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Molina Healthcare (NYSE:MOH)

Q3 2012 Earnings Call

October 23, 2012 5:00 pm ET

Executives

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

Joseph W. White - Chief Accounting Officer

Terry P. Bayer - Chief Operating Officer

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

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

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Melissa McGinnis - Morgan Stanley, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Scott J. Green - BofA Merrill Lynch, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Operator

Welcome to the Molina Healthcare Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, October 23, 2012. And I would now like to turn the conference over to Mr. Juan José Orellana, VP of Investor Relations. Please go ahead, sir.

Joseph Mario Molina

Thank you, Chantal. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the third quarter ended September 30, 2012. 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.

Participating for Molina today will be Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer.

After the completion of our prepared remarks, we will open the call to take your questions. [Operator Instructions]

Our comments today contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act regarding our Texas cost-containment efforts and year-end profitability, our Ohio Duals expansion, our transition of ABD members into managed care at our California, Washington and Texas health plants, our MMS operations and other matters. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report for fiscal year 2011, our Form 10-Q quarterly reports and our Form 8-K current reports. These reports can be accessed under the Investor Relations tab of our company's website or on the SEC's website.

All forward-looking statements made during today's call represent our judgment as of October 23, 2012, and we disclaim any obligation to update such statements.

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

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

Joseph Mario Molina

Thank you, Juan José. Hello, everyone.

Today, we reported earnings of $3 million or $0.07 per diluted share for the third quarter of 2012. We are pleased with the progress we made during the third quarter. Both revenue and enrollment were strong, which bodes well for our company's future as we improve our margins. More importantly, in Texas, we saw incremental improvement this quarter as the implementation of our utilization and unit cost initiatives gained momentum. We are seeing continued stability in our Molina Medicaid Solutions business, and it is making the kind of contribution we expected when we made the acquisition.

So let's start with Texas. Since reporting our second quarter results, we have made considerable progress toward achieving our objective of reaching a breakeven run rate by the end of the year. Our medical care ratio in Texas decreased from 109% in the second quarter to 90% in the third quarter. This improvement is even better than the medical care ratio we reported in Texas for the second -- third quarter of 2011. However, we are not yet out of the woods. There is still a considerable amount of work to be done and we must remember that this early success does not constitute trend.

The improvement in our Texas medical care ratio was due to the implementation of initiatives aimed at reducing utilization and unit costs. As Terry Bayer outlined at our Investor Day in September, this included changes to contracts with providers to lower unit costs and the implementation of state-required changes to fee schedules. In addition, a blended 4% premium rate increase that went into effect on September 1 also contributed to the improvement.

Ohio was also in the headlines this past quarter. Molina Healthcare Ohio was selected to participate in Ohio's Integrated Care Delivery System for dual eligibles. As a reminder, we were awarded the maximum number of regions allowed per health plan and the awarded regions are within our existing service areas. This service area overlap is important during a transition from fee-for-service to managed care. If we assume that premium rates are set adequately to cover medical costs, then having an established provider network and experience in a given market can ease the transition to managed care for members.

In addition to Texas, Washington and California are the 2 other states where we continue to transition thousands of ABD members from fee-for-service to managed care. In California, our health plan has experienced a considerable change in our member mix, adding about 20,000 ABD members over the past year and nearly doubling our ABD enrollment. Accordingly, our medical care ratio also increased during the same period because these members require more medical care. The California Department of Health Care Services recently asked for health plan input in a review of premium rates for ABD members. Our California health plan has already provided input in support of that review. In addition, we will be exiting an area in Northern Los Angeles County where there is only 1 hospital and costs are extremely high. We expect this will reduce our enrollment by about 6,000 members, but lead to lower medical costs.

In Washington, we added nearly 19,000 blind and disabled members since July of this year. Unlike California, the influx of these members has moderately increased our Washington health plan medical care ratio when compared to the second quarter of this year. Our initial data related to these new members in Washington is promising, but I caution you, the claims data will take some time to develop fully.

There are a few developments since our Investor Day presentation that I would like to bring to your attention. On October 12, Governor de Jongh of the U.S. Virgin Islands announced a partnership between the Virgin Islands and the state of West Virginia in which Molina will provide our Medicaid Management Information System to the U.S. Virgin Islands through our West Virginia fiscal agent operation. The contract outlining the sharing of the Molina platform went through several rounds of review at the federal level and has been approved by CMS. The partnership will benefit both the Virgin Islands and taxpayers by avoiding the cost associated with the design, development and implementation of a new system, while gaining leverage from operating on a common platform. This partnership can serve as a model for the country by demonstrating that states and territorial governments can reduce their costs by sharing such technologies for their Medicaid programs.

