MOH-03.31.2015-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number: 001-31719
 
 
 
 
MOLINA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
13-4204626
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
200 Oceangate, Suite 100
Long Beach, California
 
90802
(Address of principal executive offices)
 
(Zip Code)
(562) 435-3666
(Registrant’s telephone number, including area code)
 
 
 
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.    Yes  ý    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).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting 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
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes  ¨ No  ý
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of May 1, 2015, was approximately 50,132,000.


Table of Contents

MOLINA HEALTHCARE, INC.
Form 10-Q

For the Quarterly Period Ended March 31, 2015
TABLE OF CONTENTS
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
 
March 31,
2015
 
December 31,
2014
 
(Amounts in thousands,
except per-share data)
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,870,024

 
$
1,539,063

Investments
1,203,866

 
1,019,462

Receivables
491,430

 
596,456

Deferred income taxes
42,631

 
39,532

Prepaid expenses and other current assets
193,498

 
50,884

Derivative asset
474,121

 

Total current assets
4,275,570

 
3,245,397

Property, equipment, and capitalized software, net
344,727

 
340,778

Deferred contract costs
57,314

 
53,675

Intangible assets, net
84,702

 
89,273

Goodwill
272,046

 
271,964

Restricted investments
101,366

 
102,479

Derivative asset

 
329,323

Other assets
34,064

 
44,326

 
$
5,169,789

 
$
4,477,215

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Medical claims and benefits payable
$
1,448,132

 
$
1,200,522

Amounts due government agencies
622,158

 
527,193

Accounts payable and accrued liabilities
427,644

 
241,654

Deferred revenue
169,811

 
196,076

Income taxes payable
10,836

 
8,987

Current portion of long-term debt
440,632

 
341

Derivative liability
473,983

 

Total current liabilities
3,593,196

 
2,174,773

Convertible senior notes
270,836

 
704,097

Lease financing obligations
161,013

 
160,710

Lease financing obligations – related party
40,135

 
40,241

Deferred income taxes
29,267

 
24,271

Derivative liability

 
329,194

Other long-term liabilities
33,349

 
33,487

Total liabilities
4,127,796

 
3,466,773

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 150,000 shares authorized; outstanding: 49,908 shares at March 31, 2015 and 49,727 shares at December 31, 2014
50

 
50

Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding

 

Additional paid-in capital
398,141

 
396,059

Accumulated other comprehensive income (loss)
297

 
(1,019
)
Retained earnings
643,505

 
615,352

Total stockholders’ equity
1,041,993

 
1,010,442

 
$
5,169,789

 
$
4,477,215

See accompanying notes.

1

Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(Amounts in thousands, except net income (loss) per share)
(Unaudited)
Revenue:
 
 
 
Premium revenue
$
2,970,652

 
$
1,940,337

Service revenue
51,858

 
53,630

Premium tax revenue
95,347

 
51,693

Health insurer fee revenue
47,948

 
18,696

Investment income
3,015

 
1,629

Other revenue
2,303

 
3,258

Total revenue
3,171,123

 
2,069,243

Operating expenses:
 
 
 
Medical care costs
2,635,784

 
1,721,658

Cost of service revenue
35,902

 
40,657

General and administrative expenses
256,090

 
188,087

Premium tax expenses
95,347

 
51,693

Health insurer fee expenses
40,778

 
22,190

Depreciation and amortization
24,992

 
20,691

Total operating expenses
3,088,893

 
2,044,976

Operating income
82,230

 
24,267

Other expenses, net:
 
 
 
Interest expense
14,876

 
13,822

Other income, net
(10
)
 
(44
)
Total other expenses, net
14,866

 
13,778

Income from continuing operations before income tax expense
67,364

 
10,489

Income tax expense
39,223

 
5,655

Income from continuing operations
28,141

 
4,834

Income (loss) from discontinued operations, net of tax
12

 
(336
)
Net income
$
28,153

 
$
4,498

 
 
 
 
Basic net income (loss) per share:
 
 
 
Continuing operations
$
0.58

 
$
0.11

Discontinued operations

 
(0.01
)
Basic net income per share
$
0.58

 
$
0.10

 
 
 
 
Diluted net income (loss) per share:
 
 
 
Continuing operations
$
0.56

 
$
0.10

Discontinued operations

 
(0.01
)
Diluted net income per share
$
0.56

 
$
0.09

See accompanying notes.

2

Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(Amounts in thousands)
(Unaudited)
Net income
$
28,153

 
$
4,498

Other comprehensive income:
 
 
 
Unrealized investment gain
2,116

 
1,426

Effect of income taxes
800

 
722

Other comprehensive income, net of tax
1,316

 
704

Comprehensive income
$
29,469

 
$
5,202


See accompanying notes.


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Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(Amounts in thousands)
(Unaudited)
Operating activities:
 
 
 
Net income
$
28,153

 
$
4,498

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
32,574

 
32,994

Deferred income taxes
1,097

 
(670
)
Share-based compensation
5,675

 
5,596

Amortization of convertible senior notes and lease financing obligations
7,290

 
6,674

Other, net
3,564

 
(1,548
)
Changes in operating assets and liabilities:
 
 
 
Receivables
105,026

 
(39,297
)
Prepaid expenses and other assets
(137,278
)
 
(78,023
)
Medical claims and benefits payable
247,610

 
149,754

Amounts due government agencies
94,965

 
43,265

Accounts payable and accrued liabilities
189,373

 
58,952

Deferred revenue
(26,265
)
 
24,060

Income taxes
1,849

 
4,642

Net cash provided by operating activities
553,633

 
210,897

Investing activities:
 
 
 
Purchases of investments
(438,591
)
 
(142,145
)
Proceeds from sales and maturities of investments
255,609

 
147,370

Purchases of property, equipment and capitalized software
(24,974
)
 
(17,788
)
Increase in restricted investments
(4,612
)
 
(14,381
)
Net cash paid in business combinations
(8,006
)
 

Other, net
(7,216
)
 
(547
)
Net cash used in investing activities
(227,790
)
 
(27,491
)
Financing activities:
 
 
 
Contingent consideration liabilities settled

 
(38,119
)
Proceeds from employee stock plans
1,089

 
1,330

Other, net
4,029

 
857

Net cash provided by (used in) financing activities
5,118

 
(35,932
)
Net increase in cash and cash equivalents
330,961

 
147,474

Cash and cash equivalents at beginning of period
1,539,063

 
935,895

Cash and cash equivalents at end of period
$
1,870,024

 
$
1,083,369


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Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(Amounts in thousands)
(Unaudited)
Supplemental cash flow information:
 
 
 
 
 
 
 
Schedule of non-cash investing and financing activities:
 
 
 
Increase in non-cash lease financing obligation – related party
$

 
$
7,775

Common stock used for share-based compensation
$
(8,774
)
 
$
(8,217
)
 
 
 
 
Details of change in fair value of derivatives, net:
 
 
 
Gain on 1.125% Call Option
$
144,798

 
$
10,266

Loss on 1.125% Conversion Option
(144,789
)
 
(10,264
)
Change in fair value of derivatives, net
$
9

 
$
2

 
 
 
 
Details of business combinations:
 
 
 
Fair value of assets acquired
$
(82
)
 
$

Payable to seller
(7,924
)
 

Net cash paid in business combinations
$
(8,006
)
 
$


See accompanying notes.


5

Table of Contents

MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2015
1. Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality health care to those receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program. We report our financial performance based on two reportable segments: the Health Plans segment and the Molina Medicaid Solutions segment.
Our Health Plans segment consists of health plans in 11 states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of March 31, 2015, these health plans served nearly 3 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. Additionally, we serve Health Insurance Marketplace (Marketplace) members, many of whom are eligible for 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 direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate, as well as of the management of a hospital in southern California under a management services agreement.
Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida.
Market Updates - Health Plans Segment
Florida. In the first quarter of 2015, our Florida health plan enrolled 185,000 Marketplace members, more than doubling its total membership as of December 31, 2014.
Puerto Rico. On April 1, 2015, our Puerto Rico health plan became operational, enrolling approximately 350,000 members.
Market Updates - Molina Medicaid Solutions Segment
New Jersey. On April 9, 2015, the state of New Jersey announced its selection of Molina Medicaid Solutions to design and operate its new Medicaid management information system (MMIS). The new contract is effective May 1, 2015, and has a term of 10 years with three one-year renewal options. Molina Medicaid Solutions was the state's previous MMIS provider, and was awarded the new contract as a result of Molina Medicaid Solutions' submission in response to the state of New Jersey's request for proposals.
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., its subsidiaries, and variable interest entities in which Molina Healthcare, Inc. is considered to be the primary beneficiary. Such variable interest entities are insignificant to our consolidated financial position and results of operations. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented have been included; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated. The consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2015.
The unaudited consolidated interim financial statements have been prepared under the assumption that users of the interim financial data have either read or have access to our audited consolidated financial statements for the fiscal year ended December 31, 2014. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2014 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2014 audited consolidated financial statements.
Reclassifications
We have reclassified certain amounts in the 2014 statement of cash flows to conform to the 2015 presentation.

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2. Significant Accounting Policies
Revenue Recognition
Premium Revenue – Health Plans Segment
Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally subject to significant accounting estimates. Premium revenues are recognized in the month that members are entitled to receive health care services, and premiums collected in advance are deferred.
Certain components of premium revenue are subject to accounting estimates as follows:
Contractual Provisions That May Adjust or Limit Revenue or Profit
Health Plan Medical Cost Floors (Minimums), Medical Cost Corridors, and Administrative Cost Ceilings (Maximums): A portion of certain Medicaid, Medicare, and Marketplace premiums received by our health plans may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded a liability under the terms of such contract provisions of $446.5 million and $392.4 million at March 31, 2015, and December 31, 2014, respectively, to amounts due government agencies. Approximately $430 million of the liability accrued at March 31, 2015 relates to our participation in Medicaid expansion programs.
In general, such amounts are subject to future changes in estimate based upon our actual cost performance and interpretations of allowable medical costs and revenue. At our Washington health plan (where we had recorded a liability of approximately $260 million related to the Medicaid expansion medical cost floor at March 31, 2015), premium revenue may be retroactively adjusted across the entire state Medicaid expansion program based upon the medical cost performance of the program as a whole. As such, our liability under Washington’s contractual provisions is determined not just by our own medical cost performance, but by that of all health plans participating in the program; and we have limited visibility into the costs of those health plans. 
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold, but we had no receivables recorded at March 31, 2015 or December 31, 2014 that were related to such provisions. Separately, in certain states we may be levied with non-monetary sanctions if certain minimum amounts are not spent on defined medical care costs, or if administrative costs exceed certain amounts.
Health Plan Profit Sharing and Profit Ceiling: Our contracts with certain states contain profit-sharing or profit ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage, in some cases in accordance with a tiered rebate schedule. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. As a result of profits in excess of the amount we are allowed to retain, we recorded a liability of $5.6 million and $0.5 million at March 31, 2015 and December 31, 2014, respectively.
Medicare Revenue Risk Adjustment: Based on member encounter data that we submit to the Centers for Medicare and Medicaid Services (CMS), our Medicare premiums are subject to retroactive adjustment for both member risk scores and member pharmacy cost experience for up to two years after the original year of service. This adjustment takes into account the acuity of each member’s medical needs relative to what was anticipated when premiums were originally set for that member. In the event that a member requires less acute medical care than was anticipated by the original premium amount, CMS will recover premium from us. In the event that a member requires more acute medical care than was anticipated by the original premium amount, CMS will pay us additional retroactive premium. A similar retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy utilization. We estimate the amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health care utilization patterns and CMS practices. Based on our knowledge of member health care utilization patterns and expenses we have recorded a net receivable of $17.3 million and $7.6 million for anticipated Medicare risk adjustment premiums at March 31, 2015, and December 31, 2014, respectively.
Quality Incentives
At our California, Illinois, New Mexico, Ohio, South Carolina, Texas, Washington and Wisconsin health plans, revenue ranging from approximately 1% to 4% of certain health plan premiums is earned if specified performance measures are met.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the period presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of March 31, 2015 are not known, we have no reason to believe that the adjustments to prior years noted below are not indicative of the potential future changes in our estimates as of March 31, 2015.

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Three Months Ended
 
March 31,
 
2015
 
2014
 
(In thousands)
Maximum available quality incentive premium - current period
$
30,315

 
$
20,164

 
 
 
 
Amount of quality incentive premium revenue recognized in current period:
 
 
 
Earned current period
$
9,551

 
$
5,297

Earned prior periods
383

 
(378
)
Total
$
9,934

 
$
4,919

 
 
 
 
Total premium revenue recognized for state health plans with quality incentive premiums
$
2,353,235

 
$
1,200,619

California Health Plan Rate Settlement Agreement
In 2013, our California health plan entered into a settlement agreement with the California Department of Health Care Services (DHCS). The agreement settled rate disputes initiated by our California health plan dating back to 2003 with respect to its participation in Medi-Cal (California’s Medicaid program). Under the terms of the agreement, a settlement account (the Account) applicable to the California health plan’s managed care contracts has been established.
Effective January 1, 2014, the Account was established with an initial balance of zero, and will be settled after December 31, 2017. DHCS will make an interim partial settlement payment to us if it terminates early, without replacement, any of our managed care contracts. The Account will be adjusted annually to reflect a calendar year deficit or surplus, which is determined by comparing the California health plan’s pre-tax margin and a target margin established in the settlement agreement. Upon expiration of the settlement agreement, if the Account is in a deficit position, then DHCS will pay the amount of the deficit to us, subject to an alternative minimum payment amount. If the Account is in a surplus position, then no amount is owed to either party. The maximum amount that DHCS would pay to us under the terms of the settlement agreement is $40.0 million.
We estimate and recognize the retrospective adjustments to premium revenue based on our experience to date under the California health plan's managed care contracts. As of March 31, 2015, the California health plan's pre-tax margin exceeded the target margin, resulting in a surplus position. Consequently, a retrospective premium adjustment was not required at March 31, 2015.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally greater than the U.S. federal statutory rate primarily because of state taxes, nondeductible expenses under the Affordable Care Act's Health Insurer Fee (HIF), nondeductible compensation and other general and administrative expenses. The effective tax rate may be subject to fluctuations during the year, particularly as a result of the level of pretax earnings, and also as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers.
New Accounting Standards
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03 - Simplifying the Presentation of Debt Issuance Costs, which will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of such debt liability, consistent with debt discounts. This ASU will be effective for us in the first quarter of 2016, and is applied retrospectively to all prior periods presented in the financial statements; early adoption is permitted. We are evaluating the potential effects of the adoption of the ASU on our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.

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3. Net Income per Share
The following table sets forth the calculation of the denominators used to compute basic and diluted net income per share:
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(In thousands)
Shares outstanding at the beginning of the period
48,578

 
45,871

Weighted-average number of shares:
 
 
 
Issued, share-based compensation
107

 
150

Denominator for basic net income per share
48,685

 
46,021

Effect of dilutive securities:
 
 
 
Share-based compensation
468

 
597

Convertible senior notes (1)

 
902

1.125% Warrants (1)
918

 

Denominator for diluted net income per share
50,071

 
47,520

 
 
 
 
Potentially dilutive common shares excluded from calculations (2):
 
 
 
Stock options

 
45

Restricted shares
55

 
192

1.125% Warrants

 
13,490

______________________________
(1)
For more information regarding the convertible senior notes, refer to Note 11, "Debt." For more information regarding the 1.125% Warrants, refer to Note 12, "Derivatives."
(2)
The dilutive effect of all potentially dilutive common shares is calculated using the treasury-stock method. Certain potentially dilutive common shares issuable are not included in the computation of diluted net income per share because to do so would be anti-dilutive. For the three months ended March 31, 2014, the 1.125% Warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price of our common stock.
4. Business Combinations
Health Plans Segment
Florida. In December 2014, our Florida health plan acquired certain assets relating to the Medicaid business of First Coast Advantage, LLC (FCA). As part of the transaction, we assumed FCA's Medicaid contract and certain provider agreements for Region 4 of the Statewide Medicaid Managed Care Managed Medical Assistance Program in the state of Florida. The Florida health plan's membership increased by approximately 62,000 members as a result of this transaction. The final purchase price for this acquisition amounted to $44.6 million, of which $36.6 million was paid in December 2014, and $8.0 million was paid in the first quarter of 2015.
5. Share-Based Compensation
As of March 31, 2015, there are approximately 312,000 unvested restricted shares awarded to our named executive officers with market and performance conditions outstanding. In the event the vesting conditions are not achieved, the awards will lapse. As of March 31, 2015, we expect the performance conditions to be met in full.

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Charged to general and administrative expenses, total share-based compensation expense was as follows:
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(In thousands)
Restricted stock and performance awards
$
4,601

 
$
4,608

Employee stock purchase plan and stock options
1,074

 
988

 
$
5,675

 
$
5,596

As of March 31, 2015, there was $29.3 million of total unrecognized compensation expense related to unvested restricted stock awards, including those with performance conditions, which we expect to recognize over a remaining weighted-average period of 2.0 years.
Restricted and performance stock activity for the three months ended March 31, 2015 is summarized below:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested balance as of December 31, 2014
1,282,072

 
$
33.55

Granted
171,835

 
63.07

Vested
(371,198
)
 
32.03

Forfeited
(26,582
)
 
37.35

Unvested balance as of March 31, 2015
1,056,127

 
38.79

The total fair value of restricted and performance awards granted during the three months ended March 31, 2015 and 2014 was $10.8 million and $22.9 million, respectively. The total fair value of restricted awards, including those with performance and market conditions, which vested during the three months ended March 31, 2015 and 2014 was $23.4 million and $20.9 million, respectively.
6. Fair Value Measurements
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, other assets, trade accounts payable, medical claims and benefits payable, amounts due government agencies, long-term debt, and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:
Level 1 — Observable Inputs
Level 1 financial instruments recorded at fair value consist of investments including government-sponsored enterprise securities (GSEs) and U.S. treasury notes that are classified as current investments in the accompanying consolidated balance sheets. These financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.
Level 2 — Directly or Indirectly Observable Inputs
Level 2 financial instruments recorded at fair value consist of investments including corporate debt securities, municipal securities, certificates of deposit, and asset-backed securities that are classified as current investments in the accompanying consolidated balance sheets. Such investments are traded frequently though not necessarily daily. Fair value for these investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
Level 3 — Unobservable Inputs
Derivative financial instruments. Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of March 31, 2015 included the price of our common stock, time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note 12, “Derivatives,” the 1.125%

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Call Option asset and the 1.125% Conversion Option liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.
Contingent consideration liability. The contingent consideration liability represents the remaining liability associated with the Medicare-Medicaid Plan (MMP) component of our South Carolina health plan acquisition in 2013, and is recorded in accounts payable and accrued liabilities. We applied a cash flow analysis to determine the fair value of this liability. The significant unobservable input is the purchase price estimate for the projected membership.
Auction rate securities. Auction rate securities are designated as available-for-sale and are reported at fair value in other assets. To estimate the fair value of these securities we use valuation data from our primary pricing source, a third party who provides a marketplace for illiquid assets with over 10,000 participants. This valuation data is based on a range of prices that represent indicative bids from potential buyers. To validate the reasonableness of the data, we compare these valuations to data from other third-party pricing sources, which also provide a range of prices representing indicative bids from potential buyers. We have concluded that these estimates, given the lack of market available pricing, provide a reasonable basis for determining the fair value of the auction rate securities as of March 31, 2015.
Our financial instruments measured at fair value on a recurring basis at March 31, 2015, were as follows:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Corporate debt securities
$
809,150

 
$

 
$
809,150

 
$

Municipal securities
120,157

 

 
120,157

 

GSEs
142,859

 
142,859

 

 

U.S. treasury notes
64,327

 
64,327

 

 

Certificates of deposit
56,018

 

 
56,018

 

Asset-backed securities
11,355

 

 
11,355

 

Auction rate securities
2,800

 

 

 
2,800

1.125% Call Option derivative asset
474,121

 

 

 
474,121

Total assets measured at fair value on a recurring basis
$
1,680,787

 
$
207,186

 
$
996,680

 
$
476,921

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
473,983

 
$

 
$

 
$
473,983

Contingent consideration liability
500

 

 

 
500

Total liabilities measured at fair value on a recurring basis
$
474,483

 
$

 
$

 
$
474,483

Our financial instruments measured at fair value on a recurring basis at December 31, 2014, were as follows:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Corporate debt securities
$
641,729

 
$

 
$
641,729

 
$

Municipal securities
127,045

 

 
127,045

 

GSEs
122,269

 
122,269

 

 

U.S. treasury notes
59,543

 
59,543

 

 

Certificates of deposit
68,876

 

 
68,876

 

Auction rate securities
4,847

 

 

 
4,847

1.125% Call Option derivative asset
329,323

 

 

 
329,323

Total assets measured at fair value on a recurring basis
$
1,353,632

 
$
181,812

 
$
837,650

 
$
334,170

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
329,194

 
$

 
$

 
$
329,194

Contingent consideration liability
500

 

 

 
500

Total liabilities measured at fair value on a recurring basis
$
329,694

 
$

 
$

 
$
329,694


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The following table presents activity relating to our assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Changes in Level 3 Instruments
 
Auction Rate Securities
 
Derivatives, Net
 
Contingent Consideration Liability
 
(In thousands)
Balance at December 31, 2014
$
4,847

 
$
129

 
$
(500
)
Total gains for the period recognized in:
 
 
 
 
 
Other expenses, net

 
9

 

Other comprehensive income
53

 

 

 
 
 
 
 
 
Settlements
(2,100
)
 

 

Balance at March 31, 2015
$
2,800

 
$
138

 
$
(500
)
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our convertible senior notes, which are classified as Level 2 financial instruments, are indicated in the following table. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
 
March 31, 2015
 
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
1.125% Notes
$
440,248

 
$
919,919

 
$

 
$
919,919

 
$

1.625% Notes
270,836

 
381,610

 

 
381,610

 

 
$
711,084

 
$
1,301,529

 
$

 
$
1,301,529

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
1.125% Notes
$
435,330

 
$
767,377

 
$

 
$
767,377

 
$

1.625% Notes
268,767

 
337,292

 

 
337,292

 

 
$
704,097

 
$
1,104,669

 
$

 
$
1,104,669

 
$

7. Investments
The following tables summarize our investments as of the dates indicated:
 
March 31, 2015
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Corporate debt securities
$
809,009

 
$
783

 
$
642

 
$
809,150

Municipal securities
119,896

 
291

 
30

 
120,157

GSEs
142,851

 
98

 
90

 
142,859

U.S. treasury notes
64,061

 
266

 

 
64,327

Certificates of deposit
56,019

 
1

 
2

 
56,018

Asset-backed securities
11,359

 
1

 
5

 
11,355

Subtotal - current investments
1,203,195

 
1,440

 
769

 
1,203,866

Auction rate securities
3,000

 

 
200

 
2,800

 
$
1,206,195

 
$
1,440

 
$
969

 
$
1,206,666


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Table of Contents

 
December 31, 2014
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Corporate debt securities
$
642,910

 
$
201

 
$
1,382

 
$
641,729

Municipal securities
127,185

 
129

 
269

 
127,045

GSEs
122,317

 
34

 
82

 
122,269

U.S. treasury notes
59,546

 
30

 
33

 
59,543

Certificates of deposit
68,893

 
1

 
18

 
68,876

Subtotal - current investments
1,020,851

 
395

 
1,784

 
1,019,462

Auction rate securities
5,100

 

 
253

 
4,847

 
$
1,025,951

 
$
395

 
$
2,037

 
$
1,024,309

The contractual maturities of our investments as of March 31, 2015 are summarized below:
 
Amortized Cost
 
Estimated
Fair Value
 
(In thousands)
Due in one year or less
$
594,621

 
$
594,574

Due one year through five years
601,243

 
601,953

Due after five years through ten years
7,331

 
7,339

Due after ten years
3,000

 
2,800

 
$
1,206,195

 
$
1,206,666

Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Gross realized investment gains and losses for the three months ended March 31, 2015 and 2014 were insignificant.
For investments other than our auction rate securities, discussed below, we have determined that unrealized gains and losses at March 31, 2015 and December 31, 2014, are temporary in nature, because the change in market value for these securities has resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. So long as we hold these securities to maturity, we are unlikely to experience gains or losses. In the event that we dispose of these securities before maturity, we expect that realized gains or losses, if any, will be immaterial.
The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a loss position for 12 months or more as of March 31, 2015:
 
In a Continuous Loss Position
for Less than 12 Months
 
In a Continuous Loss Position
for 12 Months or More
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
(Dollars in thousands)
Corporate debt securities
$
307,035

 
$
455

 
189

 
$
75,899

 
$
187

 
33

Municipal securities
23,469

 
13

 
31

 
3,820

 
17

 
9

GSEs
67,378

 
90

 
16

 

 

 

Certificates of deposit
7,037

 
2

 
29

 

 

 

Asset-backed securities
7,456

 
5

 
6

 

 

 

Auction rate securities

 

 

 
2,800

 
200

 
4

 
$
412,375

 
$
565

 
271

 
$
82,519

 
$
404

 
46


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Table of Contents

The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a loss position for 12 months or more as of December 31, 2014:
 
In a Continuous Loss Position
for Less than 12 Months
 
In a Continuous Loss Position
for 12 Months or More
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
(Dollars in thousands)
Corporate debt securities
$
379,034

 
$
1,151

 
265

 
$
28,668

 
$
231

 
10

Municipal securities
53,626

 
168

 
64

 
11,075

 
101

 
13

GSEs
75,025

 
69

 
22

 
2,986

 
13

 
3

U.S. treasury notes
19,199

 
33

 
13

 

 

 

Certificates of deposit
12,591

 
18

 
52

 

 

 

Auction rate securities

 

 

 
4,847

 
253

 
6

 
$
539,475

 
$
1,439

 
416

 
$
47,576

 
$
598

 
32


Auction Rate Securities. Due to events in the credit markets, the auction rate securities held by us experienced failed auctions beginning in the first quarter of 2008, and such auctions have not resumed. Therefore, quoted prices in active markets have not been available since early 2008. Our investments in auction rate securities are collateralized by student loan portfolios guaranteed by the U.S. government, and the range of maturities for such securities is from 16 years to 31 years. Considering the insignificance of these securities when compared with our liquid assets and other sources of liquidity, we have no current intention of selling these securities nor do we expect to be required to sell these securities before a recovery in their cost basis. For this reason, and because the decline in the fair value of the auction rate securities was not due to the credit quality of the issuers, we do not consider the auction rate securities to be other-than-temporarily impaired at March 31, 2015. At the time of the first failed auctions during first quarter 2008, we held a total of $82.1 million in auction rate securities at par value; since that time, we have settled $79.1 million of these instruments at par value.
For the three months ended March 31, 2015 and 2014, we recorded unrealized gains of $0.05 million and $0.03 million, respectively, to accumulated other comprehensive income for the changes in their fair value. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income. If we determine that any future impairment is other-than-temporary, we will record a charge to earnings as appropriate.

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Table of Contents

8. Receivables
Receivables consist primarily of amounts due from state Medicaid agencies, which may be subject to potential retroactive adjustments. Because all of our receivable amounts are readily determinable and substantially all of our creditors are governmental authorities, our allowance for doubtful accounts is immaterial.  
 
March 31,
2015
 
December 31,
2014
 
(In thousands)
California
$
83,772

 
$
310,938

Florida
19,833

 
2,141

Illinois
85,640

 
31,594

Michigan
20,748

 
19,880

New Mexico
61,532

 
49,609

Ohio
59,167

 
45,187

South Carolina
13,386

 
4,134

Texas
40,642

 
29,348

Utah
10,176

 
6,389

Washington
45,474

 
42,848

Wisconsin
11,752

 
8,102

Direct delivery and other
10,642

 
11,295

Total Health Plans segment
462,764

 
561,465

Molina Medicaid Solutions segment
28,666

 
34,991

 
$
491,430

 
$
596,456

9. Restricted Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities in certificates of deposit and U.S. treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. In connection with a Molina Medicaid Solutions segment state contract, we maintain restricted investments as collateral for a letter of credit. The following table presents the balances of restricted investments:
 
March 31,
2015
 
December 31,
2014
 
(In thousands)
California
$
373

 
$
373

Florida
28,661

 
28,649

Illinois
311

 
311

Michigan
1,014

 
1,014

New Mexico
39,639

 
35,135

Ohio
12,719

 
12,719

Puerto Rico
5,095

 
5,097

South Carolina
310

 
6,040

Texas
3,502

 
3,500

Utah
3,600

 
3,601

Washington
151

 
151

Other
990

 
888

Total Health Plans segment
96,365

 
97,478

Molina Medicaid Solutions segment
5,001

 
5,001

 
$
101,366

 
$
102,479


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The contractual maturities of our held-to-maturity restricted investments as of March 31, 2015 are summarized below:
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Due in one year or less
$
96,101

 
$
96,103

Due one year through five years
5,265

 
5,271

 
$
101,366

 
$
101,374

10. Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable (including amounts payable for the provision of long-term services and supports, or LTSS) as of the dates indicated.
 
March 31,
2015
 
December 31,
2014
 
(In thousands)
Fee-for-service claims incurred but not paid (IBNP)
$
1,089,903

 
$
870,429

Pharmacy payable
84,180

 
71,412

Capitation payable
47,171

 
28,150

Other
226,878

 
230,531

 
$
1,448,132

 
$
1,200,522

"Other" medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various government agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. Such non-risk provider payables amounted to $105.4 million and $119.3 million as of March 31, 2015 and December 31, 2014, respectively.
The following table presents the components of the change in our medical claims and benefits payable from continuing and discontinued operations combined for the periods indicated. The amounts presented for “Components of medical care costs related to: Prior periods” represent the amount by which our original estimate of medical claims and benefits payable at the beginning of the period were more than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.
 
Three Months Ended
 
Year Ended
 
March 31, 2015
 
December 31, 2014
 
(Dollars in thousands)
Medical claims and benefits payable, beginning balance
$
1,200,522

 
$
669,787

Components of medical care costs related to:
 
 
 
Current period
2,771,588

 
8,122,885

Prior periods (1)
(135,833
)
 
(45,979
)
Total medical care costs
2,635,755

 
8,076,906

 
 
 
 
Change in non-risk provider payables
(13,914
)
 
(31,973
)
 
 
 
 
Payments for medical care costs related to:
 
 
 
Current period
1,647,981

 
7,064,427

Prior periods
726,250

 
449,771

Total paid
2,374,231

 
7,514,198

Medical claims and benefits payable, ending balance
$
1,448,132

 
$
1,200,522

 
 
 
 
Benefit from prior period as a percentage of:
 
 
 
Balance at beginning of period
11.3
%
 
6.9
%
Premium revenue, trailing twelve months
1.4
%
 
0.5
%
Medical care costs, trailing twelve months
1.5
%
 
0.6
%

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____________________
(1)
The benefit from prior period development of medical claims and benefits payable for the three months ended March 31, 2015 included approximately $25 million relating to programs that contain medical cost floor or corridor provisions. Accordingly, premium revenue for the three months ended March 31, 2015 was reduced by the same amount.
That portion of our total medical claims and benefits payable liability that is most subject to variability in the estimate is fee-for-service claims incurred but not paid (IBNP). Our IBNP, as included in medical claims and benefits payable, represents our best estimate of the total amount of claims we will ultimately pay with respect to claims that we have incurred as of the balance sheet date. We estimate our IBNP monthly using actuarial methods based on a number of factors.
Assuming that our initial estimate of IBNP is accurate, we believe that amounts ultimately paid out would generally be between 8% and 10% less than the IBNP liability recorded at the end of the period as a result of the inclusion in that liability of the provision for adverse claims deviation and the accrued cost of settling those claims. Because the amount of our initial liability is merely an estimate (and therefore not perfectly accurate), we will always experience variability in that estimate as new information becomes available with the passage of time. Therefore, there can be no assurance that amounts ultimately paid out will fall within the range of 8% to 10% lower than the liability that was initially recorded. Furthermore, because our initial estimate of IBNP is derived from many factors, some of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the reasons for a change in estimate – we only know when the circumstances for any one or more factors are out of the ordinary.
The use of a consistent methodology in estimating our liability for medical claims and benefits payable minimizes the degree to which the under- or overestimation of that liability at the close of one period may affect consolidated results of operations in subsequent periods. In particular, the use of a consistent methodology should result in the replenishment of reserves during any given period in a manner that generally offsets the benefit of favorable prior period development in that period. Facts and circumstances unique to the estimation process at any single date, however, may still lead to a material impact on consolidated results of operations in subsequent periods. Any absence of adverse claims development (as well as the expensing through general and administrative expense of the costs to settle claims held at the start of the period) will lead to the recognition of a benefit from prior period claims development in the period subsequent to the date of the original estimate.
As indicated above, the amounts ultimately paid out on our medical claims and benefits payable liabilities in fiscal years 2015 and 2014 were less than what we had expected when we had established those liabilities. The differences between our original estimates and the amounts ultimately paid out (or now expected to be ultimately paid out) for the most part related to IBNP. While many related factors working in conjunction with one another determine the accuracy of our estimates, we are seldom able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
We believe that the most significant factors that will determine the accuracy of our IBNP estimates at March 31, 2015 are as follows:
At our Florida health plan, Marketplace enrollment increased by 185,000 members in the first quarter of 2015. Because of these new members the reserves are more subject to change than usual.
At our Illinois health plan, enrollment has increased by nearly 81,000 members during the fourth quarter of 2014 and the first quarter of 2015. Because of these new members the reserves are more subject to change than usual.
At our Ohio health plan, enrollment in the MMP integrated duals program has increased by approximately 9,000 members during the first quarter of 2015. Because of these new members the reserves are more subject to change than usual.
At our Washington health plan, certain delays related to the implementation of revised fee schedules resulted in a significant increase to our claims inventory in the first quarter of 2015. This additional inventory adds to the uncertainty of our unpaid claims estimates.
We recognized favorable prior period claims development in the amount of $135.8 million for the three months ended March 31, 2015. This amount represents our estimate as of March 31, 2015, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2014 was more than the amount that will ultimately be paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
At our Ohio health plan, approximately 17,000 members were enrolled in the new MMP program during 2014. Since we did not have enough historical claims data to use the pattern of paid and incurred claims, we initially estimated the reserves for these new members by applying an estimated medical care ratio (MCR). This resulted in an overstatement in our reserve liability as of December 31, 2014.

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Table of Contents

Also at our Ohio health plan, reserves for the Medicaid expansion population were partially based on expected costs built into the pricing assumptions because this program was new in 2014. Our costs were ultimately less than those assumed in those pricing assumptions, resulting in an overestimation of our liability as of December 31, 2014.
At our California health plan, the reserves for the Medicaid expansion membership were also partially based on expected claims in the pricing assumptions. Since experience was ultimately better than assumed in the pricing, this caused an overstatement of reserves as of December 31, 2014.
11. Debt
As of March 31, 2015, maturities of debt for the years ending December 31 are as follows (in thousands):
 
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
1.125% Notes
$
550,000

 
$

 
$

 
$

 
$

 
$

 
$
550,000

1.625% Notes (1)
301,551

 

 

 

 

 

 
301,551

 
$
851,551

 
$

 
$

 
$

 
$

 
$

 
$
851,551

(1)
The 1.625% Notes have a contractual maturity date in 2044; however, on specified dates beginning in 2018 as described below, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes, or we may redeem any or all of the 1.625% Notes.
1.125% Cash Convertible Senior Notes due 2020. In February 2013, we issued $550.0 million aggregate principal amount of 1.125% cash convertible senior notes (the 1.125% Notes) due January 15, 2020, unless earlier repurchased or converted. Interest on the 1.125% Notes is payable semiannually in arrears on January 15 and July 15 at a rate of 1.125% per annum.
The 1.125% Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 1.125% Notes; equal in right of payment to any of our unsecured indebtedness that is not subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our subsidiaries.
The 1.125% Notes are convertible only into cash, and not into shares of our common stock or any other securities. The initial conversion rate for the 1.125% Notes is 24.5277 shares of our common stock per $1,000 principal amount of the 1.125% Notes. This represents an initial conversion price of approximately $40.77 per share of our common stock. Upon conversion, in lieu of receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount of 1.125% Notes, equal to the settlement amount, determined in the manner set forth in the indenture. We may not redeem the 1.125% Notes prior to the maturity date.
Holders may convert their 1.125% Notes only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on June 30, 2013 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of 1.125% Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
upon the occurrence of specified corporate events; or
at any time on or after July 15, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date.
The 1.125% Notes met the stock price trigger in the quarter ended March 31, 2015, and are convertible to cash through at least June 30, 2015. Because the 1.125% Notes may be converted within 12 months, the $440.2 million carrying amount is reported in current portion of long-term debt as of March 31, 2015.
The 1.125% Notes contain an embedded cash conversion option (the 1.125% Conversion Option), which was separated from the 1.125% Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the 1.125% Conversion Option transaction settles or expires. The initial fair value liability of the 1.125% Conversion Option simultaneously reduced the carrying value of the 1.125% Notes (effectively an original issuance

18

Table of Contents

discount). This discount is amortized to the 1.125% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. This has resulted in our recognition of interest expense on the 1.125% Notes at an effective rate of approximately 6%. As of March 31, 2015, the 1.125% Notes have a remaining amortization period of 4.8 years. The 1.125% Notes' if-converted value exceeded their principal amount by approximately $237 million and $93 million as of March 31, 2015, and December 31, 2014, respectively.
1.625% Convertible Senior Notes due 2044. In September 2014, we issued $301.6 million aggregate principal amount of 1.625% convertible senior notes (the 1.625% Notes) due August 15, 2044, unless earlier repurchased, redeemed or converted. Interest on the 1.625% Notes is payable semiannually in arrears on February 15 and August 15, at a rate of 1.625% per annum, beginning on February 15, 2015. In addition, beginning with the semiannual interest period commencing immediately following the interest payment date on August 15, 2018, contingent interest will accrue on the 1.625% Notes during any semiannual interest period in which certain conditions or events occur, or under certain events of default. For example, additional interest of 0.25% per year will be payable on the 1.625% Notes for any semiannual interest period for which the principal amount of 1.625% Notes outstanding is less than $100 million.
The 1.625% Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 1.625% Notes; equal in right of payment to any of our unsecured indebtedness that is not subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our subsidiaries.
The initial conversion rate for the 1.625% Notes is 17.2157 shares of our common stock per $1,000 principal amount of the 1.625% Notes. This represents an initial conversion price of approximately $58.09 per share of our common stock. Upon conversion, we will pay cash and, if applicable, deliver shares of our common stock to the converting holder in an amount per $1,000 principal amount of 1.625% Notes equal to the settlement amount (as defined in the related indenture).
Holders may convert their 1.625% Notes only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of 1.625% Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
upon the occurrence of specified corporate events;
if we call any 1.625% Notes for redemption, at any time until the close of business on the business day immediately preceding the redemption date;
during the period from, and including, May 15, 2018 to the close of business on the business day immediately preceding August 19, 2018; or
at any time on or after February 15, 2044 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 1.625% Notes, in integral multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
As of March 31, 2015, the 1.625% Notes were not convertible.
We may not redeem the 1.625% Notes prior to August 19, 2018. On or after August 19, 2018, we may redeem for cash all or part of the 1.625% Notes, except for the 1.625% Notes we are required to repurchase in connection with a fundamental change or on any specified repurchase date. The redemption price for the 1.625% Notes will equal 100% of the principal amount of the 1.625% Notes being redeemed, plus accrued and unpaid interest. In addition, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes for cash on August 19, 2018, August 19, 2024, August 19, 2029, August 19, 2034 and August 19, 2039, in each case, at a specified price equal to 100% of the principal amount of the 1.625% Notes to be repurchased, plus accrued and unpaid interest.
Because the 1.625% Notes have cash settlement features, we have allocated the principal amount between a liability component and an equity component. The reduced carrying value on the 1.625% Notes resulted in a debt discount that is amortized back to the 1.625% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. The expected life of the debt is approximately four years, beginning on the issuance date and ending on the first date we may redeem the notes in August 2018. As of March 31, 2015, the 1.625% Notes have a remaining amortization period of 3.4 years. This has resulted in our recognition of interest expense on the 1.625% Notes at an effective rate approximating what we would

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have incurred had nonconvertible debt with otherwise similar terms been issued, or approximately 5%. The outstanding 1.625% Notes’ if-converted value exceeded their principal amount by approximately $29 million as of March 31, 2015, and did not exceed their principal amount as of December 31, 2014. At March 31, 2015, the equity component of the 1.625% Notes, including the impact of deferred taxes, was $22.9 million.
The principal amounts, unamortized discount (net of premium related to 1.625% Notes), and net carrying amounts of the convertible senior notes were as follows:
 
Principal Balance
 
Unamortized Discount
 
Net Carrying Amount
 
(In thousands)
March 31, 2015:
 
 
 
 
 
1.125% Notes
$
550,000

 
$
109,752

 
$
440,248

1.625% Notes
301,551

 
30,715

 
270,836

 
$
851,551

 
$
140,467

 
$
711,084

December 31, 2014:
 
 
 
 
 
1.125% Notes
$
550,000

 
$
114,670

 
$
435,330

1.625% Notes
301,551

 
32,784

 
268,767

 
$
851,551

 
$
147,454

 
$
704,097

 
Three Months Ended March 31,
 
2015
 
2014
 
(In thousands)
Interest cost recognized for the period relating to the:
 
 
 
Contractual interest coupon rate
$
2,772

 
$
3,300

Amortization of the discount
6,986

 
6,314

 
$
9,758

 
$
9,614

Lease Financing Obligations. In 2013 we entered into a sale-leaseback transaction for the sale and contemporaneous leaseback of the Molina Center located in Long Beach, California, and our Ohio health plan office building located in Columbus, Ohio. Due to our continuing involvement with these leased properties, the sale did not qualify for sale-leaseback accounting treatment and we remain the "accounting owner" of the properties. These assets continue to be included in our consolidated balance sheets, and also continue to be depreciated over their remaining useful lives. The lease financing obligation is amortized over the 25-year lease term such that there will be no gain or loss recorded if the lease is not extended at the end of its term. Rent will increase 3% per year through the initial term. Payments under the lease adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income. Such interest expense amounted to $3.1 million for the three months ended March 31, 2015 and 2014.
As described and defined in further detail in Note 16, "Related Party Transactions," we entered into a lease for office space in February 2013 consisting of two office buildings. We have concluded that we are the accounting owner of the buildings due to our continuing involvement with the properties. We have recorded $37.7 million to property, equipment and capitalized software, net, in the accompanying consolidated balance sheet as of March 31, 2015, which represents the total cost incurred by the Landlord for the construction of the buildings, net of accumulated depreciation. As of March 31, 2015, the aggregate amount recorded to lease financing obligations, including the current portion, amounted to $40.5 million. Payments under the lease adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income. Such interest expense was $1.0 million and $0.6 million for the three months ended March 31, 2015 and 2014, respectively. In addition to the capitalization of the costs incurred by the Landlord, we impute and record rent expense relating to the ground leases for the property sites. Such rent expense is computed based on the fair value of the land and our incremental borrowing rate, and was insignificant for the three months ended March 31, 2015, and 2014.

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12. Derivatives
The following table summarizes the fair values and the presentation of our derivative financial instruments (defined and discussed individually below) in the consolidated balance sheets:
 
Balance Sheet Location
 
March 31, 2015
 
December 31, 2014
 
 
 
(In thousands)
Derivative asset:
 
 
 
 
 
1.125% Call Option
Current assets: Derivative asset
 
$
474,121

 
$

 
Non-current assets: Derivative asset
 
$

 
$
329,323

 

 


 
 
Derivative liability:
 
 
 
 
 
1.125% Conversion Option
Current liabilities: Derivative liability
 
$
473,983

 
$

 
Non-current liabilities: Derivative liability
 
$

 
$
329,194

Our derivative financial instruments do not qualify for hedge treatment, therefore the change in fair value of these instruments is recognized immediately in our consolidated statements of income, and reported in other expense, net. Gains and losses for our derivative financial instruments are presented individually in the consolidated statements of cash flows, supplemental cash flow information.
As of March 31, 2015, the 1.125% Call Option and the 1.125% Conversion Option were classified as a current asset and current liability, respectively, because the 1.125% Notes may be converted within 12 months of March 31, 2015, as described in Note 11, "Debt.”
1.125% Notes Call Spread Overlay. Concurrent with the issuance of the 1.125% Notes in 2013, we entered into privately negotiated hedge transactions (collectively, the 1.125% Call Option) and warrant transactions (collectively, the 1.125% Warrants), with certain of the initial purchasers of the 1.125% Notes (the Counterparties). We refer to these transactions collectively as the Call Spread Overlay. Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the 1.125% Notes), these transactions are intended to offset cash payments due upon any conversion of the 1.125% Notes.
1.125% Call Option. The 1.125% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note 6, "Fair Value Measurements."
1.125% Conversion Option. The embedded cash conversion option within the 1.125% Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the cash conversion option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Conversion Option, refer to Note 6, "Fair Value Measurements."
13. Stockholders' Equity
Stockholders' equity increased $31.6 million during the three months ended March 31, 2015 compared with stockholders' equity at December 31, 2014. The increase was due to net income of $28.2 million, $1.3 million related to other comprehensive income and $2.1 million related to employee stock transactions.
1.125% Warrants. In connection with the 1.125% Notes Call Spread Overlay transaction described in Note 12, "Derivatives," we issued 13,490,236 warrants with a strike price of $53.8475 per share. The number of warrants and the strike price are subject to adjustment under certain circumstances. If the market value per share of our common stock exceeds the strike price of the 1.125% Warrants on any trading day during the 160 trading day measurement period under the 1.125% Warrants, we will be obligated to issue to the Counterparties a number of shares equal in value to the product of the amount by which such market value exceeds such strike price and 1/160th of the aggregate number of shares of our common stock underlying the 1.125% Warrants, subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price of the 1.125% Warrants. We will not receive any additional proceeds if the 1.125% Warrants are exercised.

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Securities Repurchase Programs. Effective as of February 25, 2015, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock. Stock repurchases under this program may be made through open-market and/or privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and market conditions. This repurchase program extends through December 31, 2015.
Shelf Registration Statement. In May 2012, we filed an automatic shelf registration statement on Form S-3 with the SEC covering the issuance of an indeterminate number of our securities, including common stock, warrants, or debt securities. We may publicly offer securities from time to time at prices and terms to be determined at the time of the offering.
Stock Plans. In connection with our equity incentive plans, we issued approximately 273,000 shares of common stock, net of shares used to settle employees’ income tax obligations, for the three months ended March 31, 2015.
14. Segment Information
We report our financial performance based on two reportable segments: the Health Plans segment and the Molina Medicaid Solutions segment. Our reportable segments are consistent with how we manage the business and view the markets we serve. Our Health Plans segment consists of our health plans and our direct delivery business. Our health plans represent operating segments that have been aggregated for reporting purposes because they share similar economic characteristics.
Our Molina Medicaid Solutions segment provides MMIS design, development, and implementation; business process outsourcing solutions; hosting services; and information technology support services to state Medicaid agencies.
We rely on an internal management reporting process that provides segment information to the operating income level for purposes of making financial decisions and allocating resources. The accounting policies of the segments are the same as those described in Note 2, "Significant Accounting Policies." For presentation purposes, the cost of centralized services is reported within the Health Plans segment.
 
Three Months Ended March 31,
 
2015
 
2014
 
(In thousands)
Revenue, continuing operations:
 
 
 
Health Plans segment:
 
 
 
Premium revenue
$
2,970,652

 
$
1,940,337

Premium tax revenue
95,347

 
51,693

Health insurer fee revenue
47,948

 
18,696

Investment income
3,015

 
1,629

Other revenue
2,303

 
3,258

Molina Medicaid Solutions segment:
 
 
 
Service revenue
51,858

 
53,630

 
$
3,171,123

 
$
2,069,243

 
 
 
 
Income from continuing operations before income tax expense:
 
 
 
Health Plans segment
$
68,440

 
$
14,019

Molina Medicaid Solutions segment
13,790

 
10,248

Operating income, continuing operations
82,230

 
24,267

Other expenses, net
14,866

 
13,778

 
$
67,364

 
$
10,489

15. Commitments and Contingencies
Legal Proceedings. The health care and business process outsourcing industries are subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and regulations include significant fines and penalties, exclusion from participating in publicly funded programs, and the repayment of previously billed and collected revenues.
We are involved in legal actions in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. We have accrued liabilities for certain matters for which we deem

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the loss to be both probable and estimable. Although we believe that our estimates of such losses are reasonable, these estimates could change as a result of further developments of these matters. The outcome of legal actions is inherently uncertain and such pending matters for which accruals have not been established have not progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to estimate a range of possible loss, if any. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these pending matters could have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
State of Louisiana. On June 26, 2014, the state of Louisiana filed a Petition for Damages against Molina Medicaid Solutions, Molina Healthcare, Inc., Unisys Corporation, and Paramax Systems Corporation, a subsidiary of Unisys, in the Parish of Baton Rouge, 19th Judicial District, versus number 631612. The Petition alleges that between 1989 and 2012, the defendants utilized an incorrect reimbursement formula for the payment of pharmaceutical claims. We believe we have several meritorious defenses to the claims of the state, and any liability for the alleged claims is not currently probable or reasonably estimable.
USA and State of Florida ex rel. Charles Wilhelm. On July 24, 2014, Molina Healthcare, Inc. and Molina Healthcare of Florida, Inc. were served with a Complaint filed under seal on December 5, 2012 in District Court for the Southern District of Florida by relator, Charles C. Wilhelm, M.D., Case No. 12-24298. The Complaint alleges that in late 2008 and early 2009, in connection with the acquisition of Florida NetPass under which Molina Healthcare of Florida, Inc. began conducting business in the state of Florida, the defendants failed to adequately staff the plan and provide other services, resulting in a disproportionate number of sicker beneficiaries of Florida NetPass moving back into the Florida fee-for-service Medicaid program. This alleged conduct purportedly resulted in a violation of the federal False Claims Act. Both the United States of America and the state of Florida have declined to intervene. We believe we have several meritorious defenses to the claims of the relator, and any liability for the alleged claims is not currently probable or reasonably estimable.
United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc., et al. On or around October 14, 2014, Molina Healthcare of California, Molina Healthcare of California Partner Plan, Inc., Mobile Medical Examination Services, Inc. (MedXM), and other health plan defendants were served with a Complaint previously filed under seal in the Central District Court of California by relator, Anita Silingo, Case No. SACV13-1348-FMO(SHx). The Complaint alleges that MedXM improperly modified medical records and otherwise took inappropriate steps to increase members’ risk adjustment scores, and that the defendants, including Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc., purportedly turned a “blind eye” to these unlawful practices. The Department of Justice has declined to intervene. We believe that we have several meritorious defenses to the claims of the relator, and any liability for the alleged claims is not currently probable or reasonably estimable.
Provider Claims. Many of our medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such differing interpretations have led certain medical providers to pursue us for additional compensation. The claims made by providers in such circumstances often involve issues of contract compliance, interpretation, payment methodology, and intent. These claims often extend to services provided by the providers over a number of years.
Various providers have contacted us seeking additional compensation for claims that we believe to have been settled. These matters, when finally concluded and determined, will not, in our opinion, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
Regulatory Capital and Dividend Restrictions. Our health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. Regulators in some states may also attempt to enforce capital requirements upon us that require the retention of net worth in excess of amounts formally required by statute or regulation. Such statutes, regulations and informal capital requirements also restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was approximately $928 million at March 31, 2015, and $859 million at December 31, 2014. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such cash, cash equivalents and investments amounted to $210.6 million and $202.6 million as of March 31, 2015 and December 31, 2014, respectively.
The National Association of Insurance Commissioners (NAIC), adopted rules effective December 31, 1998, which, if implemented by the states, set minimum capitalization requirements for insurance companies, HMOs, and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital (RBC) rules which may vary from state to state.

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As of March 31, 2015, our health plans had aggregate statutory capital and surplus of approximately $987 million compared with the required minimum aggregate statutory capital and surplus of approximately $581 million. All of our health plans were in compliance with the minimum capital requirements at March 31, 2015. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.
16. Related Party Transactions
We have entered into a lease (the Amended Lease) with 6th & Pine Development, LLC (the Landlord) for two office buildings. The principal members of the Landlord are John C. Molina, our chief financial officer and a director of the Company, and his wife. In addition, in connection with the development of the buildings being leased, John C. Molina has pledged shares of common stock in the Company that he holds. Dr. J. Mario Molina, our chief executive officer, president and chairman of the board of directors, holds a partial interest in such shares as trust beneficiary.
The Amended Lease provides for an annual rent escalator of 3.4% per year, and will expire on December 31, 2029, unless extended or earlier terminated. For information regarding the lease financing obligation, refer to Note 11, "Debt."
Refer to Note 17, "Variable Interest Entities," for a discussion of the Joseph M. Molina, M.D. Professional Corporations.
17Variable Interest Entities
Joseph M. Molina M.D., Professional Corporations
The Joseph M. Molina, M.D. Professional Corporations (JMMPC) were created in 2012 to further advance our direct delivery business. JMMPC's primary shareholder is Dr. J. Mario Molina, our chief executive officer, president, and chairman of the board of directors. Dr. Molina is paid no salary and receives no dividends in connection with his work for, or ownership of, JMMPC. JMMPC provides primary care medical services through its employed physicians and other medical professionals. Beginning in the fourth quarter of 2014, JMMPC also provided certain specialty referral services to our California health plan members through a contracted provider network. Substantially all of the individuals served by JMMPC are members of our health plans. JMMPC does not have agreements to provide professional medical services with any other entities.
Our wholly owned subsidiary, Molina Medical Management, Inc. (MMM), has entered into services agreements with JMMPC to provide clinic facilities, clinic administrative support staff, patient scheduling services and medical supplies to JMMPC. The services agreements were designed such that JMMPC will operate at break even, ensuring the availability of quality care and access for our health plan members. The services agreements provide that the administrative fees charged to JMMPC by MMM are reviewed annually to assure the achievement of this goal.
Separately, our California, Florida, New Mexico, Utah and Washington health plans have entered into primary care services agreements with JMMPC. These agreements direct our health plans to perform a monthly reconciliation, to either fund JMMPC's operating deficits, or receive JMMPC's operating surpluses, such that JMMPC will derive no profit or loss. Because the MMM services agreements described above mitigate the likelihood of significant operating deficits or surpluses, such monthly reconciliation amounts are generally insignificant.
We have determined that JMMPC is a variable interest entity (VIE), and that we are its primary beneficiary. We have reached this conclusion under the power and benefits criterion model according to GAAP. Specifically, we have the power to direct the activities that most significantly affect JMMPC's economic performance, and the obligation to absorb losses or right to receive benefits that are potentially significant to the VIE, under the agreements described above. Because we are its primary beneficiary, we have consolidated JMMPC. JMMPC's assets may be used to settle only JMMPC's obligations, and JMMPC's creditors have no recourse to the general credit of Molina Healthcare, Inc. As of March 31, 2015, JMMPC had total assets of $10.7 million, and total liabilities of $8.8 million. As of December 31, 2014, JMMPC had total assets of $31.1 million, and total liabilities of $30.8 million.
Our maximum exposure to loss as a result of our involvement with JMMPC is generally limited to the amounts needed to fund JMMPC's ongoing payroll, employee benefits and medical care costs associated with JMMPC's specialty referral activities. We believe that such loss exposures will be immaterial to our consolidated operating results and cash flows for the foreseeable future.


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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, and results of operations within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Securities Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. All statements, other than statements of historical facts, included in this quarterly report may be deemed to be forward-looking statements for purposes of the Securities Act and the Securities Exchange Act. Without limiting the foregoing, we use the words “anticipate(s),” “believe(s),” “estimate(s),” “expect(s),” “intend(s),” “may,” “plan(s),” “project(s),” “will,” “would,” “could,” “should” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and, accordingly, you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from the forward-looking statements that we make. You should read these factors and the other cautionary statements as being applicable to all related forward-looking statements wherever they appear in this quarterly report. We caution you that we do not undertake any obligation to update forward-looking statements made by us. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected, estimated, expected, or contemplated. Those known risks and uncertainties include, but are not limited to, the following:
continuing uncertainties associated with the implementation of the Affordable Care Act, including the full grossed up reimbursement by states of the non-deductible ACA health insurer fee, the Medicaid expansion, the insurance marketplaces, the effect of various implementing regulations, the King v. Burwell case now pending before the Supreme Court, and uncertainties regarding the Medicare-Medicaid dual eligible demonstration programs in California, Illinois, Michigan, Ohio, South Carolina, and Texas;
management of our medical costs, including seasonal flu patterns and rates of utilization that are consistent with our expectations, and our ability to reduce over time the high medical costs commonly associated with new patient populations;
federal or state medical cost expenditure floors, administrative cost and profit ceilings, and profit sharing arrangements;
the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures, including 2014 and 2015 at-risk premium rules in the state of Texas;
cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;
the success of our new health plan in Puerto Rico;
newly FDA-approved specialty drugs such as Sovaldi, Olysio, Harvoni, and other specialty drugs or generic drugs that are exorbitantly priced but not factored into the calculation of our capitated rates;
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 accurate estimation of incurred but not paid medical costs across our health plans;
retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments, including Medicaid pharmaceutical rebates or retroactive premium rate increases;
efforts by states to recoup previously paid amounts;
the success of our efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states;
the continuation and renewal of the government contracts of both our health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed;
complications, member confusion, or enrollment backlogs related to the annual renewal of Medicaid coverage;
government audits and reviews, and any fine, enrollment freeze, or monitoring program 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 or unfavorable resolution of litigation, arbitration, or administrative proceedings, including pending qui tam actions in Florida and California, and the litigation commenced against us by the state of Louisiana alleging that Molina Medicaid Solutions and its predecessors used an incorrect reimbursement formula for the payment of pharmaceutical claims;
the relatively small number of states in which we operate health plans;
our management of a portion of College Health Enterprises’ hospital in Long Beach, California;

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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;
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;
public alarm associated with the Ebola virus, measles, or any actual widespread epidemic;
changes in general economic conditions, including unemployment rates; and
increasing competition and consolidation in the Medicaid industry.
Investors should refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurance that any results or events projected or contemplated by our forward-looking statements will in fact occur.
This document and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report, and the audited financial statements and Management's Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, 2014.







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Company Overview
Molina Healthcare, Inc. provides quality health care to those receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program. We report our financial performance based on two reportable segments: the Health Plans segment and the Molina Medicaid Solutions segment.
Our Health Plans segment consists of health plans in 11 states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of March 31, 2015, these health plans served nearly 3 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. Additionally, we serve Health Insurance Marketplace (Marketplace) members, many of whom are eligible for 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 direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate, as well as of the management of a hospital in southern California under a management services agreement.
Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida.
The following discussion and analysis, with the exception of cash flow information, is presented in the context of continuing operations unless otherwise noted.
Overview of Financial Results, Continuing Operations
Financial results for the first quarter of 2015 improved markedly over the first quarter of 2014 due to higher revenue, greater administrative cost efficiency, and steady medical care costs. Both income from continuing operations before income tax expense and net income per diluted share, continuing operations, increased substantially in the first quarter of 2015 compared with the first quarter of 2014.
Premium revenue increased approximately 53% in the first quarter of 2015 compared with the first quarter of 2014, resulting from:
An increase of over 38% in enrollment due to growth across all health plan programs.
An increase of nearly 15% in premium revenue per member per month (PMPM) due to membership growth in programs serving the needs of members with more complex medical conditions for whom we receive higher monthly premiums.
Medical care costs as a percent of premium revenue (the "medical care ratio") were consistent with the first quarter of 2014 at 88.7% and improved over the fourth quarter of 2014 medical care ratio of 89.4%. Medical margin (defined as the excess of premium revenue over medical care costs) increased 53% in 2015 over 2014.
General and administrative expenses as a percentage of total revenue (the "general and administrative expense ratio") decreased significantly to 8.1% in the first quarter of 2015 compared with 9.1% in the first quarter of 2014. The decrease in the general and administrative expense ratio would have been even greater but for expenses associated with the start-up of our Puerto Rico health plan, broker commissions and Marketplace fees. Without these costs, the first quarter 2015 general and administrative expense ratio would have been approximately 7.4%.
Health Care Reform
We believe that government-sponsored initiatives, including the Affordable Care Act (ACA) will continue to provide us with significant opportunities for membership growth in our existing markets and in new programs in the future as follows:
Medicaid Expansion. In the states that have elected to participate, the ACA provides for the expansion of the Medicaid program to offer eligibility to nearly all low-income people under age 65 with incomes at or below 138% of the federal poverty line. Medicaid expansion membership phased in beginning January 1, 2014. Our health plans in California, Illinois, Michigan, New Mexico, Ohio, and Washington participate in Medicaid expansion. At March 31, 2015, our membership included approximately 437,000 Medicaid expansion members, or 15% of total membership.
Marketplace. The ACA authorized the creation of Marketplace health 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 all of the states in which we operate, except Illinois and South Carolina. At March 31, 2015, our membership included approximately 266,000 Marketplace members, with approximately 185,000, or 70%, of those members in Florida.

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Medicare-Medicaid Plans. To coordinate care for those who qualify to receive both Medicare and Medicaid services (the "dual eligible"), and to deliver services to the dual eligible in a more financially efficient manner, 15 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 Medicare-Medicaid Plans (MMPs). Our MMPs in California, