Molina Healthcare Inc. Q2 2008 Earnings Call Transcript

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 |  About: Molina Healthcare, Inc. (MOH)
by: SA Transcripts

Molina Healthcare Inc. (NYSE:MOH)

Q2 2008 Earnings Call

July 23 2008 5:00 pm ET

Executives

Juan Jose Orellana - VP of IR

Mario Molina - Chairman, President and CEO

John Molina - EVP of Financial Affairs, CFO and Treasurer

Joe White - CAO

Terry Bayer - COO

Analysts

Josh Raskin - Lehman Brothers

Greg Nersessian - Credit Suisse

Daryn Miller - Goldman Sachs

Tom Carroll - Stifel Nicolaus

John Rex - JPMorgan

Operator

Welcome to the Molina Healthcare second quarter 2008 Earnings Call. (Operator Instructions).

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

Juan Jose Orellana

Thank you, Tim. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the second quarter ended June 30, 2008. The company's earnings release reporting its results was issued today after the market closed, and is now posted for viewing on our company website.

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

I also would like to remind you that our comments today contain numerous forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions that are subject to numerous risks, uncertainties and other factors that could cause our actual results to differ materially. A description of such risk factors can be found in our press release, our 10-K annual report and our 10-Q quarterly reports filed with the Securities and Exchange Commission. These reports can be accessed under the Investor Relations tab of our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of July 23, 2008, and we disclaim any obligation to update such statements.

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

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

Mario Molina

Thank you, Juan Jose, and hello, everyone. I am pleased to report that our business continues to perform well, as evidenced by our second quarter earnings of $0.59 per share. As I assess our performance midyear, I am also very pleased with the company's consistent execution. Our focus on execution should not only carry our performance momentum into the second half of 2008, but will also enable us to achieve our longer term growth and profitability objectives.

As you know, we emphasize reporting transparency, and we have consistently reported on both our successes and our challenges. During our last two company Investor Day conferences, I have gone over with you our strategic plan and its five main goals. We have often used the framework of our strategic plan to measure our company's progress. During today's remarks, John and I will use the framework of our strategic plan to discuss our financial and operating results. The five areas of focus under our strategic plan are growth, financial strength, customer service, compliance and quality.

Now, I would like to turn the call over to John, so that he can discuss with you our financial performance for the second quarter, our guidance, as well as the growth, financial strength and customer service elements of our strategic plan. After John concludes his remarks, I will make some additional comments and discuss compliance and quality.

John Molina

Thank you, Mario. Good afternoon, everyone.

Let me begin by highlighting our earnings, and then move on to our quarterly financial performance as it relates to our strategic plan. Results for the second quarter of 2008 were $0.59 per diluted share, representing a year-over-year growth of 24%. Net income for the quarter ended June 30, 2008 increased to $17 million compared to $13 million in the same quarter last year.

As Mario just mentioned, one of the key areas of focus in our strategic plan is growth, which also leads to diversification in revenue and enrollment. Premium revenues for the second quarter of 2008 increased by $154 million to $761 million. This is a 25% increase when compared to the second quarter of 2007. Contributing to this revenue increase were organic growth, growth in our Medicare product, growth in new populations and growth from our Missouri acquisition.

Our consolidated membership grew by nearly 8% year-over-year even without the Missouri health plan. On a sequential basis, including Missouri, our membership grew by approximately 4%. This enrollment gain is significant both on a year-over-year and sequential basis since our historical full year organic growth rate have been in the range of 3% to 4%.

Our Medicare line of business is also experiencing steady growth. Medicare premium revenues have more than doubled since the second quarter of 2007, growing to approximately $23 million in the second quarter of 2008 with enrollment of approximately 7,000 members.

As a reminder, our Medicare business focuses primarily on special needs and other low income populations under managed care contracts with CMS. We do not participate in a private fee-for-service Medicare segment.

Revenue and enrollment growth associated with new states like our Missouri acquisition and new populations like the Ohio ABD population have also made meaningful contributions in our pursuit of greater diversification. Our diversification strategy is focused on reducing our revenue reliance from each of our states to no more than 15% of total revenue.

Our entry into the Missouri market, combined with our organic growth in Ohio and in Medicare, has reduced our revenue reliance on our larger states; California, Michigan and Washington. A year ago, these health plans represented 62% of total revenue, while today California, Michigan and Washington only represent 54%.

The second area of focus in our strategic plan is financial strength. To succeed, we must be efficient and manage medical costs, while controlling administrative costs. Our medical care ratio decreased to 84.2% in the second quarter of 2008 from 85.1% in the second quarter of 2007. Sequentially, the medical care ratio decreased from 85.8% in the quarter ended March 31, 2008, a decrease of 160 basis points.

Lower medical care costs at our Michigan, Missouri, New Mexico and Texas health plans more than offset higher medical costs in California and Ohio, underscoring the benefits of our focus on geographic diversification.

General and administrative expenses in the second quarter were 11.4% of total revenue or $87 million as compared to 10.9% of total revenue for the second quarter of 2007 or $67 million. Core G&A expenses, defined as G&A expenses less premium taxes, increased to 8.2% of total revenue for the second quarter of 2008 as compared to 7.7% for the second quarter of 2007. The increase in G&A expenses was the result of continued infrastructure investments necessary to support our growing Medicare business and also an increase in the accrual for incentive compensation due to the company's improving financial performance.

We recorded an effective tax rate of 40.9% for the second quarter of 2008, bringing our year-to-date effective tax rate to 40.8%. This rate is significantly higher than the tax rate in 2007. As we discussed last quarter, the higher tax rate is due to the change in the Michigan state tax calculation methodology effective January 1, 2008.

Cash flow provided by operating activities for the quarter ended June 30, 2008 was $39 million compared with cash flow from operations totaling $88 million for the same period in 2007, a decrease of $49 million. The decline was primarily due to three items.

First, the timing of the receipt of premiums recorded as deferred revenue in Ohio and Washington, netting a $16 million decline year-over-year; second, the reversal of $13 million accrued costs relating to the minimum medical care ratio contract provisions in New Mexico in the first half of 2008; and third, the maturation of our operations in Texas and Ohio during the first half of 2008.

As enrollment grew at these health plans during 2007, medical expense outpaced claims payment, leading to an increase in claims liabilities. Now that enrollment has stabilized, claims payment has caught up with expense and cash flow is at the level we expect in a mature health plan.

The company had cash and investments of approximately $688 million at June 30, 2008. The parent company had cash and investments of approximately $76 million.

We repurchased about 1.1 million shares of our common stock for approximately $30 million at an average cost of $26.50 per share during the second quarter of 2008. Shares used for computing diluted earnings per share for the second quarter of 2008 were 28 million versus 28.3 million in the second quarter of 2007. This demonstrates minimal impact of the share repurchase on EPS for the second quarter. Our Board of Directors has authorized us to buy up to 1 million additional shares. Our stock purchase program continues to be an attractive use of cash and underscores our belief in the long-term value of our stock as well as our commitment to deliver shareholder value.

I want to address the issue of claims payment. Service is part of our strategic plan. We want to pay our providers promptly and our claim statistics demonstrate that we are paying more promptly. Measures of claims inventory continues to decline. Specifically, the number of claims in inventory and bill charges of claims in inventory have declined year-over-year. Also, claims in inventory per member have decreased by 50% from 2007.

We are increasing our guidance for the full year 2008 to the range of $2.20 to $2.40 per diluted share. Improved financial performance at a number of our health plans including Michigan, Missouri, New Mexico and Texas, partially offset by higher administrative costs principally related to increased accruals for incentive compensation, have resulted in the revision of guidance.

I want to caution you that we have not yet received official notification from the State of Michigan as to the new rates under our contract effective as of October 1, 2008, the impact of risk adjustors on those rates or of any remediation of our Michigan business tax issues. We think, however, that the new contract rates effective October 1, 2008 will include an overall increase of approximately 3% for health plans. However, our Michigan plans final contract rates may differ depending on our risk scores.

We also think that the new rates will include going for remediation of the Michigan business tax issue starting on October 1, 2008 that is not included in the 3%. However, until we receive official confirmation of this, we will continue to accrue taxes for the full Michigan business tax. Also, there have been discussions with the Michigan Department of Community Health about the Michigan tax remediation on historic basis for the first nine months of 2008. To-date, these discussions have been inconclusive.

We have previously based our guidance projection on a 1.5% rate increase in Michigan. The possibility that a risk adjusted rate increase could exceed 1.5% and that we may receive relief on the Michigan business tax are among the factors contributing to the $0.20 spread between the low-end and the high-end of our guidance range.

Now let me turn the call back to Mario.

Mario Molina

Thank you, John. My congratulations to you and all of our employees for the strong performance in the second quarter. Now, let me give everyone an update on a couple of other issues.

In California the legislation eliminating the proposed fee-for-service provider rate cuts as well as providing for a managed care rate increase has been agreed to by the conference committee, representing both Houses of the State Legislature. However, any changes to the Medi-Cal rates are wrapped up in the California budget negotiations and both the outcome of the negotiations and the timing for the adoption of the budget is uncertain.

Despite this uncertainty, the management team at our California health plan is making progress implementing the plan for mitigating the revenue impact of the proposed cuts. This plan includes the implementation of provider fee reductions to fee-for-service and capitated providers, new medical management initiatives and administrative cost reductions. We continue to be hopeful of both the rescission of the cuts and ultimately a rate increase.

I continue to be encouraged by the progress we are making in Ohio in establishing ourselves as a trusted Medicaid partner with the state despite a challenging medical cost environment. We are not immune to the challenges facing our peer companies in Ohio. However, we believe the medical management initiatives coupled with administrative efficiency will allow us to establish profitability in the long run.

Our data suggest that the majority of our difficulties are in Ohio's central region, specifically, unit costs in this region remain higher than in other regions. In addition, the implementation of risk adjustors by the State has decreased the estimated benefits from the midyear rate adjustment that became effective on July 1. Finally, higher than anticipated behavioral health costs have also unfavorably contributed to the Ohio health plans current medical cost profile.

Our management team at Ohio has implemented several key initiatives to lower our medical care costs. These include renegotiating provider contracts, tighter medical management and bringing the behavioral health component in-house on September 1, 2008.

Over our 27-year history, we have learned to assess our business in the same manner that investors assess their investments; as a portfolio. In some cases, some investments will outperform others in the portfolio, thus minimizing the risks and optimizing the return. So what's the point?

The point is that in the Molina's health plan portfolio, California and Ohio represent approximately 24% of our medical margin on a year-to-date basis. This indicates that over 75% of our medical margin is currently being generated by other health plans that are performing at or above expectations.

As John said and it bears repeating, we continue to hold the line on our core administrative costs, and we expect to gain additional leverage as our enrollment continues to grow. Our total enrollment is up 4% sequentially from last quarter with membership increasing in the majority of our health plans. Historically, organic growth rates, absent large RFPs, have been in the range of 3% to 4% for the entire year. Our commitment to keep our administrative cost low drives our financial strength and, ultimately it is what enables us to outlast temporary market fluctuations created by budgetary uncertainties or higher than anticipated medical costs.

The two final elements of our strategic plan are compliance and quality. In the highly competitive and regulated environment in which we operate it is essential to maintain a reputation for compliance among all stakeholders. Our members entrust us with one of their most prized possessions; their health. Our state partners entrust us with public funds and expect us to be prudent stewards of those resources. Likewise, our shareholders entrust us with their hard earned capital. We take these responsibilities very seriously and constantly strive to operate in a manner consistent with all applicable financial and industry requirements and standards.

I am happy to report that we continue to enjoy positive relationships with multiple agencies that license and regulate us, and we also have an excellent track record with the Securities and Exchange Commission. We are not subject to any government investigations or lawsuits, and we routinely collaborate with regulators on how to improve our industry and the care we provide to our members.

Our long-term success will depend on the quality of services we provide. It is, for us, important that our health plans continue to maintain their accreditation by the National Committee for Quality Assurance, which is the industry leader in assessing quality measures of health plans. I assure you that maintaining our NCQA accreditations will continue to be an ongoing and continuous focus.

This concludes our prepared remarks. Tim, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Josh Raskin with Lehman Brothers. Please proceed.

Josh Raskin - Lehman Brothers

Hi, thanks. Good evening. Three questions, I guess. The first just a quick one, I think it's easy. New Mexico, I'm just a little confused by the accounting for that one, the $6.2 million that I'm talking about. Why is that a revenue boost and not a cost, if it's a minimum MLR? I think I'm missing out on how it works.

Joe White

Hi, Josh. This is Joe White speaking. The requirement in New Mexico is that funds that exceed to the extent we fall below a certain minimum medical loss ratio we have to return the appropriate piece of the revenue to the state. So, for example, if we had $100 of revenue and $79 of medical expense, we would calculate the revenue due from the state based on in effect taking that $79 and dividing it by 0.8 and that is the appropriate amount of revenue we can recognize. So that's the difference between that and what the state pays us is what we owe the state back.

Josh Raskin - Lehman Brothers

Okay. I got you. So I think I did understand it, I just didn't get the mechanics. Second question just on the higher comp accruals on the SG&A, they came a little bit higher. Now, obviously the guidance today is still sort of $0.05 below the original year. But am I correct in assuming that the updated guidance last quarter included lower comp expense and now you're getting back a portion of that? Is that the way it works?

Joe White

That's correct.

Josh Raskin - Lehman Brothers

Okay. That's an easy one, and then just the last one. Just on Ohio, obviously, you guys are looking at sort of a 91% MLR overall in the first half of the year and you'd suggest a goal of 88%, sounds like that's going to be sort of tough to get to, obviously. Ohio is a big market, a couple of hundred basis points here is a lot. So I'm just curious in terms of the new goals for Ohio, you talked about being a long-term partner with the state and I think long-term financially viable, but when is the cut-off, is the first question, and then what are the other states that are making up what I calculate to be somewhere between $0.35 and $0.40 this year?

John Molina

Josh, I think that the answer to the first part of your question is when would we say enough is enough is when we determine that there is not long-term financial viability in the state. We certainly haven't reached that point in Ohio. And as I stated, as far as one of the reasons that we are upping our guidance is because plants such as New Mexico, Missouri, Michigan and Texas are outperforming our original expectations. And so, again, it gets back to what Mario talked about in the portfolio theory in our geographic diversification. Some might not be performing as well like Ohio, but we've got others that are continuing to chug along.

Josh Raskin - Lehman Brothers

Okay. I guess I was just looking at second quarter MLRs for the other states that you mentioned. It didn't look like there was a magnitude there to sort of make it up, but I guess it's just generally spread across the other states?

John Molina

Correct.

Mario Molina

Correct.

Josh Raskin - Lehman Brothers

Okay. Thanks

Operator

Our next question comes from the line of Greg Nersessian with Credit Suisse. Please go ahead.

Greg Nersessian - Credit Suisse

Hi, thanks. Good evening. Just the first question, just to follow-up on Josh's question regarding the New Mexico accrual. I mean, I guess, how much of that do you sort of view as kind of one-time this year that would not necessarily be recurring going forward into 2009? Because you had 6.2 this quarter, I think you had, what, 5.8 last quarter or something like that?

Joe White

Correct. It's a little over $12 million. This is Joe speaking. It's a little over $12 million taken into the year. So that is, as we anticipated, exhausted by the close of the first half of the year. So there won't be any benefit from that going forward.