Molina System in the West Virginia is a fully-certified system by the federal government. And as a result, the Virgin Islands will be the first U.S. territory to have a certified system. It is important to note that West Virginia system is the first to be certified under the Department of Health and Human Services' 7 Conditions and Standards for Enhanced Funding. Although the revenue associated with this partnership is small, the precedent established by this partnership is significant. In our health plan business, we are especially proud that our focus on quality continues to attract national attention and recognition from Consumer Reports and the National Committee for Quality Assurance, which ranks the top Medicaid health plans in the country. 8 of our health plans are accredited and have been nationally ranked for the 2012, 2013 cycles. We are especially proud that our New Mexico, Utah and Washington health plans were ranked the top Medicaid Health Plans in their respective states.

Our health plans are also gaining recognition for innovative partnerships and programs. For example, Molina Healthcare of California and Sacramento County joined forces to launch the Low-Income Health Program. This program, a safety net managed care health plan administered by Molina, will allow uninsured low-income Sacramento County residents who do not qualify for Medicaid to receive health care. The program is a precursor to the Medicaid expansion in California and the implementation of an insurance exchange pursuant to the Affordable Care Act. It will ensure continuity of care and reduce stress and confusion among members by allowing them to keep their providers when the Affordable Care Act is implemented. Many of our clinics in the Sacramento region will participate as primary care providers. The new plan goes into effect in November of 2012, and up to 14,000 childless adults whose income is less than 67% of the federal poverty level will be enrolled in the Low-Income Health Program.

We've also joined forces with America's Health Insurance Plans and the Centers for Disease Control and Prevention to implement the National Diabetes Prevention Program. As part of this initiative, Molina Healthcare will implement the program to prevent type 2 diabetes in individuals who have prediabetes, a condition of elevated blood sugar that may lead to type 2 diabetes. By developing innovative partnerships with local and regional organizations, Molina Healthcare will be able to leverage existing competencies and resources to provide a National Diabetes Prevention Program to our members in Florida and New Mexico.

Molina's involvement in this program also happens to be personally rewarding for me. This positions our company as a national health care leader focused on prevention of a disease that affects nearly 26 million Americans. As an endocrinologist, the diagnosis and treatment of diabetes was the focal point of my medical education, training and research.

As we move into the fourth quarter, today's results give us confidence that we're on the right path toward improving our profitability. The combination of our short-term tactical actions, coupled with the experience we are building from the long-term, bodes well for our future.

Now I'd like to turn the call over to John, who is celebrating his birthday today with us. Happy birthday, John.

John C. Molina

Thank you, Mario. It's always a pleasure to celebrate your birthday with 58 of your analytical friends.

Hello, everyone. As Mario pointed out, today we reported net income of $3 million or $0.07 per diluted share, a substantial improvement over the loss of $0.80 per diluted share that we reported in the second quarter. Of course, our turnaround in Texas is the big story for this quarter. Our medical care ratio dropped from 109% in the second quarter to 90% this quarter. I want to be clear that we still have work to do in Texas. But we are delivering on the commitment we made 3 months ago that Texas would be breakeven on a run rate basis by the end of 2012. It is my belief that we will be able to report success in reaching that goal when we announce our fourth quarter results.

With that said, I want to talk for a moment about our third quarter results from my broader perspective.

Premium revenue for the third quarter grew to $1.5 billion, representing a 31% increase over the third quarter of 2011. All of the key factors driving our business forward position us well for the implementation of the Affordable Care Act. Revenue grew due to membership increases, more ABD members and the addition of more benefits into managed care. And the growth in our business is not just year-over-year. We can actually see the changes happening from last quarter to this quarter.

We were able to maintain revenue between the second and the third quarters despite the loss of our contract in Missouri. Put another way, our growth in Washington this quarter was enough to offset the loss of all of our membership from Missouri. The growth in Washington came from 2 initiatives, the transition of ABD members into managed care and the transition of additional TANF members to Molina as a result of market consolidation.

Our ABD enrollment has grown to 15% of our total membership, representing about 1/3 of our revenue. Our experience managing these chronically-ill and complex members is important because this is a significant area of future growth.

