10-K 1 moh-12312017x10k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-31719  
 
 
 
molinalogo2016a24.jpg
MOLINA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 

Delaware
 
13-4204626
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
200 Oceangate, Suite 100, Long Beach, California 90802
(Address of principal executive offices)
(562) 435-3666
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
 
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ý  Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
¨  Yes     ý  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨  Yes    ý  No
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2017, the last business day of our most recently completed second fiscal quarter, was approximately $2,952.7 million (based upon the closing price for shares of the registrant’s Common Stock as reported by the New York Stock Exchange, Inc. on June 30, 2017).
As of February 23, 2018, approximately 59,727,000 shares of the registrant’s Common Stock, $0.001 par value per share, were outstanding.
 
 
 
 
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2018 Annual Meeting of Stockholders to be held on May 2, 2018, are incorporated by reference into Part III of this Form 10-K, to the extent described therein.






MOLINA HEALTHCARE, INC. 2017 FORM 10-K
CROSS-REFERENCE INDEX
ITEM NUMBER
Page
 
 
 
PART I
 
 
 
 
1.
Business
3-6, 9-16, 25-26, 43-44

 
 
 
1A.
1-2, 44-64

 
 
 
1B.
Not Applicable.

 
 
 
2.

 
 
 
3.

 
 
 
4.
Not Applicable.

 
 
 
 
 
 
 
5.
41-43

 
 
 
6.
40-41

 
 
 
7.
6-39

 
 
 
7A.
28

 
 
 
8.
69-129

 
 
 
9.
Not Applicable.

 
 
 
9A.

 
 
 
9B.
Not Applicable.

 
 
 
 
 
 
 
10.

 
 
 
11.
(a)

 
 
 
12.
(b)

 
 
 
13.
(c), Note 17, Note 18

 
 
 
14.
(d)

 
 
 
 
 
 
 
15.
131-137

 
 
 
16.
Form 10-K Summary
Not Applicable.


(a)
Incorporated by reference to “Executive Compensation” in the 2018 Proxy Statement.
(b)
Incorporated by reference to “Security Ownership of Certain Beneficial Owners and Management” in the 2018 Proxy Statement.
(c)
Incorporated by reference to “Related Party Transactions” and “Corporate Governance and Board of Directors Matters — Director Independence” in the 2018 Proxy Statement.
(d)
Incorporated by reference to “Fees Paid to Independent Registered Public Accounting Firm” in the 2018 Proxy Statement.





MOLINA HEALTHCARE, INC. 2017 FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Form 10-K”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Many of the forward-looking statements are located under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly due to numerous known and unknown risks and uncertainties. Those known risks and uncertainties include, but are not limited to, the risk factors identified in the section of this Form 10-K titled “Risk Factors,” as well as the following:

the success of our profit improvement and maintenance initiatives, including the timing and amounts of the benefits realized, and administrative savings achieved;
the numerous political and market-based uncertainties associated with the Affordable Care Act (the “ACA”) or “Obamacare;”
the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated with risk transfer requirements, the potential for disproportionate enrollment of higher acuity members, the discontinuation of premium tax credits, the adequacy of agreed rates, and potential disruption associated with market withdrawal from Utah, Wisconsin, or other states;
subsequent adjustments to reported premium revenue based upon subsequent developments or new information, including changes to estimated amounts payable or receivable related to Marketplace risk adjustment/risk transfer, risk corridors, and reinsurance;
effective management of our medical costs;
our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with seasonal flu patterns or other newly emergent diseases;
significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;
the full reimbursement of the ACA health insurer fee, or HIF;
the success of our efforts to retain existing government contracts, including those in Florida, New Mexico, Puerto Rico, Texas, and Washington, including the success of any protest filings;
our ability to manage our operations, including maintaining and creating adequate internal systems and controls relating to authorizations, approvals, provider payments, and the overall success of our care management initiatives;
our ability to consummate and realize benefits from acquisitions or divestitures;
our receipt of adequate premium rates to support increasing pharmacy costs, including costs associated with specialty drugs and costs resulting from formulary changes that allow the option of higher-priced non-generic drugs;
our ability to operate profitably in an environment where the trend in premium rate increases lags behind the trend in increasing medical costs;
the interpretation and implementation of federal or state medical cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit sharing arrangements, and risk adjustment provisions and requirements;
our estimates of amounts owed for such cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit-sharing arrangements, and risk adjustment provisions;
the Medicaid expansion cost corridors in California, New Mexico, and Washington, and any other retroactive adjustment to revenue where methodologies and procedures are subject to interpretation or dependent upon information about the health status of participants other than Molina members;
the interpretation and implementation of at-risk premium rules and state contract performance requirements regarding the achievement of certain quality measures, and our ability to recognize revenue amounts associated therewith;
cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;
the success of our health plan in Puerto Rico, including the resolution of the Puerto Rico debt crisis, payment of all amounts due under our Medicaid contract, the effect of the PROMESA law, the impact of Hurricane Maria and our efforts to better manage the health care costs of our Puerto Rico health plan;

Molina Healthcare, Inc. 2017 Form 10-K | 1



the success and renewal of our duals demonstration programs in California, Illinois, Michigan, Ohio, South Carolina, and Texas;
the accurate estimation of incurred but not reported or paid medical costs across our health plans;
efforts by states to recoup previously paid and recognized premium amounts;
complications, member confusion, or enrollment backlogs related to the annual renewal of Medicaid coverage;
government audits and reviews, or potential investigations, and any fine, sanction, enrollment freeze, monitoring program, or premium recovery that may result therefrom;
changes with respect to our provider contracts and the loss of providers;
approval 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;
the relatively small number of states in which we operate health plans, including the greater scale and revenues of our California, Ohio, Texas, and Washington health plans;
the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity and meet our liquidity needs, including the interest expense and other costs associated with such financing;
our failure to comply with the financial or other covenants in our credit agreement, our bridge credit agreement or the indentures governing our outstanding notes;
the sufficiency of our funds on hand to pay the amounts due upon conversion or maturity of our outstanding notes;
the failure of a state in which we operate to renew its federal Medicaid waiver;
changes generally affecting the managed care or Medicaid management information systems industries;
increases in government surcharges, taxes, and assessments, including but not limited to the deductibility of certain compensation costs;
newly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated public alarm; and
increasing competition and consolidation in the Medicaid industry.
Each of the terms “Molina Healthcare,Inc.” “Molina Healthcare,” “Company,” “we,” “our,” and “us,” as used herein, refers collectively to Molina Healthcare, Inc. and its wholly owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.