Greg Nersessian - Credit Suisse

Okay. So presumably the New Mexico MLR should migrate back up into that kind of 85% level or maybe a little bit higher going forward, is that right?

Joe White

Probably the way the contract is structured a little bit below 85%, but definitely increasing.

Greg Nersessian - Credit Suisse

Mid 80s, okay. And then, I guess, on the auction rate issue, I mean is any of that going to impact your working capital in terms of the regulated subsidiaries or are you well overcapitalized there? I mean is that an issue?

Joe White

No, we haven't had any indication that those assets are not acceptable for any [IC] minimum networks requirements.

Greg Nersessian - Credit Suisse

Okay. And then, I think, you mentioned that the Michigan tax change goes into effect October 1. Does that mean that fourth quarter we revert back to kind of your historical tax rate, is that what we should be building into our model?

Joe White

Right now, Greg, we don't know for sure. We haven't received confirmation that that's going to happen. But if it does get inactive, we believe that the rates starting October 1 will normalize to where it's been historically. There's also a piece going back for the first three quarters. That's a separate issue that needs to be addressed as well.

Greg Nersessian - Credit Suisse

Right. Okay. So that would be kind of like a one-time adjustment, and then if you get --

John Molina

Greg, the second piece would be a one-time adjustment if they fix the historic.

Greg Nersessian - Credit Suisse

Okay.

Mario Molina

But I'd say just to make clear on what John said, there seems to be more momentum now about adjusting our actual premium rate rather than going back and changing the Michigan tax code. So what you're going to see is the Michigan Funding Authority is, we're hopeful, going to increase our payment, so you are going to see it on the premium line not in the income. The income tax will still remain high as a percentage.

Greg Nersessian - Credit Suisse

Okay. Is that in the 3% number that you mentioned or would that be on top of that?

Mario Molina

That would be on top of that.

Greg Nersessian - Credit Suisse

Okay. But the current guidance range is still assuming the 40.6 for the full year tax rate, right?

Mario Molina

The guidance actually if you will see in the release is 41.7. There are certain ambiguities about the Michigan situation that could increase the tax. I would just say that the reason we have a range, as John noted in his remarks, is to encompass these different eventualities. So I think it's fair to say that to the extent that's not from all things being equal to the extent that's not remediated we're going to show be it towards the lower end to the extent it's remediated or towards the higher end. So that's actually why we have a range.

Greg Nersessian - Credit Suisse

Okay, great. And then, Mario, if you could just touch on what you sort of view as the next steps in terms of the California budget situation, in terms of where that negotiation goes from here? And that will be it for me. Thanks.

Mario Molina

Well, we were talking about that earlier. The California budget situation comes down to a negotiation between what's called the "Big Five," the leadership of the Republicans and the Democrats in both Houses plus the Governor, who get together to negotiate out any final budget differences, and then that is returned to the Legislature for passage. It then goes to the Governor for signature, and the Governor does have the right to do what is called blue-pencil or line item veto certain things. But I expect that we will have a budget in August or September. This is really no different than what happens every year, and unfortunately, it generates a lot of headline risks for us. But it seems like almost every year the budget is late, but it does get passed and these things work themselves out.

Operator

Our next question comes from the line of Daryn Miller with Goldman Sachs.

Daryn Miller - Goldman Sachs

Hi, good evening. Joe, a question for you, following up on the question Josh asked on incentive comp. Your adjusted guidance was looking for a $0.10 pickup due to lower incentive comp accruals. What does that number look like now with you guys booking more incentive comp?

Joe White

I'm sorry. Repeat that question, Daryn. You are talking about what we shared the last time we were out on guidance.

Daryn Miller - Goldman Sachs

Correct. You had looked for total admin savings of like $0.19. Approximately half of that or $0.10 was for lower incentive comps.

Joe White

So we've moved midpoint up to 2.30. So essentially half of that difference would go back.

Daryn Miller - Goldman Sachs

So about $0.05?

Joe White

Roughly.