Our consolidated medical care ratio decreased sequentially, from 92% in the second quarter to 88% in the third quarter. This decrease was the result of substantial improvement at the Texas health plan, which contributed nearly 1/4 of all premium revenues in the third quarter. And therefore, the medical cost improvements in Texas had a disproportionate impact on our consolidated results.

I want to also talk about the traction we're getting in Texas. Now let me provide you with more detail.

The medical care ratio for the Texas ABD membership declined to 94% in the third quarter of 2012 from 119% in the second quarter. ABD membership overall constitutes approximately 67% of all Texas health plan revenue.

Turning to California, the increase in the medical care ratio year-over-year was primarily due to the mandatory assignment of ABD members previously served under fee-for-service arrangements. Generally speaking, individuals who are new to managed care have higher utilization of medical services upon enrolling into managed care. Our internal data and experience with this population suggest that medical care costs will decrease for the ABD members over time.

In California, ABD enrollment was spread out over a 12-month period beginning in June 2011 and ending May of 2012. We have seen utilization decline for the members enrolled early, but are experiencing the expected higher costs from members more recently enrolled. As Mario pointed out during his remarks, we are working with the state by providing input into their review of ABD premium rates in California. We are also exiting a high-cost area with about 6,000 members and a medical care ratio well in excess of 100%.

We continue to accrue for the premium impact of the provider cuts called for by Assembly Bill 97 in California. As of September 30, 2012, we have accrued approximately $15 million to pay back to the state as a result of these provider cuts. Because we have not passed on these cuts to providers, this accrual have resulted in a higher medical care ratio at our California health plan since July 1, 2011.

General and administrative expenses for the quarter were essentially flat sequentially and year-over-year, at 8.3% of total revenue. Cash flow provided by operating activities grew to $264 million for the 9 months ended September 30, 2012, compared with approximately $155 million for the same period last year. This is a 70% higher than it was last year.

Similar to last quarter, higher medical claims and benefits payable, mostly in Texas, were the main reasons for the increase in cash flow provided for operating activities, followed by an increase in deferred revenue.

We reported a tax benefit in the third quarter. This is the result of a true-up of our year-to-date effective tax rate to reflect the impact of a lower net income, including the effect of nondeductible expenses. The company had cash and investments in excess of $1 billion. Our parent company had cash and investments of $41 million. Days in claims payable increased sequentially by 1 day to 45 days. Year-over-year, days in claims payable increased from 39 days to 45 days.

I'm also pleased to report that we had another strong quarter at Molina Medicaid Solutions. We reported operating income for MMS of $8 million for the quarter and $23 million year-to-date. Operating margins for MMS were 17% for the quarter and 18% year-to-date. As we expected when we acquired MMS, the long-run consistency of operating margins in this business counteracts the unevenness that we often observe in the health plans.

We have made great strides in improving our operations, which are reflected in the improvement of our third quarter results when compared to second quarter results. But we still have a ways to go until we are satisfied, as the year-over-year results still show a gap. As such, we will not be providing EPS guidance until we are confident that the operational improvements made in Q3 have gained traction for the long term.

Operator, that concludes our prepared remarks. We're ready to take calls.

Question-and-Answer Session

Operator

[Operator Instructions] And we have our first question from the line of Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

So Texas question for you. It sounds like the 90.3% MLR would have been -- if you would have the rate increase for the full quarter instead of just 1 month, I'm calculating about 88% and I'm getting a profit for September. So it sounds like your goal of breakeven by year-end, is it fair to say you're kind of already there? Is there something that you're anticipating in the fourth quarter? Is it seasonality of costs or something that could potentially bring you back under that?

John C. Molina

So Josh, this is John. As Terry Bayer likes to say, "One point doesn't constitute a trend, but every trend starts with one point." We had a good September in Texas. I think you calculated it correctly. We do have issues such as seasonality that will creep up in the fourth quarter, so we're not ready to say that Texas has reached our goal, but we're confident that we can get there.

Joshua R. Raskin - Barclays Capital, Research Division

Okay, so not declaring victory I guess. Second question, just around capital needs and stuff. And I guess the first question, just around Missouri and the exit there. The claims runout, is that in line with expectations? And are you expecting any additional capital freeing up over the next, I don't know how long it takes, 6, 9, maybe even 12 months? And then maybe you could just update us on your overall thoughts around capital adequacy and any potential needs for additional capital as you continue to see the top line accelerate?