Molina Healthcare, Inc. 2017 Form 10-K | 2



ABOUT MOLINA HEALTHCARE
Molina Healthcare, Inc. provides managed health care services under the Medicaid and Medicare programs and through the state insurance marketplaces. Through our health plans operating across the nation and in the Commonwealth of Puerto Rico, we serve approximately 4.5 million members.
2017 was a year of great change for Molina Healthcare. On May 2, 2017, after several disappointing quarters in which we continued to underperform relative to our own internal financial metrics and to the managed care sector as a whole, the board terminated the employment of Dr. J. Mario Molina, our former president and chief executive officer, and John C. Molina, our former chief financial officer. Our former chief accounting officer, Joseph W. White, was promoted to chief financial officer and interim president and chief executive officer, while the board launched a search for a permanent president and chief executive officer. Effective as of November 6, 2017, Joseph M. Zubretsky was named as president and chief executive officer of Molina Healthcare. Over the past ten months, the executive management team has been largely restructured.
2017
(Dollars in millions, except per-share amounts)
 
 
 
 
 
Total Revenue
 
Net Loss per Diluted Share
 
Adjusted Net Loss Per Share*
$19,883
 
($9.07)
 
($8.72)
 
 
 
 
 
Net Loss Margin
 
EBITDA*
 
Ending Membership
(2.6)%
 
($329)
 
4,453,000
__________________________
Non-generally accepted accounting principles (Non-GAAP) financial measures referred to in this Form 10-K are designated with an asterisk (*). For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)—Non-GAAP Financial Measures,” and “MD&A—Supplemental Information.”
OUR MISSION
Our mission is to provide quality healthcare to people receiving government assistance.
OUR BUSINESS STRATEGY
We are building a plan to improve and sustain profitability
Our margin recovery and sustainability plan is designed to:
Restore margins through operational improvements and managed care fundamentals
Optimize the revenue base for profitability and future revenue growth
Enhance balance sheet and capital management discipline
Restore margins through operational improvements and managed care fundamentals
In 2017, we changed leadership, restructured our workforce to better meet the needs of our business, and improved our cost structure. As described further below in “Consolidated Results–Fiscal Year 2017 Financial Summary,” and in the Notes to the Consolidated Financial Statements, Note 15, “Restructuring and Separation Costs,” in 2017 we implemented a comprehensive restructuring and profitability improvement plan that will reduce annualized run-rate expenses by approximately $300 million to $400 million when completed by the end of 2018. As of December 31, 2017, we achieved $235 million of these run-rate reductions on an annualized basis.
We have reconfigured our organization. By reducing the workforce and number of management layers, and increasing management’s span of control, we have achieved significant savings.
We are simplifying our provider networks. We are terminating or renegotiating high-cost providers, narrowing networks in certain geographies, evaluating stop-loss thresholds and carve-outs, implementing value-based

Molina Healthcare, Inc. 2017 Form 10-K | 3



contracting, evaluating ancillary services and pharmacy benefit management pricing and operations, and we have exited direct delivery operations.
We are improving the effectiveness of utilization review and care management. Areas of focus include specialist referrals, pre-authorization, concurrent review, high acuity populations and high utilizers of services, emergency room utilization and behavioral and medical integration.
We are addressing at-risk revenues and risk adjustment. We seek to more effectively engage in state rate setting, improve STAR ratings, increase retention of quality revenue withholds, and focus on coding and documentation to achieve risk scores commensurate with the acuity of our population.
We are improving our claims payment function. The key areas of improvement will include provider experience, payment accuracy and oversight of claims fraud, waste and abuse.
We are evaluating information technology and management. We seek to standardize the administrative platform, streamline operations and procedures, evaluate potential co-sourcing and/or outsource operational components, and consolidate data warehousing and data mining capabilities.
Optimize revenue base for profitability and future revenue growth
We will focus on defending existing revenue.
In early 2018, we received the disappointing news that we were unsuccessful in defending all of our New Mexico Medicaid business and most of our Florida Medicaid business during state re-procurements.
We will lodge the necessary protests and appeals to ensure that we have exhausted every avenue available to us for retaining the managed care contracts currently held by our Florida and New Mexico health plans.
In addition, we have taken significant steps to improve our RFP response process to better articulate and present the Molina value proposition. Steps we have taken include marshaling more internal and external resources to support the RFP process, engaging a broader and deeper array of subject matter experts, infusing more local market knowledge into the process, and retaining outside experts in Medicaid procurement to pre-score our proposals and conduct mock reviews.
We have also experienced some success in the pursuit of new revenue and the defense of existing revenue:
In May 2017, our Washington health plan was selected by the Washington State Health Care Authority to negotiate and enter into managed care contracts for the North-Central region of the state’s Apple Health Integrated Managed Care Program. The new contract commenced January 1, 2018.
In June 2017, Molina Healthcare of Mississippi, Inc. was awarded a Medicaid Coordinated Care Contract for the statewide administration of the Mississippi Coordinated Access Network (MississippiCAN). The operational start date for the program is currently scheduled for October 1, 2018, pending the completion of a readiness review. The initial term of the contract is through June 2020, with options to renew annually for up to two additional years.
In August 2017, our Illinois health plan was awarded a statewide Medicaid managed care contract by the Illinois Department of Healthcare and Family Services. This Medicaid contract further integrates behavioral health and physical health by combining the state’s three current managed care programs into one program. The contract began January 1, 2018, and will continue for four years with options to renew annually for up to four additional years.
We will consider opportunistic revenue growth opportunities only if specific parameters are met. Such parameters include a positive regulatory environment, manageable competitive forces, network viability, the ability to leverage scale and operations, and a scalable population.
We will continue to identify opportunities for significant performance improvement. The under-performing geographies and lines of business we have identified are under intense review for performance improvement to ensure that every product and geography contributes to the portfolio.
We have taken decisive action with respect to our Affordable Care Act (ACA) Marketplace products. Effective January 1, 2018, we have:

Molina Healthcare, Inc. 2017 Form 10-K | 4



Exited the Utah and Wisconsin Marketplaces;
Reduced the scope of our Washington state Marketplace participation;
Increased premiums averaging 58%; and
Mitigated our exposure to uncertainties relating to cost sharing reduction (CSR) funding and reconciliation.
Enhance balance sheet and capital management discipline
We are taking steps to improve reserving accuracy, increase tangible net equity, reduce the cost of borrowing, maximize the dividend capacity of our subsidiaries, maximize parent company liquidity and cash flow, deploy excess capital in a balanced manner, and reduce the optionality in our capital structure.
OUR CORE BUSINESS FOOTPRINT TODAY
As of December 31, 2017, our health plan footprint included the five largest Medicaid markets.
molinamap.jpg


OUR SEGMENTS
We manage our operations through three reportable segments. These segments consist of our Health Plans segment, which constitutes the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment. We regularly evaluate the appropriateness of our reportable segments, particularly in light of organizational changes, acquisition and divestiture activity, and changing laws and regulations. Therefore, these reportable segments may change in the future.
Business and financial overviews for our reportable segments are provided in “MD&A—Reportable Segments.”
Refer to Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies” for revenue information by state health plan, and Note 20, “Segment Information,” for segment revenue, profit and total assets information.


Molina Healthcare, Inc. 2017 Form 10-K | 5



COMPETITIVE CONDITIONS AND ENVIRONMENT
We face varying levels of competition. Health care reform proposals may cause organizations to enter or exit the market for government sponsored health programs. However, the licensing requirements and bidding and contracting procedures in some states may present partial barriers to entry into our industry.
We compete for government contracts, renewals of those government contracts, members, and providers. State agencies consider many factors in awarding contracts to health plans. Among such factors are the health plan’s provider network, quality scores, medical management, degree of member satisfaction, timeliness of claims payment, and financial resources. Potential members typically choose a health plan based on a specific provider being a part of the network, the quality of care and services available, accessibility of services, and reputation or name recognition of the health plan. We believe factors that providers consider in deciding whether to contract with a health plan include potential member volume, payment methods, timeliness and accuracy of claims payment, and administrative service capabilities.
For further competitor information specific to each of our reportable segments, refer to “MD&A—Reportable Segments.”

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

NON-GAAP FINANCIAL MEASURES
We use non-GAAP financial measures as supplemental metrics in evaluating our financial performance, making financing and business decisions, and forecasting and planning for future periods. For these reasons, management believes such measures are useful supplemental measures to investors in comparing our performance to the performance of other public companies in the health care industry. These non-GAAP financial measures should be considered as supplements to, and not as substitutes for or superior to, GAAP measures.
See further information regarding non-GAAP measures in the “Supplemental Information” section of this MD&A, including the reconciliations to U.S. GAAP. Non-GAAP financial measures referred to in this Form 10-K are designated with an asterisk (*).

