that doesn't happen. We also don't know what's going to happen with "Doc Picks" as they call it, which may cut Medicare rates. But right now, if Medicaid rates go up to Medicare for primary care services, that will have a big impact on our premiums because primary care is about 10% of our medical expense right now.
And if you think about the clinics, a lot of that increase will get passed on to providers. But if you think about our clinics, it's additional revenue will come in, without a commensurate increase in costs. And to the extent we're growing those clinics, it could have a more than nominal impact on the bottom line. It's not going to have a huge impact on the top line for those clinics. It will have a big impact overall, but a fair amount will go after the bottom line.
The Presidential election is going to have a big impact. There are those Republicans that are out there touting block [ph] grants to Medicaid, to the states, and that would have an impact on 2013. If they win, if the Republicans get control of Congress, and if they're able to do that.
The Ohio RFP goes in effect January 2013, that's also going to have a big impact. As we consolidate from 3 regions, from 8 regions to 3, it's going to have a material impact on our enrollment. Also we're going to bring in 37,000 of the disabled children. And right now, it's probably too speculative to know what's that going to do for us.
Our Florida expansion. Florida is looking to move most of their Medicaid beneficiaries into managed care in the 2013, 2014 timeframe. We don't know exactly when, but they're putting out a series of small RFPs. I think the nursing home diversion program is one that they're looking at for next year. And until we have a better clarity on that, it's hard to really translate that into a number for 2013.
Likewise, Georgia, right now looks like they're going to put out an RFP in the spring or summer, to take effect sometime the 2013. We've talked about Georgia, I think at the last Investor Day, about how that's a state that we have been targeting. But given everything else that's going on, it's a decision that we're going to have to make if we want to continue to pursue that or do we want to focus on our dual eligible enrollment.
The Texas and Washington [ph] as I've talked about. And the biggest thing is the dual transitions in California and Michigan first, but Ohio and Washington both have had a number of discussions with health plans and in the legislature about moving their dual eligible population into managed-care plans as well. And this is the biggest unknown, not that it's not going to happen. We're pretty convinced, it's going to happen. The question is, when, how big and how much are the premiums going to be?
So let me remind you, there are about 9 million Duals in the country, 40% of them are in the states in which Molina has a health plan. So if we do nothing, we've got access to 40% of that market. And between California, Michigan, Ohio and Washington, that's about 1.8 million.
Now we've seen some numbers: the Medicare number, the Part D number and what we think the Medicaid piece is. The premiums are going to the somewhere between $2,000 and $3,000. That's a big difference, and a lot of it is going to depend on how much the states carve into the health plan or how much they leave out.
Our preference obviously is to carve as much in as possible, but you're talking about a political issue as well as a financial and a regulatory one. The mental health providers, of course, they want everything carved out. The Home Support Services want everything carved out. We want everything carved in.
But if you look at that number, 1.8 million, for every 10,000 patients who would be enrolled, and let's just take that $2,000, $3,000 premiums and split the difference, call it, $2,500, that's about $275 million, $300 million dollars in your annual revenue for 10,000 patients.
We're talking about 1.8 million people will be enrolled presumably in 2013 in just 4 states. The numbers can get big pretty quickly. And so we hate to unintentionally lead people down and the wrong path. We say we're going to get 100,000, and we end up getting 50, or we say we're going to 50, and we end up getting 150. It's just right now, the numbers are too big and that there's not enough clarity for us to give you what we consider to be a credible estimate on what that can be.
Now as things develop this year, maybe in September we can come back and revisit that if we've got better clarity. But we really don't want them to intentionally mislead anybody to say this opportunity is bigger or smaller than it really is. And right now, there is no one opportunity. The way it's going roll out in California is different than the way that they're going to do it in Michigan, and it's different in the way they're going to do it in, say, Florida. And Florida's approach really has been, rather than to do a 3-part contract between the health plan and the Medicaid agency and Medicare, Florida is basically saying, "Look if you get the Medicaid piece, go out and sign them up on the Medicare side." Just 2 contracts, 2 different regulators.