Joseph W. White

It's Joe. In terms of Missouri, it's playing out essentially as we expected it would. And, yes, sometime between now and first half of next year, we'll be able to withdraw -- I think we've talked about there's somewhere between $20 million and $25 million for Missouri. Regarding overall capital, I think John talked about that in New York quite a bit. I don't know if John wants to add anything.

John C. Molina

Josh, I mean nothing has changed in our thinking right now.

Joshua R. Raskin - Barclays Capital, Research Division

Okay, okay. I would have thought the quarter obviously -- that's positive, but it sounds like the growth is coming in a little bit stronger. So net-net, sort of no change to the overall thoughts around capital?

John C. Molina

Correct.

Operator

And our next question comes from the line of Justin Lake with JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

Just first in the -- obviously the Texas improvement is fairly dramatic there. I know the rate helps in September, and -- but can you talk us through a little bit about what -- maybe a few of the drivers that you saw in the quarter in terms of what you were able to implement that got that MLR to improve so much. And what you still have left to put in place, maybe in terms of further cost and medical management?

Terry P. Bayer

This is Terry. We always share with you that we use a very basic and simple formula to improve our medical costs. We had unit cost changes, we had utilization changes, we had claims processing changes, and then we had a rate increase. And all of that combined came into play to bring down that MCR. I think the details are simply that we looked at our highest cost providers and we brought them back closer to the Medicaid fee schedule or made the adjustments we needed to there. We greatly enhanced our active utilization management and increased our activities so that only appropriate care was being authorized, and we did implement a number of claims processing changes that relate to implementation of state fee schedules. So you're quite correct that the rate increase helped. At this point, we continue on as we do in all of our markets, we'll continue to monitor our unit costs, we'll continue to manage the utilization and implement other changes as they come. So there's nothing dramatic to share with you except a continuation of the same.

Justin Lake - JP Morgan Chase & Co, Research Division

Can you delineate for us what the unit cost versus utilization, just to give us some idea of where the bigger --

Terry P. Bayer

We haven't looked at it in that greater detail.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. Just a follow-up then on the California dual rollout and kind of what you're seeing now at ABD. So first, can you remind us what the -- when the ABD rates were set here, and as you're kind of relooking at them now, what was the assumed savings versus fee-for-service in these rates?

Terry P. Bayer

We've heard -- this is Terry again. We've heard that the state was looking upwards of 20% to 30% for savings, but that was not shared early on with us as overtly as it was for instance in the Texas market. So there was a cost savings embedded there, and all of the health plans have -- brought together their combined experience and are working with the state actuaries at the state's recognition that they're going to reevaluate the rates now that we are post-16 months into that population rollout.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay and just -- and then thinking about the California dual rollout, any update there on timing? And what kind of savings that California might be looking at with the duals? Would it be similar? Would it be materially different there?

Joseph Mario Molina

The state had not updated us beyond what we shared with you folks in September.

Operator

And our next question is from the line of Chris Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Just to come back to California real quickly. On the 6,000 members in the unprofitable service area, what will that do to the MLR perspectively? Or I guess, at a minimum, can you give us a sense for how much of a drag they were on the current quarter?

John C. Molina

Chris, this is John. We didn't separately quantify what the profitability was for those members. It's a relatively small number out of the 350,000 that we've got. Suffice to say that, for that group though, on the MLR side, the medical care costs were exceeding 100% of premium.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

How many of the 6,000 were ABD? Or any of them ABD?

John C. Molina

I couldn't tell you. I would imagine that some of them probably were, but I couldn't tell you how many of them were.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then more broadly in California, on the rate side, I believe a portion of your membership was supposed to receive a rate update October 1. Did that happen? Or have you been given any color as to what that rate change might look like?

John C. Molina

The 2-plan model contracts, L.A., Riverside, San Bernardino, have an October 1 rate year. I think the state has given out draft rates that folks are looking at and looking at the methodology and commenting on. They're not final yet. And so we don't typically comment on draft rates.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I mean anything directionally? Or are you expecting a positive rate update?