Molina Healthcare, Inc. 2017 Form 10-K | 6



KEY PERFORMANCE INDICATORS
(Dollars in millions except per-share amounts, membership in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Ending total membership
4.5

 
4.2

 
3.5

 
 
 
 
 
 
Premium revenue
$
18,854

 
$
16,445

 
$
13,261

Health Plans segment medical margin (1)
$
1,781

 
$
1,671

 
$
1,467

Operating (loss) income
$
(555
)
 
$
306

 
$
387

 
 
 
 
 
 
Net (loss) income
$
(512
)
 
$
52

 
$
143

Net (loss) income per diluted share
$
(9.07
)
 
$
0.92

 
$
2.58

Diluted weighted average shares outstanding
56.5

 
56.3

 
55.6

 
 
 
 
 
 
Adjusted net (loss) income per diluted share*
$
(8.72
)
 
$
1.28

 
$
2.78

EBITDA*
$
(329
)
 
$
467

 
$
508

 
 
 
 
 
 
Operating Statistics:
 
 
 
 
 
Medical care ratio (2)
90.6
 %
 
89.8
%
 
88.9
%
G&A ratio (3)
8.0
 %
 
7.8
%
 
8.1
%
Premium tax ratio (2)
2.3
 %
 
2.8
%
 
2.9
%
Effective income tax (benefit) expense rate
(16.4
)%
 
74.8
%
 
55.5
%
Net (loss) profit margin (3)
(2.6
)%
 
0.3
%
 
1.0
%
__________________
(1)
Medical margin is equal to premium revenue minus medical costs.
(2)
Medical care ratio represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium tax expenses as a percentage of premium revenue plus premium tax revenue.
(3)
G&A ratio represents general and administrative expenses as a percentage of total revenue. Net (loss) profit margin represents net (loss) income as a percentage of total revenue.
See discussion of Key Performance Indicators in the “Consolidated Results” and “Reportable Segments” sections of this MD&A.

CONSOLIDATED RESULTS
FISCAL YEAR 2017 FINANCIAL SUMMARY
Net loss per diluted share was $9.07 in 2017 compared with net income per diluted share of $0.92 in 2016.
Adjusted net loss per diluted share* was $8.72 in 2017 compared with adjusted net income per diluted share* of $1.28 in 2016.
The medical care ratio increased to 90.6% in 2017, from 89.8% in 2016.
The general and administrative ratio increased to 8.0% in 2017, from 7.8% in 2016.
We recorded a $73 million charge as a result of the federal government’s decision to stop paying cost sharing reduction rebates (CSRs) to health plans beginning in the fourth quarter of 2017. We believe we are legally entitled to those payments, and will pursue all available means to collect them.
We recorded $47 million in charges for Marketplace changes in estimates, including risk adjustment and CSRs, related to 2016 dates of service that were estimated at December 31, 2016, and finalized during the second quarter of 2017.
We recognized the $30 million release of the Marketplace-related premium deficiency reserve we had established as of December 31, 2016.

Molina Healthcare, Inc. 2017 Form 10-K | 7



We incurred non-cash impairment losses of $470 million in 2017. These losses included $269 million, primarily in connection with our Florida, New Mexico, and Illinois health plans. The impairments at Florida and New Mexico were the result of our recent Medicaid contract losses. The Illinois impairment was the result of management’s determination, in the course of its annual impairment assessment of the goodwill of the Illinois health plan, that the plan’s future cash flow projections were insufficient to produce an estimated fair value in excess of its carrying amount. While we are confident that we can improve profitability in Illinois so that it is a meaningful contributor to our company, the current profit profile of the health plan does not support the purchase prices paid for certain membership years ago.
Also during 2017, we recorded impairment losses of $28 million for our Molina Medicaid Solutions segment because management determined that Molina Medicaid Solutions will provide fewer future benefits for its support of the Health Plans segment than previously anticipated. In addition, we recorded impairment losses of $173 million for our Other segment, primarily relating to our Pathways business, because management determined that Pathways will not provide future benefits relating to the integration of its operations with the Health Plans segment to the extent previously expected.
We incurred restructuring and separation costs of $234 million in 2017 as a result of the implementation of our restructuring and profit improvement plan in 2017 (the 2017 Restructuring Plan). As previously disclosed, we estimate that our 2017 Restructuring Plan will reduce annualized run-rate expenses by approximately $300 million to $400 million when completed by the end of 2018. As of December 31, 2017, we achieved $235 million of these run-rate reductions by the elimination of administrative costs (some of which are classified as medical care costs) on an annualized basis. As of December 31, 2017 we had also achieved an undetermined amount of medical care cost savings on an annualized basis through the re-negotiation of various medical provider contracts and the restructuring of our direct delivery operations. We expect to have more visibility into the actual value of these medical care cost savings later in 2018. We incurred substantially all of the costs associated with the 2017 Restructuring Plan in 2017.
We incurred $14 million in expenses, including transaction fees, relating to our exchange of equity for $141 million face value of our 1.625% convertible senior notes.
We recognized $75 million of other income for fees we received in connection with the termination of a proposed Medicare acquisition in early 2017.
We recognized approximately $54 million in additional tax expense during the fourth quarter, due to the revaluation of our deferred tax assets as a result of the Tax Cuts and Jobs Act of 2017.
The following table summarizes significant items affecting 2017 financial results (in millions, except per diluted share amounts).
 
Year Ended December 31, 2017
 
Amount
 
Per Diluted Share (1)
Termination of CSR subsidy payments for the fourth quarter of 2017
$
73

 
$
0.82

Marketplace adjustments related to risk adjustment, CSR subsidies, and other items for 2016 dates of service
47

 
0.52

Change in Marketplace premium deficiency reserve for 2017 dates of service
(30
)
 
(0.33
)
Impairment losses
470

 
6.01

Restructuring and separation costs
234

 
2.86

Loss on debt extinguishment
14

 
0.24

Fee received for terminated Medicare acquisition
(75
)
 
(0.84
)
 
$
733

 
$
9.28

___________________________
(1)
Amounts shown are before considering revaluation of related deferred tax assets as a result of the Tax Cuts and Jobs Act of 2017, as applicable. Except for certain items that are not deductible for tax purposes, per diluted share amounts are generally calculated at a statutory income tax rate of 37%, which is in excess of the effective tax rate recorded in our consolidated statements of operations.

Molina Healthcare, Inc. 2017 Form 10-K | 8



TRENDS AND UNCERTAINTIES
Medicaid Contract Re-Procurement
The following table illustrates Health Plans segment Medicaid contracts scheduled for re-procurement in the near term. While we have been notified of the Medicaid regulators’ intention to re-procure the contracts, the anticipated award dates and effective dates are management’s current best estimates; such dates are subject to change. Premium revenue is stated in millions.
 