Daryn Miller - Goldman Sachs

Okay. Question on California, going back to the updated guidance you were trimming guidance by $0.10 on issues that were going on in California, which assumed that you would be successful in renegotiating some of your contracts. Can you talk just in terms of how successful those renegotiations have been, and are you on pace to only have the 10% reduction, assuming that none of the other activities flow through in California?

Terry Bayer

This is Terry. I will respond to that question. We're proceeding with the plan that we outlined at our Investor Day. On the 10% rate cut to fee-for-service providers, that's put into our system and we're proceeding until we have an indication that that is not to go forward. And that's not a contract change, that's the rates, the Medi-Cal fee schedule. So we loaded the Medi-Cal fee schedule 10% lower. And on the reductions that we negotiated with our capitated providers, we have moved forward as planned and over 85% of those have been returned. So we are proceeding to mitigate the $0.10 until we know differently.

Daryn Miller - Goldman Sachs

So in relation to that $0.10, is that 85% successful recontracting higher or lower than what you had originally assumed?

Terry Bayer

It's not significantly different, because if you recall we had some medical management initiatives and we had administrative cost cuts. And in some of those areas, it is exceeding our original estimate so we are on target to mitigate the risk.

Daryn Miller - Goldman Sachs

Got you. When I look at where the Street is on '08 and the Street is on '09 and I think about a couple of items in '08 that may be considered one-timeish, maybe the $0.25 in New Mexico and $0.05 in incentive comp, it implies more than a 30% increase. I just wondered if you can just help kind of walk through what's going to contribute to that 30% growth.

John Molina

Daryn, we haven't given 2009 guidance and I hate to comment on what the Street's put out. What I will say is we've got our plan, as Mario says, the portfolio theory, and we are just continuing to execute on our strategic plan.

Daryn Miller - Goldman Sachs

Okay. Thanks. One last question, John, just in relation to you guys bought back a little over 1 million shares of stock. Can you just talk about how you think about the value of the stock at the current levels and just reconcile that with what would seem like it's been an uptick on insider sales on the shares. Thanks.

John Molina

Sure. I think that given the fact that the Board has authorized us to buy another million shares that we believe that the stock overall is undervalued. In terms of individual selling, a lot of that is the 10b5-1 plans that are on autopilot.

Daryn Miller - Goldman Sachs

Just a follow-up question on that, because the 10b5-1 plan, if you look at the rate, there's not a pattern that is apparent. How does that work in terms of those automatic plans that are established? I would tend to think that we'd see more consistent rate of selling and amount of shares that are sold?

John Molina

I think that that would have to go to the individuals in the trust that have set those things up. I can't speak to it. The 10b5-1s can be shaped in different ways and different people have shaped theirs in different ways. But once it's in place, the sellers don't have the ability to alter those items from month-to-month, quarter-to-quarter.

Daryn Miller - Goldman Sachs

Okay. Thank you, John.

Operator

(Operator Instructions). And our next question comes from the line of Tom Carroll with Stifel Nicolaus.

Tom Carroll - Stifel Nicolaus

Hi, good evening, everyone. Most of my questions have been answered, but a quick follow-up on the Michigan tax issue. It sounds like you guys are leaning towards them adding to your rate and having you use that as a pass-through to pay the higher taxes rather than get some kind of lump sum that would be retroactive, I mean is that true? I mean it sounds like you guys are going back and forth on that in your conversation so far today, but it sounds like maybe it's going to be forward-looking and it's not going to be retroactive. Would that be your gut?

John Molina

No, Tom. There's two pieces of it. The first piece would take effect, if enacted, on October 1, 2008. It would be a higher premium rate to the health plan that can be then used to cover the higher tax on a go-forward basis.

Tom Carroll - Stifel Nicolaus

Right. So a piece in addition to the 3%?

John Molina

Correct.

Tom Carroll - Stifel Nicolaus

Okay.