John C. Molina

Right now, I think that they are still in negotiations. If it was dramatic, I think we would have said something. Other plans would have said something. But the fact that no one is doing much in the way commenting would suggest that it's probably what we expected. If you recall at the January Investor Day, we're talking about rates flat to slightly down.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then changing gears. I know you don't have a lot of members in Wisconsin, and it's not a big part of your business right now, but obviously United has left there. And you saw a pretty big sequential drop in MLR. Is this now a business that you would be actively soliciting? Or any color on what's going on there would be great.

Joseph Mario Molina

This is Mario. No, we're not actively soliciting any of that business. The state will reassign those members beginning, I believe, in February, we are still working with the state trying to determine what the rates will be for next year. We don't yet have the rates. And that's going to have a big impact on our decision whether or not to stay in Wisconsin. Obviously, we would pick up a portion of those members. And unless we get an appropriate rate increase, we probably will not be able to remain in Wisconsin.

Operator

Our next question is from the line of Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Seems like you've done well with Washington considering bringing on the ABD population, is this a situation of familiarity with the state and population that kind of helped you manage it out of the gate? And I guess your comfort level, just in terms of the unlikeliness of seeing any hiccups there, relative to maybe some of the other states where you have seen issues within this population?

Joseph Mario Molina

Yes, this is Mario again. I want to go back to the comments I made earlier, and that is that having an established provider network and experience in the market is really helpful when you're transitioning new populations. We have a very strong provider network in Washington. It's a plant with a lot of experience. We've been operating there since 2000. Good reputation, good relationships, and that has made a big difference. I think that any time we're in a situation where we can transition members to an existing service area, like the upcoming situation in Ohio, that's certainly our preference.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And then just going back to California sort of higher MLR there, and state to review the premiums. Does that -- I guess does that give you any pause around the duals? Or how you think about the ability to manage that population at all? And then how do we think about startup costs and initial MLRs for the California duals?

Joseph Mario Molina

Well, first of all -- this is Mario again. I think everyone has struggled in California with the implementation of the ABD patients, and that's why there's been a lot of discussion back and forth with the state over the rates. The other thing to remember, as John pointed out, that, that these patients were rolled in 1 month at a time over a 12-month period. And while the costs have been lower for those that entered early, as they've come down, we still have -- of patients that came in later and we're still experiencing higher medical costs. If you look at all the states though, one of the things we've pointed out is that the ABD patients have pushed up the medical costs somewhat. And that's to be expected, when you got relatively sick patients who are higher utilizers than the TANF patients, and these are patients that are new to managed care. I think the same applies for the duals. And when we get the ABD members in who are duals, we're going to have similar issues and it's going to take time to work down the medical costs. So we have said before, we expect higher medical costs for certain populations in the future. We think we can bring them down over time. And we also think that a big key to managing the duals is going to be managing the long-term care benefits, which are less medical and more social and supportive in nature.

Operator

Our next question comes from the line of Tom Carol with Stifel.

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

Sticking with Washington state, enrollment was much higher there than we expected. I guess 2-part question. Did you retain more than you expected? Or did members voluntarily stay with Molina, given your presence in the state? And secondly, is there anything to suggest that this enrollment will become more costly as claims mature a bit more over the next couple months?

John C. Molina

Tom, this is John. With respect to your first question, we did get a greater retention and we did get greater new enrollment, which is why enrollment is higher than what we had guided to back in January. Not quite sure what you mean by the second part of your question. Will this enrollment be more expensive? Could you clarify?

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

So you have new enrollment coming in, and we're seeing a slight increase in the MLR in the market, and I'm just wondering if there's any other data points you can give us to provide some comfort that we won't see another 3 or 4 or 5 or whatever percent increase -- percentage point increase in the MLR in that market, with a bolus of new members coming in.

John C. Molina

I apologize, Tom. I heard disenrollment, not this enrollment. Perhaps I need a hearing aid for my birthday. Right now the data that we've got -- the claims data from the first 3 months suggest that the costs are not running up higher than we expected. I think we actually got a little bit of positive development for Washington, so we're feeling that the costs are in line.

Operator

[Operator Instructions] Our next question is from the line of Peter Costa with Wells Fargo Securities.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Getting back to the Texas question again, your ABD MLR is from 119% down to 94%. I think you said maybe 1/3 of that comes from the rate in September, but the other 2/3 comes from other things. Are there some onetime items in there that we can sort of back out or timing things that we can back out? Or should we look at that as the current run rate trend? I know you don't talk a lot about prior period development, but if you can discuss that, perhaps that would help us understand it? Or maybe is there a timing differential between when you got the rate increase versus when you have to pass some of that rate increase along to providers?