So every state is doing it a little bit differently. So what we do know is the opportunity looks big, which is how it comes into play and when it comes into play. But if 10,000 members generate around $250 million to $300 million in revenue, if we missed the window, and we tell you it's going to start January 1 and only starts in -- and starts again in March instead, that's a big difference in terms of the revenue.
So I know this is a topic that everybody wants to talk about, please be patient. We'll give you as much as we know, but there are certain things that we just don't know.
And these are the investment highlights. And I think these are the same investment highlights that came out when we did our IPO in July of 2003. This is an attractive sector, driven by the government policies. Our portfolio approach, I think, has proven over time to be a good one. And we stick with the government programs, we diversifying by state and by product line.
We've got good geographic exposure. We focus on government sponsored health programs. We got a seasoned management team, a lot more gray hair now than there was 8 years ago, with the exception of Terry, and over 30 years of experience.
Now we'd be happy to take -- I didn't want to bring attention to Joe at all. Happy to take questions now.
Thanks for laying out what could affect the 2012 headwinds and tailwinds. One thing you didn't mention was the potential for overall utilization trends to either be higher or lower. And I know the wind has been at the industry's back there for a couple of years, in particular, maternity rates have come down with the weak economy. I'm wondering what your current view is on utilization trends? And can you remind us about what percent of all your medical expense is maternity related? And whether you've seen those trends start to stabilize or are they still decreasing?
John C. Molina
I don't know that we've seen a big uptick in maternity. I think it's probably a state specific, some states it's gone up.
Have you seen an uptick?
John C. Molina
I think we have seen an uptick. On the maternity though, because we get the delivery case right, where there's a margin built in, more births actually can be a good thing. You're going to offset that with the more births as a percentage to higher probability you're going to have a few NICU cases. So I don't see that, that drives us this year. The flu season continues to be rather benign. And we're still in January and it usually peaks around March, but I haven't seen anything. Mario, I don't know if you have seen anything that would suggest that it's either a fluke that 3-years in a row, it's been pretty benign or the public awareness campaign seem to be working.
Joseph W. White
Well, yes. Since I said that, yes, I just would reiterate. We do get a delivery payment. I think we have seen, on average, declines in deliveries over the last few years but the delivery payment itself. It generally doesn't have the same margins as a normal medical capitations. It's really much tighter margins. So, the P&L impact is not substantial.
John C. Molina
Don't worry Josh, we'll get you.
With respect on the Washington Slide, can you just tell us how much of variability there is around that in terms of understanding the outcome at regions. How they work in the re-enrollment process specifically for the '12 and your enrollment expectations there?
John C. Molina
At this point, John, we don't know which regions we're in. We're presuming we're in all the existing regions that we're in, but we don't know for sure. We have a debriefing, I think, with the state and then there's the protest period [indiscernible] there were 2 disqualified, if they want to protest. It's a little too early to know.
So you presume status -- you're in all your existing regions. Do you presume you keep -- that your existing membership is not reallocated away also?
John C. Molina
And the presumption right now is that the existing membership stays, but new members roll off and they would go disproportionately to the new entrants, that's why the TANF membership declines more than the ABD.
I mean, King County is probably the biggest variable then in terms of...
John C. Molina
I always get the King, Pierce confused, Spokane. I am from Washington.
But King County is the biggest one. So I mean, you presumed you're in that. There's going to be 3 plans in that county right here and there, but there would be -- you presumed you'd...
John C. Molina
At this point, we don't know exactly where we are. and I think that, that's -- as soon as we get more information, we're going to let the folks know.
Can we talk a little bit more about the potential need for capital. Things like that could be a big issue that we're talking about over the next year. So you layed out the slide. I think Joe layed out the slide that talked about $4 billion of potential revenue under the existing capacity. But that's assuming all the revenues is lined up in the existing states. So California has only got $185 million available, additional revenue capital, we'll call it, that's probably not going to work out. So is there an ability -- how long does it take to sort of shift amongst your subs? And then I guess, more importantly, you've had this bias historically for converts and/or equity. Is that the way we should think about the future as well?