John Molina

The Michigan Department of Community Health and the health plans have been discussing a way to remediate the first three quarters of the year. We don't know how that's going to resolve itself. The folks from MDCH have told us they would like to try and do something, but the mechanism and the amount are still under discussion. But that would be a separate item. That would be one-time if it's enacted.

Tom Carroll - Stifel Nicolaus

Okay. So it sounds like there might be three pieces then. A regular rate increase, an increase of 1%, 1.5% or something like that for future remediation, and then a third piece that would capture retroactivity back through the year.

John Molina

You could characterize it that way. You're not going to see that on the income statement. Starting October 1 though you will see a single increase in premium.

Tom Carroll - Stifel Nicolaus

Okay. That's good. I was just trying to get some more clarification on that. I'm done. Thanks.

Operator

Our next question comes from the line of John Rex with JPMorgan.

John Rex - JPMorgan

Hi. Thanks. Just a couple of follow-ups on guidance. I wanted to make sure I understood it. John, I just want to get again what you mentioned on kind of the difference between the high-end and the low-end of the guidance, what the swing factor was there?

John Molina

The swing factor includes things like Michigan, it includes like what the Texas rate ends up being, what we get for Medicare and some other things. Joe, anything you want to throw in there?

Joe White

Yeah, I mean there is a brief summary of this, John, on the ER, but essentially we talk about rate issues in California, Michigan and Texas, how Ohio cost trends develop and the Michigan issue, I think, would be the three biggest categories.

John Rex - JPMorgan

I mean, actually, what I was trying to clarify is what is the high-end contemplate in terms of resolution on Michigan? Does that contemplate retroactivity, I'm just trying to think kind of how much swing there is for Michigan?

Joe White

If we were to isolate the Michigan tax issue, we talked at our last call about the impact of that being about $0.08 for the year, looking at our guidance the proportional or relative increase of Michigan profitability during this year is actually driving that number up a little bit in our projections now. My best bet is that tax issue is ultimately going to shake out at potentially a $0.12 impact for the year. Again, as Michigan is proportionally more profitable, the tax bite grows. So theoretically, I guess you could have a $0.12 swing on Michigan taxes alone.

John Rex - JPMorgan

Right. And so the high-end would essentially anticipate retroactivity. Would that be the right way to think about it that you get a retroactive payment for that?

Joe White

I mean there are a lot of factors in there.

John Molina

John, let me see if I can answer that question a different way. If the Michigan tax gets resolved, will that lead us to automatically raise guidance? No. It is in itself not a necessary nor a sufficient condition that would cause us to change guidance. But it is a piece.

John Rex - JPMorgan

Okay. And does the guidance still anticipate two interest rate cuts this year?

Mario Molina

The guidance anticipates we're done with interest rate cuts.

John Rex - JPMorgan

That's a change from where you were before, right?

Mario Molina

I think last time we went out, we were anticipating another 0.25 point cut, July 1?

Terry Bayer

Right.

Mario Molina

July 1. We removed that.

John Rex - JPMorgan

You removed that. Isn't that worth like about $0.08 a share?

John Molina

Yes. But, John, you also have to take into account that our share repurchase happened sooner. So we've got less cash for investment. The difficulty with trying to parse out the different elements of what builds us exactly up to our guidance is there are so many potential combinations and permutations.

John Rex - JPMorgan

Right. Okay. So it wouldn't be fair just to say that I could take the low-end of the guidance coming up is mostly about the declining rate, it's obviously about the removal of one of the rate cuts it's kind of all of these factors then?

John Molina

Yeah. Isolating one thing would not be fair nor accurate.

Joe White

And if you were to go back and look at what we've talked about rates, John, you mathematically can't get there from the elimination of one quarter.

John Rex - JPMorgan

Yeah.

Joe White

It's not that's significant.

John Rex - JPMorgan

Okay. Great. Thank you.

Operator

Dr. Molina we have no further questions. I'll turn the call back over to you.

Mario Molina

Well, thank you for joining us everyone. We will talk to you next quarter.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation, and we now ask that you please disconnect your lines. Have a great day, everyone.

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