Joseph Mario Molina

Now I think part of what's changing that is you have to factor in the premium deficiency reserve that we took in the second quarter. So I think you're going to see this from some other folks in the future, as these new contracts come online, if other organizations take a premium with the efficiency reserve in one period, then they push costs from a future period into the current period. We did that in second quarter, so we didn't have those costs occurring in the third quarter.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

So there's none to be backed out that you didn't over reserve perhaps at that point?

John C. Molina

The premium deficiency reserve, it has an impact. I think that we are very adequately reserved from a pure claims standpoint in Texas. If you look at the days in claims payable, if you look at our cash flow, which you see is an increase in the medical claims benefit line, a lot of that is coming from increasing the reserves in Texas. So I don't think it's a case that we're going to be under-reserved in Texas. I also don't think that the 90-plus% MCR that we experienced is the run rate. I think that what Terry talked about in terms of decreasing utilization and having some of the provider contract changes take -- have full effect. We should see continued improvement there medical care ratio for the ABD members.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

And then can you talk about the timing on the California rate review process? Like what's the time frame on that?

John C. Molina

We've submitted our data. I don't know who else has yet. Obviously, we're pushing the state to get us an answer as quick as possible. But we also want to make sure that we don't exchange expediency for accuracy. We want the right rate, not a quick one.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

And if you had a handicap, what's the likelihood that, that rate goes higher versus goes lower?

John C. Molina

If I had a handicap stuff, I'd be at the racetrack, I think. I mean it's really hard to know. Our data suggest that they were too aggressive in the rate assumptions.

Operator

And our next question is from the line of Melissa McGinnis with Morgan Stanley.

Melissa McGinnis - Morgan Stanley, Research Division

One more thing on Texas, just to understand as well some of the things that might be driving the margin improvement there. Was there any disproportionate loss of membership of some of the higher-cost members? Because it actually looks like despite the rate increase, your premiums PMPM came down sequentially. I'm just trying to understand what might be the driver of that.

Terry P. Bayer

Sure, this is Terry. We shared with you at Investor Day about an 8% drop in our ABD enrollment, about close to 10,000 members over the last 3 or 4 months. And yes, those that dropped out were running a significantly higher MCR.

Melissa McGinnis - Morgan Stanley, Research Division

Okay, great. And then --

Terry P. Bayer

Let me just add this. This is Terry again. That also impacted the mix on the rate increase we received. So we received slightly over 4% rate increase and it would have been greater if we would have had more higher cost members. So that was calculated very thoughtfully by the state to pick up the gap where the higher costs were.

Melissa McGinnis - Morgan Stanley, Research Division

Right, great. And then maybe switching to a different market. If we look at Michigan, the MOR there has come up pretty significantly over the last 9 months. And I was just wondering, if I'm remembering right, Michigan actually carved in or started assigning some of their duals on the Medicaid side. Is that having any impact on the MLR there? And I guess, just wanting to understand the margin change in that market.

Joseph Mario Molina

Melissa, this is John. The margin change primarily due to the change in the premium tax, it used to be, I believe 6%. And so it had the effect of bumping up the revenue, and then we would take the premium tax line out of admin, not out of the medical cost. So that's had the biggest change in what appears to be MCR margin.

Operator

And our next question is from the line of Dave Windley with Jefferies.

David H. Windley - Jefferies & Company, Inc., Research Division

So I wanted to follow up on Peter Costa's question, ask one more directly on -- as I look at your claims and benefits payable schedule for the 3 months ended September of 2012, the prior period positive development is $47 million and is from a negative development number on the last quarter. And I guess I wanted to understand more directly how much of that, if any, affected the income statement in the current quarter.

Joseph W. White

This is Joe speaking. Without going into a state-by-state basis. I think it's fair to say that much of the -- we talked in the second quarter about the negative impact of prior period development in Texas. We think we've restored those reserves in the second quarter and then carried on into the third. So if you look at the $46 million of prior period development from Q2 to Q3, that's pretty consistent with what we've shown in the past, if you look out the runout from 2010 -- 2009. So again, I would say, I think we caught up in the second quarter and we've maintained those margins in the third.

David H. Windley - Jefferies & Company, Inc., Research Division

Okay. So as I think about the change, then in MLR is the sequential change in MLR not attributable to some of this positive development?