Joseph Mario Molina
I think that we can move capital from 1, basically, from 1 plan to the parent and the parent up to another 1. Probably over 1 to 2 quarters, Joe?
Joseph W. White
That's fair to say.
Joseph Mario Molina
So it's not immediately fungible, but we have ways to do that. In terms of what our bias in the past, we tend to be conservative company. I think you all know that. Very few companies get into major financial issues if they have no debt. So I think our bias has been against putting out debt. However, we also realize that, from a our shareholder's standpoint, there is a bigger cost to equity or convert than there is to permanent layer of debt. So we're in the process of evaluating that. And I don't think it's an all or nothing in terms of do all equity or all debt. I think we need to look at where our ratios -- what's our cash flow? The other thing that we don't talk about in there, that Joe didn't talk about is, that's a snapshot as of about third quarter or maybe fourth quarter. The best thing that can happen is if we continue to be profitable. We continue to use those profits. And it's not factored into how much growth we can have just using existing -- I don't think that the capital needs are huge because we can grow another $4 billion, just on existing plus the profits. And so we'll be evaluating what is the right trade-off.
Okay. Just one quick follow up on the converts. Since we're getting close to the conversion price. Is there good rule of thumb around dilution, how we should think about what the EPS impact is? When and if that happens?
Joseph Mario Molina
Sure. The conversion price is $31.29 and I think, at least, for the first $4 or $5 above that. You can look at each additional dollar adding maybe 150,000 to 160,000 shares to be the denominator. So it's not that substantial.
Just a followup on the capital question. The $4 billion in incremental revenue, what's the RBC ratio you're assuming there? Are you basically assuming that you're operating at the minimum RBC or is there some cushion?
Joseph W. White
I would say we're operating at the minimum RBC or whatever the requirement [indiscernible].
And do you guys have a target RBC ratio that you'd like to offer [ph] ?
Joseph W. White
I wouldn't. No. I wouldn't say that. No. Obviously, we want to keep the plans funded well enough, but, no, we don't have a particular target, no.
John C. Molina
Carl, my philosophy is it's easier to put money down than it is to pull out of a subsidiary so having a big cushion is not necessarily a great thing because we could put it down very quickly, but pulling it up takes regulatory approval.
So if $4 billion is say 200% risk-based capital, give or take in most states. And if we think about -- if you were to keep it at 300%, that it's something like $3 billion in incremental revenues?
Joseph W. White
Yes, you have to do the math but that sounds about right.
Can you help us think about the other Supreme Court issue, the Medi-Cal issue, I think there's a March potential ruling on that. What would that or what could that theoretically do to the rate environment, if anything?
Mario is the resident and it's really -- it's a political -- I think it's going to be a political issue more than anything else. Go ahead, Mario.
Joseph Mario Molina
Well if the Supreme Court rules in favor of the providers, then you're going to see law suits filed whenever the states try to decrease rates. And in some cases like California, where the rates are already very low, it's hard to imagine them going much lower and being sustainable. They'll start having providers drop out of the program, that's the problem. We're just going to have to wait and see.
Is there a read through from the Governor's budget basically with the implied rate increase to say that regardless of the way the court rules...
Joseph Mario Molina
No, I think the governor assumes that the rate decreases will hold.
And then the only other question is more of a maintenance question, the diluted share count that you guys have in the guidance, that does not assume anything on the convert yet?
Joseph Mario Molina
That is correct.
A couple of questions. First, do you assume any recoupment of the California provider rate cut or is the full amount of the cut still in your guidance for next year, the 10% provider rate cut that was proposed?
Joseph W. White
No. The guidance assumes some recoupment. I'd like to think it's about 1/3 of the cut.
Okay. And then secondly and a follow-up to the earlier question, so you had some expectations for rate cuts and some from last year will annualize, how do you think about that as an impact on the MLR? Do you assume that those are mostly pass through or that you offset those or do you assume some sort of underlying cost trend that results and some negative spread that hits the MLR?