 
 
 
 
 
Premium Revenue
 
 
 
 
 
 
 
 
Membership as of
 
Year Ended
 
Anticipated
Health Plan
 
Medicaid Program(s)
 
December 31, 2017
 
December 31, 2017
 
Award Date
 
Effective Date
Puerto Rico
 
All
 
314,000

 
$
732

 
Q2 2018
 
10/1/2018
Texas
 
ABD, MMP
 
100,000

 
$
1,814

 
Q3 2018
 
1/1/2020
Washington (1)
 
All in 7 of 9 regions
 
574,000

 
$
1,861

 
Q2 2018
 
1/1/2019
__________________
(1)
The re-procurement information presented for the Washington health plan includes all Medicaid membership in the following regions: Northeast, Northwest, Central and Southeast, Pierce County, King County, Olympic Peninsula, and West-Central. Five of the seven largest regions’ contracts that are awarded will be effective January 1, 2019. The remaining two will be effective on January 1, 2020.
Florida Health Plan. On February 1, 2018, we were selected by the Florida Agency for Health Care Administration (AHCA) to negotiate for the award of a managed care contract in only one region of Florida. That region—Region 11—comprises Miami-Dade and Monroe counties, where we currently serve 59,000 Medicaid members. As of December 31, 2017, we served approximately 360,000 Medicaid members in Florida, which represented approximately $1,486 million premium revenue for the year ended December 31, 2017. This decision does not affect the Florida health plan’s current contracts with AHCA, which run through December 31, 2018. We recorded impairment losses in connection with this event. Refer to the Notes to Consolidated Financial Statements, Note 8, “Goodwill and Intangible Assets, Net,” for further information regarding all impairment losses recorded in 2017.
New Mexico Health Plan. In January 2018, our New Mexico health plan was notified by the New Mexico Human Services Department (HSD) that the health plan had not been selected for the tentative award of a Medicaid contract effective January 1, 2019. As of December 31, 2017, we served approximately 224,000 Medicaid members in New Mexico, which represented approximately $1,205 million premium revenue for the year ended December 31, 2017. This decision does not affect the New Mexico plan’s current contract with HSD which runs through December 31, 2018. We recorded impairment losses in connection with this event.
Illinois Health Plan. In August 2017, our Illinois health plan was awarded a statewide Medicaid managed care contract by the Illinois Department of Healthcare and Family Services. This Medicaid contract further integrates behavioral health and physical health by combining the state’s three current managed care programs into one program. The contract began January 1, 2018, and will continue for four years with options to renew annually for up to four additional years.
Washington Health Plan. In May 2017, our Washington health plan was selected by the Washington State Health Care Authority to negotiate and enter into managed care contracts for the North-Central region of the state’s Apple Health Integrated Managed Care Program. The new contract commenced January 1, 2018.
Pressures on Medicaid Funding
Currently, there are a number of different legislative proposals being considered, some of which would involve significantly reduced federal spending on the Medicaid program, and constitute a fundamental change in the federal role in health care. These proposals include elements such as the following:
Ending the entitlement nature of Medicaid by capping future increases in federal health spending for these programs, and shifting more of the risk for health costs in the future to states and consumers;
Reversing the ACA’s expansion of Medicaid that enables states to cover low-income childless adults;
Changing Medicaid to a state block grant program, including potentially capping spending on a per-enrollee basis (a “per capita cap”);

Molina Healthcare, Inc. 2017 Form 10-K | 9



Requiring Medicaid beneficiaries to work;
Limiting the amount of lifetime benefits for Medicaid beneficiaries; and
Numerous other potential changes and reforms.
ACA and the Marketplace
The future of the Affordable Care Act (ACA) and its underlying programs, including the Marketplace, is subject to substantial uncertainty. Effective January 1, 2018, we have:
Exited the Utah and Wisconsin Marketplaces;
Reduced the scope of our Washington state Marketplace participation;
Increased premiums averaging 58%;
Mitigated our exposure to uncertainties relating to cost sharing reduction (CSR) funding and reconciliation; and
Adjusted broker commissions to market rates.
As a result of these actions, we estimate that our ACA Marketplace membership will decline to approximately 300,000 members by the end of 2018, from 815,000 members as of December 31, 2017.
REPORTABLE SEGMENTS
HOW WE ASSESS PERFORMANCE
We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid agencies and the federal government.
One of the key metrics used to assess the performance of our most significant segment, the Health Plans segment, is the medical care ratio (“MCR”). The medical care ratio represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying gross margin, or the amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most important measure of earnings reviewed by management.
Gross margin for our Health Plans segment is referred to as “Medical margin,” and for our Molina Medicaid Solutions and Other segments, as “Service margin.” The service margin is equal to service revenue minus cost of service revenue. Management’s discussion and analysis of the changes in the individual components of medical margin and service margin follows.
SEGMENT SUMMARY
 
2017
 
2016
 
2015
 
(In millions)
Health Plans segment medical margin (1)
$
1,781

 
$
1,671

 
$
1,467

Molina Medicaid Solutions segment service margin (2)
16

 
21

 
55

Other segment service margin (2)
13

 
33

 
5

 
$
1,810

 
$
1,725

 
$
1,527

 
 
 
 
 
 
Health Plans segment medical care ratio
90.6
%
 
89.8
%
 
88.9
%
_______________________
(1)
Represents premium revenue minus medical care costs.
(2)
Represents service revenue minus cost of service revenue.


Molina Healthcare, Inc. 2017 Form 10-K | 10



HEALTH PLANS
BUSINESS OVERVIEW
 
97.3% of total revenue in 2017        
96.9% of total revenue in 2016    
Employees: approximately 5,300
 
Our Industry
Medicaid. Medicaid was established in 1965 under the U.S. Social Security Act to provide health care and long-term care services and supports to low-income Americans. Although jointly funded by federal and state governments, Medicaid is a state-operated and state-implemented program. Subject to federal laws and regulations, states have significant flexibility to structure their own programs in terms of eligibility, benefits, delivery of services, and provider payments. As a result, there are 56 separate Medicaid programs—one for each U.S. state, each U.S. territory, and the District of Columbia.
The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s federal medical assistance percentage (FMAP). A state’s FMAP is calculated annually and varies inversely with average personal income in the state. The average FMAP across all jurisdictions is currently about 59%, and ranges from a federally established FMAP floor of 50% to as high as 75%.
We participate in the following Medicaid programs:
Temporary Assistance for Needy Families, or TANF - The most common Medicaid program, covers primarily low-income families with children.
Aged, Blind or Disabled, or ABD - Medicaid ABD programs cover low-income persons with chronic physical disabilities or behavioral health impairments. ABD beneficiaries typically use more services than those served by other Medicaid programs because of their critical health issues.
Children’s Health Insurance Program, or CHIP - A joint federal and state matching program that provides health care coverage to children whose families earn too much to qualify for Medicaid coverage. States have the option of administering CHIP through their Medicaid programs.
Medicaid Expansion - In states that have elected to participate, Medicaid Expansion provides eligibility to nearly all low-income individuals under age 65 with incomes at or below 138% of the federal poverty line.
Marketplace. The ACA authorized the creation of Marketplace insurance exchanges, allowing individuals and small groups to purchase health insurance that is federally subsidized, effective January 1, 2014. We participate in the Marketplace in California, Florida, Michigan, New Mexico, Ohio, Texas and Washington. As previously announced, we exited the Utah and Wisconsin ACA Marketplaces effective January 1, 2018.
Medicare. Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons with a variety of hospital, medical insurance, and prescription drug benefits. Medicare is funded by Congress, and administered by the Centers for Medicare and Medicaid Services (CMS). Medicare beneficiaries may enroll in a Medicare Advantage plan, under which managed care plans contract with CMS to provide benefits that are comparable to original Medicare. Such benefits are provided in exchange for a fixed per-member per-month (PMPM) premium payment that varies based on the county in which a member resides, the demographics of the member, and the member’s health condition. Since 2006, Medicare beneficiaries have had the option of selecting a new prescription drug benefit from an existing Medicare Advantage plan. The drug benefit, available to beneficiaries for a monthly premium, is subject to certain cost sharing depending upon the specific benefit design of the selected plan.
Medicare-Medicaid Plans, or MMPs. Approximately nine million low-income elderly and disabled people are covered under both the Medicare and Medicaid programs. These beneficiaries are more likely than other Medicare beneficiaries to be frail, live with multiple chronic conditions, and have functional and cognitive impairments. Medicare is their primary source of health insurance coverage. Medicaid supplements Medicare by paying for services not covered by Medicare, such as dental care and long-term care services and support, and by helping to cover Medicare’s premiums and cost-sharing requirements. Together, these two programs help to shield very low-income Medicare beneficiaries from potentially unaffordable out-of-pocket medical and long-term care costs. To coordinate care for those who qualify to receive both Medicare and Medicaid services (the “dual eligible”), and to