Joseph W. White

I think we talked in -- I think we talked at length that you go back to our second quarter release, we talked about the impact of the PVR and unfavorable development in the second quarter, I think it was $10 million on the PVR and $12 million in unfavorable development. I think the better approach is to go back and relook at your calculation at the second quarter MCR rather than the third.

David H. Windley - Jefferies & Company, Inc., Research Division

Okay, all right, I'll do that. So then, here's another follow-up on Washington. In light of this -- you've kind of answer this question already, but I'll ask it again. So in light of a couple other states where you're highlighting MLRs above 93% on ABD populations, can you talk about maybe how much visibility you have? How much claims inventory you have in hand today to give you the confidence on the 93%? Or how you would expect to track and that and play that out over the next several months or perhaps by comparison, how did the MLRs progress in those other states to get to this level? Some over 100%, like California and Texas?

John C. Molina

This is John. I think in Texas, we got the membership all at once. So just to sort that out was difficult. In California -- and little bit different because the enrollment progressed over a period of 12 months. I think in California, what the bigger driver is in terms of the MCR for that particular population is the rate giveback that we have accrued. So if you think that we want to give back a significant premium to the state, we've got to record it at $15 million, but we didn't drop the provider rates because the state didn't. You've got a mismatch there, which you don't see necessarily in other states. It's hard to take the experience in 1 state and necessarily translate it to the other. What we've got in Washington is stable provider base, rates that we believe having looked at it, are adequate for the population and frankly, some pretty aggressive UM up in Washington that has provided us with the confidence as we watched the claims run out now for 90 days at least that we're not going to have a significant negative development in the future.

Joseph Mario Molina

This is Mario. Let me just comment on California, to be sure you understand. In California, there was supposed to have been a provider fee schedule cut. There were some issues in the court that prevented that, but the issue is not resolved. And so we have been reserving, as if we were going to have to give money back to the state, because of this provider fee schedule change. Because our contracts, many of our contracts in California are tied to that Medicaid fee schedule. Until the state changes it, we don't change it either. So we've understood there's mismatch.

Operator

Our next question is from the line of Carl McDonald from Citigroup.

Carl R. McDonald - Citigroup Inc, Research Division

Just wanted to follow up on that $15 million accrual in California. And my understanding from some others was that it didn't sound like that rate cut was actually going to be implemented, so I'd be interested in your latest conversations with the state, if you have a bias one way or the other.

John C. Molina

We certainly do have a bias, Carl. And that is, until we see the final rate sheets, we're just going to keep doing what we've been doing. So we know that other plans have had discussions with the state about reversing that. And if that's the decision the state makes, then we will reverse it. Otherwise, we are confident that we're well protected against the state coming back and asking us for money.

Operator

And our next question comes from the line of Scott Green from Merrill Lynch.

Scott J. Green - BofA Merrill Lynch, Research Division

Can you tell us, did you make an accrual in the current period for lower California provider rate? Or is that kind of annualized now?

John C. Molina

The accrual is running about $1 million a month.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay. All right. And then one more on the California ABD MLR. You said it was higher, mostly attributable to the recently-added lives. But it looks like in the press release, you only added 3,000 sequentially. So I was hoping you could elaborate, whether just those most recently added that are driving that or was there some unfavorable developments in the current period California MLR?

Joseph Mario Molina

Scott, this is Mario. If you go back to our investor day, there was a slide where we showed a cohort of patients that we followed forward for 10 months, and you saw how their cost went down. Well, the more recent patients are still running at higher costs so it's going to take a while to work through that. And that's what we're talking about here. So that, that group that came on in the first month, we think has -- their costs have flattened out. But it's going to take 10 to 12 months for each cohort to kind of flatten out again. And that's what we mean. So there are continued upward pressure and it's going to level off and then go down.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay. I thought you had said before that ABD MLR in California was around 95% and now we are seeing a step-up to 110% and I wasn't sure what was driving that because it didn't seem like you added so many new members. But you're saying it's kind of been and remains elevated?

Joseph Mario Molina

It's sort of a blended number, and it's going to take time for that to come down, but we think that it will come down over time next year.

