Molina Healthcare Management Discusses Q2 2012 Results - Earnings Call Transcript

Molina Healthcare (MOH)

Q2 2012 Earnings Call

July 26, 2012 5:00 pm ET

Executives

Juan Jose Orellana - Vice President of Investor Relations

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

James W. Howatt - Former Chief Medical Officer

Terry P. Bayer - Chief Operating Officer

Joseph W. White - Chief Accounting Officer

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Kenneth Lavine - UBS Investment Bank, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Scott J. Green - BofA Merrill Lynch, Research Division

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

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

Melissa McGinnis - Morgan Stanley, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Molina Healthcare Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, Thursday, July 26, 2012. I would now like to turn the conference over to Mr. Juan José Orellana, Vice President of Investor Relations. Please go ahead.

Juan Jose Orellana

Thank you, Kim. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the second quarter ended June 30, 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 contained forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act, including, but not limited to, statements regarding the Ohio Medicaid and Duals RFA contract awards and pending appeals; Medicaid enrollment growth projections; and the implementation of dual eligibles integration and demonstration projects; our medical cost-containment initiatives in Texas and the finalization of a rate increase in Texas, effective September 1, 2012; Wisconsin rates and premium deficiency reserves with respect to estimated losses in Texas and Wisconsin. 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 website or on the SEC's website.

All forward-looking statements made during today's call represent our judgment as of July 26, 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, and thank you for joining our call today. Considering the positive trends experienced in a number of previous quarters, Molina's results for the second quarter were a disappointment to us. Despite increasing revenue by 32% and enrollment by 13%, the continuation of higher-than-expected medical cost at our Texas health plan significantly contributed to the net loss of $0.80 per share that we reported today. The factors affecting medical cost in Texas included higher-than-anticipated utilization of long-term care services, unfavorable unit costs and inadequate premiums to cover the medical costs associated with STAR+ members in the Hidalgo and El Paso service areas. John will be describing shortly some of our efforts to get us back on track in Texas in the second half of 2012.

I want to emphasize that the second quarter also included key developments that will notably contribute to driving long-term value for our shareholders. Let me take a moment to review the most significant developments.

First, our protest filing in the Ohio Medicaid RFA was upheld by the Ohio Department of Job and Family Services, also known as ODJFS. This outcome results in the retention of our existing business in Ohio, which constitutes approximately 20% of the company's premium revenue. It also enables us to expand to 38 new counties, previously not served by our health plan. The market opportunity in these 38 counties is comprised of approximately 750,000 CFC or TANF beneficiaries and 64,000 ABD beneficiaries. Although the contract is currently delayed, as the new awards are being litigated by other applicants, the rescoring of the RFP resulted in a score for Molina that ranked third out of the 5 selected health plans, firmly positioning our application among the top scorers.

Another key development during the second quarter was the Supreme Court's ruling on the Affordable Care Act. The court upheld the Medicaid expansion, but included a new twist. The federal government may not threaten the states that don't participate in the expansion with the loss of their existing Medicaid funding. The ruling, which effectively makes expansion optional, transforms Medicaid expansion from a legal issue into primarily a political one. Although we don't know which states will ultimately opt out, our working assumption is that some state governments will choose to participate. A report released by the Congressional Budget Office, earlier this week supports this assumption. The CBO's updated estimates, which incorporate the Supreme Court decision, now size the Medicaid enrollment opportunity at 11 million new beneficiaries by the year 2022, down 6 million from previous estimates. Although these expansion figures are lower than what was initially expected, it still represents considerable potential growth for companies like Molina.

Our strategy remains the same. We continue to forge ahead in our reform readiness for January of 2014. We are scaling the company for growth opportunities, both before and after that January 2014 date. And we also remain focused on the pursuit of near-term opportunities, such as the dual eligibles integration pilot programs.

On June 28, ODJFS announced the preliminary scoring results for all 7 regions of its dual eligible RFA. The RFA covers over 114,000 beneficiaries, and the contracts are scheduled to begin on April 2013. We are pleased that Molina Healthcare of Ohio received the highest scores in the 3 regions where nearly 53,000 or 43% of Ohio's dual eligibles reside. As a reminder, these regions reflect our current Covered Families And Children or CANF and ABD footprint. According to ODJFS, once the scoring protest period is complete, the top 2 scorers in each region are expected to be awarded a contract, with a maximum of 3 regions awarded per health plan. The final tentative health plan selections are excited after August 7.

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