Molina Healthcare, Inc. 2017 Form 10-K | 11



deliver services to these individuals in a more financially efficient manner, some states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual eligible individuals. The health plans participating in such demonstrations are referred to as MMPs. We operate MMPs in six states.
Significant Trends and Developments
Refer to the discussion above, in the “Consolidated Results,” and also below, in “Financial Performance by Program” sections of this MD&A.
Competition
The Medicaid managed care industry is subject to ongoing changes as a result of health care reform, business consolidations and new strategic alliances. We compete with national, regional, and local Medicaid service providers, principally on the basis of size, location, quality of provider network, quality of service, and reputation. Our primary competitors in the Medicaid managed care industry include Centene Corporation, WellCare Health Plans, Inc., UnitedHealth Group Incorporated, Anthem, Inc., and Aetna Inc. Competition can vary considerably from state to state.
Regulation
Our health plans are highly regulated by both state and federal government agencies. Regulation of managed care products and health care services varies from jurisdiction to jurisdiction, and changes in applicable laws and rules occur frequently. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Such agencies have become increasingly active in recent years in their review and scrutiny of health insurers and managed care organizations, including those operating in the Medicaid and Medicare programs.
HIPAA. In 1996, Congress enacted the Health Insurance Portability and Accountability Act (HIPAA). All health plans are subject to HIPAA, including ours. HIPAA generally requires health plans to:
Establish the capability to receive and transmit electronically certain administrative health care transactions, such as claims payments, in a standardized format;
Afford privacy to patient health information; and
Protect the privacy of patient health information through physical and electronic security measures.
Health care reform created additional tools for fraud prevention, including increased oversight of providers and suppliers participating or enrolling in Medicaid, CHIP, and Medicare. Those enhancements included mandatory licensure for all providers, and site visits, fingerprinting, and criminal background checks for higher risk providers.
Regulatory Capital Requirements and Dividend Restrictions. Our health plans are subject to stringent minimum capitalization requirements that limit their ability to pay dividends to us. For further information, refer to the Notes to Consolidated Financial Statements, Note 19, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions.”
Quality
Our long-term success depends, in large part, on the quality of the services we provide. As of December 31, 2017, 11 of our 13 health plans were accredited by the National Committee for Quality Assurance (NCQA), including the Multicultural Health Care Distinction, which is awarded to organizations that meet or exceed its rigorous requirements for multicultural health care.
The table below presents our health plans’ NCQA status, as well as their scores as part of the CMS 2017 Star Ratings, which measures the quality of Medicare plans across the country using a 5-star rating system.
We believe that these objective measures of quality are important to state Medicaid agencies, as a growing number of states link reimbursement and patient assignment to quality scores. Additionally, Medicare pays quality bonuses to health plans that achieve high quality.

Molina Healthcare, Inc. 2017 Form 10-K | 12



ncqa2017.jpg
Programs and Services
As of December 31, 2017, the Health Plans segment consisted of health plans operating in 12 states and the Commonwealth of Puerto Rico. These health plans served approximately 4.5 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. This membership includes Affordable Care Act Marketplace (Marketplace) members, most of whom receive government premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO).
Our health plans’ state Medicaid contracts generally have terms of three to four years. These contracts typically contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. The contracts are subject to risk of loss when a state issues a new request for proposal (RFP) open to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may be subject to non-renewal.
In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled (ABD); and regions or service areas.
Basis for our Premium Rates
Medicaid. Under our Medicaid contracts, state government agencies pay our health plans fixed PMPM rates that vary by state, line of business and demographics; and we arrange, pay for and manage health care services provided to Medicaid beneficiaries. Therefore, our health plans are at risk for the medical costs associated with their members’ health care. The rates we receive are subject to change by each state and, in some instances, provide for adjustments for health risk factors. CMS requires these rates to be actuarially sound. Payments to us under each of our Medicaid contracts are subject to the annual appropriation process in the applicable state.
Medicare. Under Medicare Advantage, managed care plans contract with CMS to provide benefits in exchange for a fixed PMPM premium payment that varies based on the county in which a member resides, and adjusted for demographic and health risk factors. CMS also considers inflation, changes in utilization patterns and average per capita fee-for-service Medicare costs in the calculation of the fixed PMPM premium payment. Amounts payable to us under the Medicare Advantage contracts are subject to annual revision by CMS, and we elect to participate in each Medicare service area or region on an annual basis. Medicare Advantage premiums paid to us are subject to

Molina Healthcare, Inc. 2017 Form 10-K | 13



federal government reviews and audits which can result, and have resulted, in retroactive and prospective premium adjustments. Compared with our Medicaid plans, Medicare Advantage contracts generate higher average PMPM revenues and health care costs.
Marketplace. For our Marketplace plans, we develop premium rates during the spring of each year for policies effective in the following calendar year. Premium rates are based on our estimates of projected member utilization, medical unit costs, member risk acuity, member risk transfer, and administrative costs, with the intent of realizing a target pretax percentage profit margin. Our actuaries certify the actuarial soundness of Marketplace premiums in the rate filings submitted to the various state and federal authorities for approval.
Premiums by Program
The amount of the premiums paid to our health plans may vary substantially between states and among various government programs. The following table sets forth the ranges of premiums paid to our state health plans by program on a PMPM basis, for the year ended December 31, 2017. The “Consolidated” column represents the weighted-average amounts for our total membership by program.
 
PMPM Premiums
 
Low
 
High
 
Consolidated
TANF and CHIP
$
110.00

 
$
290.00

 
$
180.00

Marketplace
180.00

 
480.00

 
270.00

Medicaid Expansion
320.00

 
510.00

 
390.00

ABD
380.00

 
1,460.00

 
1,050.00

MMP – Integrated
1,290.00

 
3,230.00

 
2,180.00

Medicare
940.00

 
1,250.00

 
1,140.00

chart-656e1fa93e305e27918.jpg chart-b14bbbe6024658afac9.jpg

Molina Healthcare, Inc. 2017 Form 10-K | 14



chart-fa6abf320bb95c67b3f.jpg


Molina Healthcare, Inc. 2017 Form 10-K | 15



Membership by Program and Health Plan
The following tables set forth our health plans’ membership as of the dates indicated:
 
As of December 31,
 
2017
 
2016
 
2015
Ending Membership by Program:
 
 
 
 
 
TANF and CHIP
2,457,000

 
2,536,000

 
2,312,000

Marketplace
815,000

 
526,000

 
205,000

Medicaid Expansion
668,000

 
673,000

 
557,000

ABD
412,000

 
396,000

 
366,000

MMP – Integrated
57,000

 
51,000

 
51,000

Medicare
44,000

 
45,000

 
42,000

 
4,453,000

 
4,227,000

 
3,533,000

 
 
 
 
 
 
Ending Membership by Health Plan:
 
 
 
 
 
California
746,000

 
683,000

 
620,000

Florida (1)
625,000

 
553,000

 
440,000

Illinois
165,000

 
195,000

 
98,000

Michigan
398,000

 
391,000

 
328,000

New Mexico (2)
253,000

 
254,000

 
231,000

New York (3)
32,000

 
35,000

 

Ohio
327,000

 
332,000

 
327,000

Puerto Rico
314,000

 
330,000

 
348,000

South Carolina
116,000

 
109,000

 
99,000

Texas
430,000

 
337,000

 
260,000

Utah
152,000

 
146,000

 
102,000

Washington
777,000

 
736,000

 
582,000

Wisconsin
118,000

 
126,000

 
98,000

 
4,453,000

 
4,227,000

 
3,533,000

_______________________
(1)
On February 1, 2018, we were selected by the Florida Agency for Health Care Administration (AHCA) to negotiate for the award of a managed care contract in only one region of Florida. That region—Region 11—comprises Miami-Dade and Monroe counties, where we currently serve 59,000 Medicaid members. As of December 31, 2017, we served a total of approximately 360,000 Medicaid members in Florida.
(2)
In January 2018, our New Mexico health plan was notified by the New Mexico Human Services Department (HSD) that the health plan had not been selected for the tentative award of a Medicaid contract effective January 1, 2019. As of December 31, 2017, we served approximately 224,000 Medicaid members in New Mexico.
(3)
The New York health plan was acquired on August 1, 2016.