Joseph W. White
I think in just about every example we saw for guidance, we're assuming it as pure pass through.
And is that because they technically are or are you assume some cost trends but then, you, on your own medical management initiatives, will be able to offset some gross amount of spread?
Joseph W. White
I'm not aware that any of those cuts are accompanied by cuts in the provider fee schedule. So any savings would have to be under our own initiative. And I think one of the most noticeable cuts is in Ohio, where we've had pretty good profitability.
Okay. And lastly, just a question on Texas, I guess. So you assumed a statewide MLR of 90, and it looks like you're currently running at 93. So could you elaborate a little bit on how you thought about what to accrue Texas at, assuming that the new revenues, at least, would probably come in above what your core revenues are running at?
John C. Molina
We look at it both at the existing membership, which we believe that our initiatives will bring the medical cost down below 90. And then the new membership is about half-and-half, would be above 90 and it comes out at 90.
Okay. Is there a way, at all, to quantify what the impact the carve-ins have on the MLR? Does inpatient and pharmacy, do they both help by a lot or do they...
John C. Molina
No. We've assumed, on average, it's 90% MLR for the whole state for the year.
Is there anyway you could tell us how Texas ran in the fourth quarter to get a sense of -- if there was improvement yet or if that will mostly happen next year?
John C. Molina
Not until we announce earnings in February.
Joseph W. White
So we can tell you in February.
Juan José Orellana
Any other questions, Kevin?
Just want to follow up on the capital question from before, because I was quickly trying to run the math myself and I was coming up with something like $3 billion compared to the $4 billion number, but use like a 7 or 8 -- if you talk about 7 or 8, as kind of the number, going forward. And I guess your guidance already has a $1 billion of revenue growth for 2012, which maybe leaves more like $2 billion. Is that the right way to think about it? Obviously adding in whatever growth you do from cash flow over the next 12 months?
Joseph W. White
Yes. So much of it hangs on, frankly, profitability. If we can bring in even 2% after-tax, it makes an enormous difference when you run the numbers. I think the main point I would want to convey from what I said was, we do not have an urgent need to raise capital. It doesn't mean we would go raise capital if the opportunity were right, but we don't feel the burning need, right now, to go do it. And I think we're just trying to lay a frame work out. So maybe you can start to see how we're looking at it. But its profitability is such a big part of it.
And so just to also confirm, since the numbers you have are kind of flat, like a 10% to 11% number right now. So in your view, if there was no huge enrollment growth, you kind of see that capital, it's really excess capital that you could deploy on something else. You kind of have built this extra capital in anticipation of growth, is that the way you think, [indiscernible] 7 or 8 is the right number going forward? Is that the right way to think about it? Or should we always think about you pulling in more capital?
Joseph W. White
I guess I would say, we have a history of leaving the sub well-capitalized, we would probably do that absent growth. I guess what all I can say is as things stand now, certainly, in our existing subs, if we grow to the extent we talked about, we're not necessarily going to need more capital. That's the best I can express it.
Just one clarification, Texas expansion, the $900 million of revenue, is that a 2012 number? So annualized it would be higher?
Joseph W. White
Correct. We were running, I think, in the third quarter at the rate of around $400 million, so you would add that $900 million on top of it.
No, I mean. so the $900 million of incremental revenue -- so, we've got $400 million in 2013, you add $400 million to that, you're saying?
Joseph W. White
No. I would say 2011 annualized [indiscernible] about 1.3 for 2012, I guess, if that's what you're asking.
The 1.3 [ph] is total Texas revenue for the 2012 and 2013 because you only have the new membership...
Joseph W. White
Oh yes. You will add that again, I think.
That's the 2012 contribution. You'd annualize it to get to 2013.
Joseph W. White
Well, hold on. You've got -- you would have to add that plus 2 months. Yes. So it would be $900 million plus 2 more months, January, February.
John C. Molina
This is why we didn't give numbers for 2013.
Juan José Orellana
Thanks a lot. Any final questions? Well then, great. That concludes our presentation for today. Thank you very much. Thank you again for attending our Investor Day.
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