Joseph W. White

Scott, it's Joe. There are a couple of items though that were, I think are driving that number higher than we would the California MCR than we would expect in a run rate. First thing I'd like to point out, it's the California has removed its premium tax this quarter. So this would apply not just to the ABD to SBDs, but across the California population. That's probably driving MCR of about 1.5%. This is analogous to the situation in Michigan in the start of the second quarter. We've also had some catch-up in California on capitation payments, specific to the STDs. We've had to go out and recontract with some of our cap providers to allow for the higher premium. So you do have some factors in there that are spiking at this quarter, but I wouldn't call run rate issues.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay, that's really helpful. Would you say the run rate maybe is a couple hundred basis points less or any way to estimate that?

Joseph W. White

When I take an estimate of the premium tax, 1.5%; the cap issue in unfavorable prior period development, probably another 2.5%. This is all on the California consolidated MCR. So we definitely saw a little bit of an uptick this quarter, but not nearly as much as the financials suggest.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay. And then can you talk about the MMIS revenue trajectory? What drove the sequential increase and how you see that trending going forward?

Joseph W. White

The sequential increase in MMS revenue is really just accounting. If you recall, we've been deferring revenue and expense recognition for the Idaho MMIS. We went through some accounting exercises with that last year you'll recall, where we had some write-offs. So upon receipt of CMS certification and acceptance of the system by the state of Idaho in July, we started recognizing both revenue and expense in MMIS. The P&L impact is pretty much 0 because, as you'll recall, we were booking revenue and expense at very similar amounts. But it will drive higher revenue and higher expense.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay. And then one last one, real quick. Any update on California's -- it was thinking about integrating the CHIP and Medi-Cal programs? I was just curious whatever happened with that?

John C. Molina

It is definitely happening and it will begin I believe in January. You will see those former CHIP members will roll over to Medicaid.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay. And do you view that as a positive or a neutral or a risk for your business?

Joseph Mario Molina

I think it's largely neutral.

Operator

And we have time for one more question. It comes from the line of Sarah James with Wedbush.

Sarah James - Wedbush Securities Inc., Research Division

I wanted to speak about contract opportunities and I guess I would break it up into 3 buckets here: Ohio, Michigan and MMIS. On Ohio, that was just -- Ohio duals was just pushed back. And I was wondering if you had any thoughts on the reasoning and if there had been any resolution there on some of the unknowns like Day 1 savings or rates?

Terry P. Bayer

This is Terry. So you know what we know, we are just at the mercy of the state letting us know when their startup dates. We know they're in negotiation with CMS. This is really a new venture for these states to work out with CMS, how these 3-part contracts are going to go. And I think they're learning as they go, and as glitches in their rollout process occur, they just turn to us and let us know it's delayed. But we have had no further official delay, although we've heard as well.

Sarah James - Wedbush Securities Inc., Research Division

And then on Michigan, as we're getting close to the end of the year here, are you still expecting to hear an update on awards in 2012?

Terry P. Bayer

No. We haven't even embarked on that RFP process. Michigan did note originally was attempting to go forth with an RFP this year for 2013. They then let us know mid-process that it would be a 1/1/2014, but the RFP process for the duals has not yet been rolled out. And we've heard nothing further about a further delay. So as far as we're concerned, they're still targeting 1/1/2014 for their duals launch.

Sarah James - Wedbush Securities Inc., Research Division

Do have a date when you expect the RFP to be rolled out?

Terry P. Bayer

No. Sorry, we don't. We don't have any further information.

Sarah James - Wedbush Securities Inc., Research Division

And then the last bucket would be for MMIS if you could just talk about some of the opportunities that you're evaluating, the CMS MMIS fiscal agent contract status report suggested about 4 to 5 contracts were coming up for rebid a year. So just any thoughts on how active we may be pursuing this new contracts and as some of them coming up for rebid in 2012 and 2013 are in states where you have a managed care contracts, if you could just speak to which contracts may be of more interest to you?

John C. Molina

Sarah, this is John. When we bought the business, we wanted it to target the states where we didn't have a managed care presence. We have plenty of growth opportunities in the health plan business, so there's no reason to cannibalize ourselves and there are enough states for the MMS business to pursue RFPs, I think that frankly, the Virgin Island example might give us real innovative and competitive target or competitive advantages in some of these applications. But right now, we're not disclosing where we're playing.

Operator

And Dr. Molina, I will now turn the call back to you to continue with your presentation or closing remarks.

Joseph Mario Molina

Well, thanks, everyone. I have nothing else to add. We look forward to being with you again at the next quarterly earnings call.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great evening, everyone.

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