FINANCIAL OVERVIEW
2017 Compared with 2016
In 2017, a 10% increase in membership, and a 5% increase in revenue PMPM, resulted in increased premium revenue of 15%, or $2.4 billion, when compared with 2016.
The medical care ratio increased to 90.6% in 2017, from 89.8% in 2016. Medical margin (measured in absolute dollars) increased 7% in 2017 over 2016. Our 2017 medical care ratio of 90.6% was burdened by substantial unfavorable out-of-period items, including:
Approximately $150 million of medical margin deterioration resulting from unfavorable prior period claims development, the related need to replenish margins for adverse development in our liability for medical claims and benefits payable, and increased reserves for premiums we expect to repay to state Medicaid agencies; and
Approximately $90 million of unfavorable Marketplace items, most notably the lack of CSR reimbursement in the fourth quarter of 2017.

Molina Healthcare, Inc. 2017 Form 10-K | 16



Absent these items, our medical care ratio for 2017 would have been approximately 89.3%.
2016 Compared with 2015
In 2016, a 27% increase in membership, partially offset by a 3% decrease in revenue PMPM, resulted in increased premium revenue of 24%, or $3.2 billion, when compared with 2015.
The medical care ratio increased to 89.8% in 2016, from 88.9% in 2015. The increase in our medical care ratio was driven primarily by Marketplace membership. Medical margin (measured in absolute dollars) increased 14% in 2016 over 2015. The medical care ratio of all of our programs excluding Marketplace decreased by 10 basis points between 2015 and 2016, as decreasing margins in Medicaid Expansion (where we saw a 300 basis point increase in our medical care ratio) were offset by improved margins in other programs. Consolidated medical care costs measured on a PMPM basis decreased approximately 3% in 2016 when compared with 2015.
FINANCIAL PERFORMANCE BY PROGRAM
The following tables summarize member months, premium revenue, medical care costs, medical care ratio, and medical margin by program for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):
 
Year Ended December 31, 2017
 
Member
Months (1)
 
Premium Revenue
 
Medical Care Costs
 
MCR (2)
 
Medical Margin
 
 
Total
 
PMPM
 
Total
 
PMPM
 
 
TANF and CHIP
30.2

 
$
5,554

 
$
183.75

 
$
5,111

 
$
169.09

 
92.0
%
 
$
443

Medicaid Expansion
8.1

 
3,150

 
388.42

 
2,674

 
329.73

 
84.9

 
476

ABD
4.9

 
5,135

 
1,050.41

 
4,863

 
994.80

 
94.7

 
272

Total Medicaid
43.2

 
13,839

 
320.16

 
12,648

 
292.61

 
91.4

 
1,191

MMP
0.7

 
1,446

 
2,177.72

 
1,317

 
1,982.36

 
91.0

 
129

Medicare
0.5

 
601

 
1,143.63

 
493

 
939.67

 
82.2

 
108

Total Medicare
1.2

 
2,047

 
1,722.47

 
1,810

 
1,523.15

 
88.4

 
237

Core operations
44.4

 
15,886

 
357.68

 
14,458

 
325.53

 
91.0

 
1,428

Marketplace
10.8

 
2,968

 
274.47

 
2,615

 
241.84

 
88.1

 
353

 
55.2

 
$
18,854

 
$
341.39

 
$
17,073

 
$
309.14

 
90.6
%
 
$
1,781

 
Year Ended December 31, 2016
 
Member
Months (1)
 
Premium Revenue
 
Medical Care Costs
 
MCR (2)
 
Medical Margin
 
 
Total
 
PMPM
 
Total
 
PMPM
 
 
TANF and CHIP
30.2

 
$
5,403

 
$
179.21

 
$
4,950

 
$
164.18

 
91.6
%
 
$
453

Medicaid Expansion
7.8

 
2,952

 
378.58

 
2,475

 
317.37

 
83.8

 
477

ABD
4.7

 
4,666

 
991.24

 
4,277

 
908.39

 
91.6

 
389

Total Medicaid
42.7

 
13,021

 
305.28

 
11,702

 
274.33

 
89.9

 
1,319

MMP
0.6

 
1,321

 
2,160.94

 
1,141

 
1,866.93

 
86.4

 
180

Medicare
0.5

 
558

 
1,063.44

 
515

 
981.36

 
92.3

 
43

Total Medicare
1.1

 
1,879

 
1,653.73

 
1,656

 
1,457.67

 
88.1

 
223

Core operations
43.8

 
14,900

 
340.28

 
13,358

 
305.03

 
89.6

 
1,542

Marketplace
6.7

 
1,545

 
231.38

 
1,416

 
212.17

 
91.7

 
129

 
50.5

 
$
16,445

 
$
325.87

 
$
14,774

 
$
292.75

 
89.8
%
 
$
1,671


Molina Healthcare, Inc. 2017 Form 10-K | 17



 
Year Ended December 31, 2015
 
Member
Months (1)
 
Premium Revenue
 
Medical Care Costs
 
MCR (2)
 
Medical Margin
 
 
Total
 
PMPM
 
Total
 
PMPM
 
 
TANF and CHIP
25.5

 
$
4,483

 
$
175.64

 
$
4,122

 
$
161.50

 
92.0
%
 
$
361

Medicaid Expansion
5.9

 
2,389

 
408.51

 
1,931

 
330.18

 
80.8

 
458

ABD
4.3

 
4,124

 
966.83

 
3,784

 
887.27

 
91.8

 
340

Total Medicaid
35.7

 
10,996

 
308.54

 
9,837

 
276.05

 
89.5

 
1,159

MMP
0.5

 
1,066

 
2,040.08

 
974

 
1,863.93

 
91.4

 
92

Medicare
0.5

 
546

 
1,069.17

 
502

 
982.50

 
91.9

 
44

Total Medicare
1.0

 
1,612

 
1,560.08

 
1,476

 
1,428.18

 
91.5

 
136

Core operations
36.7

 
12,608

 
343.80

 
11,313

 
308.51

 
89.7

 
1,295

Marketplace
2.6

 
653

 
252.58

 
481

 
185.85

 
73.6

 
172

 
39.3

 
$
13,261

 
$
337.79

 
$
11,794

 
$
300.43

 
88.9
%
 
$
1,467

_______________________
(1)
A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2)
“MCR” represents medical costs as a percentage of premium revenue.
2017 TRENDS
Medicaid TANF, CHIP and ABD. TANF represented approximately 40% of our total Medicaid revenue in 2017, with a medical care ratio of 92.0%. Keys to the cost-effective delivery of care to TANF members include:
Effective utilization controls and care management, particularly with respect to high-risk pregnancies; and
Reducing unit costs of high-cost providers.
Our ABD program represented approximately 37% of our total Medicaid revenue in 2017, with a medical care ratio of 94.7%. Keys to the cost-effective delivery of care to ABD members include:
Improved care management and coordination of services for high acuity populations, focusing on the integration of behavioral and physical health services;
Targeting high risk members for care management intervention and more comprehensive documentation of medical conditions; and
Improved management of community and other long-term care services for members in this program.
Medicaid Expansion. Medicaid Expansion represented approximately 23% of our total Medicaid revenue in 2017, with a medical care ratio of 84.9%. This program continues to contribute favorably to our overall profitability and was responsible for approximately 40% of our total Medicaid medical margin for 2017. While premiums and margins for Medicaid Expansion have been declining in recent years, the rating environment appears to have stabilized.
Marketplace. The Marketplace 2017 medical care ratio was 88.1%. As noted above, the Marketplace program was burdened in 2017 by a net $90 million unfavorable impact from various Marketplace CSR, risk adjustment and premium deficiency reserve items. In response to profitability challenges, effective January 1, 2018, we exited the Marketplaces entirely in Utah and Wisconsin while also limiting our presence in Washington. Also effective January 1, 2018, we increased Marketplace premium rates by an average of 58%.
2017 Compared with 2016
Medicaid TANF and CHIP. The performance of TANF and CHIP was very consistent between 2017 and 2016, with flat enrollment, a premium revenue increase of approximately 3%; and an increase in the medical care ratio to 92.0% in 2017, from 91.6% in 2016.
Medicaid ABD. ABD enrollment grew approximately 4% in 2017 compared with 2016, while premium revenue grew by approximately 10%. The medical care ratio for our ABD membership deteriorated to 94.7% in 2017, from 91.6% in 2016. The deterioration in medical cost performance was most notable in Michigan, New Mexico and Texas.
Medicaid Expansion. Medicaid Expansion enrollment grew approximately 4% in 2017 compared with 2016, while premium revenue grew by approximately 7%. The medical care ratio for our Medicaid Expansion membership deteriorated to 84.9% in 2017 from 83.8% in 2016. Reduced premium rates in California were the primary driver of declining performance in 2017.

Molina Healthcare, Inc. 2017 Form 10-K | 18



MMP and Medicare. MMP and Medicare enrollment and premium combined grew by approximately 9% in 2017 compared with 2016. The medical care ratio for this membership increased 30 basis points from 2016 to 2017.
Marketplace. Marketplace enrollment increased over 60% in 2017 compared with 2016, while premium revenue increased over 90%. Despite a decrease in the medical care ratio of 360 basis points in 2017 compared with 2016, our Marketplace program still failed to meet expectations in 2017.
2016 Compared with 2015
Medicaid TANF, CHIP and ABD. TANF, CHIP and ABD revenue increased in 2016 when compared with 2015, due to health plan acquisitions in late 2015 and 2016, as well as inclusion of a full year of Puerto Rico operations in 2016 (Puerto Rico began operations effective April 1, 2015). The slight decline in the medical care ratio for these programs on a consolidated basis when comparing 2016 with 2015 is not significant given normal margin fluctuations observed when performance is reviewed at this level of detail.
Medicaid Expansion. Member months increased 33% in 2016, when compared with 2015, as a result of membership growth in all states. Lower premium revenue PMPM more than offset lower medical costs PMPM, leading to an increase in the consolidated medical care ratio for the Medicaid Expansion program. Medicaid Expansion medical care ratios increased in Illinois, Michigan, New Mexico and Ohio.
MMP and Medicare. Membership and revenue increased on a consolidated basis for the MMP and Medicare programs when comparing 2016 with 2015. The medical care ratio for these programs, in the aggregate, decreased due to higher margins for the MMP program.
Marketplace. Our Marketplace program performed poorly in 2016. The medical care ratio of our Marketplace membership increased to 91.7% in 2016, from 73.6% in 2015. This decline in profitability was the result of lower premium revenue PMPM, the recording of a $30 million premium deficiency reserve at December 31, 2016, and higher medical costs PMPM.
The poor performance of our Marketplace program in 2016 was exacerbated by the federal government’s failure to pay amounts owed to our health plans under the Marketplace risk corridor program. We believe our health plans are owed approximately $76 million in Marketplace risk corridor payments for 2016 dates of service, but have not recorded any amounts associated with this claim.


Molina Healthcare, Inc. 2017 Form 10-K | 19



FINANCIAL PERFORMANCE BY STATE HEALTH PLAN
The following tables summarize member months, premium revenue, medical care costs, medical care ratio, and medical margin by state health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):
Health Plans Segment Financial Data — Core Operations (Medicaid and Medicare Combined)
 
Year Ended December 31, 2017
 
Member
Months
 
Premium Revenue
 
Medical Care Costs
 
MCR
 
Medical Margin
 
 
Total
 
PMPM
 
Total
 
PMPM
 
 
California
7.4

 
$
2,392

 
$
321.46

 
$
2,117

 
$
284.53

 
88.5
%
 
$
275

Florida
4.3

 
1,522

 
350.15

 
1,461

 
335.97

 
96.0

 
61

Illinois
2.1

 
593

 
286.69

 
638

 
308.41

 
107.6

 
(45
)
Michigan
4.6

 
1,545

 
334.22

 
1,360

 
294.15

 
88.0

 
185

New Mexico
2.9

 
1,258

 
439.95

 
1,166

 
407.94

 
92.7

 
92

New York (1)
0.4

 
181

 
449.85

 
170

 
424.17

 
94.3

 
11

Ohio
3.9

 
2,130

 
544.98

 
1,894

 
484.66

 
88.9

 
236

Puerto Rico (1)
3.8

 
732

 
190.13

 
691

 
179.65

 
94.5

 
41

South Carolina
1.4

 
445

 
328.41

 
412

 
304.04

 
92.6

 
33

Texas
2.8

 
2,150

 
769.82

 
1,978

 
708.20

 
92.0

 
172

Utah
1.1

 
355

 
316.44

 
290

 
258.96

 
81.8

 
65

Washington
8.9

 
2,445

 
275.64

 
2,143

 
241.55

 
87.6

 
302

Wisconsin
0.8

 
131

 
168.64

 
107

 
136.84

 
81.1

 
24

Other (2)

 
7

 

 
31

 

 

 
(24
)
 
44.4

 
$
15,886

 
$
357.68

 
$
14,458

 
$
325.53

 
91.0
%
 
$
1,428

 
Year Ended December 31, 2016
 
Member
Months
 
Premium Revenue
 
Medical Care Costs
 
MCR
 
Medical Margin
 
Total
 
PMPM
 
Total
 
PMPM
 
 
California
7.4

 
$
2,247

 
$
304.83

 
$
1,900

 
$
257.72

 
84.5
%
 
$
347

Florida
4.1

 
1,348

 
329.58

 
1,227

 
299.94

 
91.0

 
121

Illinois
2.3

 
603

 
258.72

 
568

 
243.71

 
94.2

 
35

Michigan
4.7

 
1,517

 
324.18

 
1,339

 
286.00

 
88.2

 
178

New Mexico
2.8

 
1,245

 
440.63

 
1,162

 
411.30

 
93.3

 
83

New York (1)
0.2

 
82

 
446.72

 
79

 
431.73

 
96.6

 
3

Ohio
3.9

 
1,927

 
490.71

 
1,718

 
437.56

 
89.2

 
209

Puerto Rico (1)
4.0

 
726

 
180.65

 
694

 
172.57

 
95.5

 
32

South Carolina
1.3

 
378

 
296.58

 
320

 
250.97

 
84.6

 
58

Texas
2.9

 
2,182

 
744.65

 
1,926

 
657.38

 
88.3

 
256

Utah
1.1

 
344

 
297.68

 
296

 
256.31

 
86.1

 
48

Washington
8.1

 
2,146

 
263.50

 
1,936

 
237.66

 
90.2

 
210

Wisconsin
1.0

 
142

 
165.95

 
106

 
123.44

 
74.4

 
36

Other (2)

 
13

 

 
87

 

 

 
(74
)
 
43.8

 
$
14,900

 
$
340.28

 
$
13,358

 
$
305.03

 
89.6
%
 
$
1,542


Molina Healthcare, Inc. 2017 Form 10-K | 20



 
Year Ended December 31, 2015
 
Member
Months
 
Premium Revenue
 
Medical Care Costs
 
MCR
 
Medical Margin
 
Total
 
PMPM
 
Total
 
PMPM
 
 
California
6.9

 
2,163

 
$
314.73

 
$
1,901

 
$
276.57

 
87.9
%
 
$
262

Florida
2.4

 
802

 
333.18

 
801

 
333.02

 
100.0

 
1

Illinois
1.2

 
398

 
329.48

 
367

 
303.72

 
92.2

 
31

Michigan
3.4

 
1,068

 
318.95

 
901

 
268.91

 
84.3

 
167

New Mexico
2.7

 
1,226

 
450.16

 
1,097

 
402.85

 
89.5

 
129

New York (1)

 

 

 

 

 

 

Ohio
4.0

 
2,025

 
500.15

 
1,710

 
422.43

 
84.5

 
315

Puerto Rico (1)
3.2

 
567

 
178.31

 
505

 
158.80

 
89.1

 
62

South Carolina
1.3

 
348

 
267.25

 
278

 
213.30

 
79.8

 
70

Texas
3.0

 
1,918

 
639.47

 
1,778

 
592.95

 
92.7

 
140

Utah
1.1

 
318

 
293.42

 
285

 
263.18

 
89.7

 
33

Washington
6.6

 
1,586

 
241.84

 
1,454

 
221.75

 
91.7

 
132

Wisconsin
0.9

 
148

 
157.14

 
113

 
120.06

 
76.4

 
35

Other (2)

 
41

 

 
123

 

 

 
(82
)
 
36.7

 
$
12,608

 
$
343.80

 
$
11,313

 
$
308.51

 
89.7
%
 
$
1,295


Health Plans Segment Financial Data — Marketplace
 
Year Ended December 31, 2017
 
Member
Months
 
Premium Revenue
 
Medical Care Costs
 
MCR
 
Medical Margin
 
 
Total
 
PMPM
 
Total
 
PMPM
 
 
California
1.7

 
$
309

 
$
185.88

 
$
231

 
$
138.61

 
74.6
%
 
$
78

Florida
3.6

 
1,046

 
293.35

 
1,009

 
283.17

 
96.5

 
37

Michigan
0.3

 
51

 
180.26

 
38

 
135.64

 
75.2

 
13

New Mexico
0.3

 
110

 
349.50

 
84

 
264.14

 
75.6

 
26

Ohio
0.2

 
86

 
363.24

 
81

 
340.44

 
93.7

 
5

Texas
2.6

 
663

 
250.08

 
517

 
195.20

 
78.1

 
146

Utah
0.9

 
180

 
215.93

 
178

 
213.33

 
98.8

 
2

Washington
0.5

 
163

 
317.39

 
156

 
304.74

 
96.0

 
7

Wisconsin
0.7

 
360

 
477.53

 
327

 
433.98

 
90.9

 
33

Other (2)

 

 

 
(6
)
 

 

 
6

 
10.8

 
$
2,968

 
$
274.47

 
$
2,615

 
$
241.84

 
88.1
%
 
$
353


Molina Healthcare, Inc. 2017 Form 10-K | 21



 
Year Ended December 31, 2016
 
Member
Months
 
Premium Revenue
 
Medical Care Costs
 
MCR
 
Medical Margin
 
Total
 
PMPM
 
Total
 
PMPM
 
 
California
0.8

 
$
131

 
$
166.01

 
$
129

 
$
164.35

 
99.0
%
 
$
2

Florida
2.6

 
590

 
228.65

 
538

 
208.53

 
91.2

 
52

Michigan

 
10

 
232.88

 
6

 
154.32

 
66.3

 
4

New Mexico
0.2

 
60

 
287.37

 
47

 
223.85

 
77.9

 
13

Ohio
0.1

 
40

 
348.06

 
29

 
254.78

 
73.2

 
11

Texas
1.4

 
279

 
208.48

 
184

 
137.13

 
65.8

 
95

Utah
0.7

 
103

 
166.21

 
127

 
204.14

 
122.8

 
(24
)
Washington
0.3

 
76

 
272.48

 
79

 
284.87

 
104.5

 
(3
)
Wisconsin
0.6

 
256

 
363.54

 
282

 
399.51

 
109.9

 
(26
)
Other (2)

 

 

 
(5
)
 

 

 
5

 
6.7

 
$
1,545

 
$
231.38

 
$
1,416

 
$
212.17

 
91.7
%
 
$
129

 
Year Ended December 31, 2015
 
Member
Months
 
Premium Revenue
 
Medical Care Costs
 
MCR
 
Medical Margin
 
Total
 
PMPM
 
Total
 
PMPM
 
 
California
0.2

 
$
37

 
$
179.77

 
$
25

 
$
124.68

 
69.4
%
 
$
12

Florida
1.7

 
397

 
229.85

 
280

 
162.04

 
70.5

 
117

Michigan

 
4

 
212.70

 
2

 
124.35

 
58.5

 
2

New Mexico
0.1

 
11

 
242.42

 
9

 
185.13

 
76.4

 
2

Ohio
0.1

 
10

 
399.81

 
8

 
290.81

 
72.7

 
2

Texas
0.1

 
45

 
286.78

 
31

 
197.41

 
68.8

 
14

Utah
0.1

 
16

 
221.00

 
15

 
202.41

 
91.6

 
1

Washington

 
19

 
369.59

 
16

 
301.94

 
81.7

 
3

Wisconsin
0.3

 
114

 
403.08

 
102

 
362.28

 
89.9

 
12

Other (2)

 

 

 
(7
)
 

 

 
7

 
2.6

 
$
653

 
$
252.58

 
$
481

 
$
185.85

 
73.6
%
 
$
172


Molina Healthcare, Inc. 2017 Form 10-K | 22




Health Plans Segment Financial Data — Total
 
Year Ended December 31, 2017
 
Member
Months
 
Premium Revenue
 
Medical Care Costs
 
MCR
 
Medical Margin
 
 
Total
 
PMPM
 
Total
 
PMPM
 
 
California
9.1

 
$
2,701

 
$
296.68

 
$
2,348

 
$
257.86

 
86.9
%
 
$
353

Florida
7.9

 
2,568

 
324.56

 
2,470

 
312.18

 
96.2

 
98

Illinois
2.1

 
593

 
286.69

 
638

 
308.41

 
107.6

 
(45
)
Michigan
4.9

 
1,596

 
325.43

 
1,398

 
285.11

 
87.6

 
198

New Mexico
3.2

 
1,368

 
430.97

 
1,250

 
393.67

 
91.3

 
118

New York (1)
0.4

 
181

 
449.85

 
170

 
424.17

 
94.3

 
11

Ohio
4.1

 
2,216

 
534.56

 
1,975

 
476.39

 
89.1

 
241

Puerto Rico (1)
3.8

 
732

 
190.13

 
691

 
179.65

 
94.5

 
41

South Carolina
1.4

 
445

 
328.41

 
412

 
304.04

 
92.6

 
33

Texas
5.4

 
2,813

 
516.84

 
2,495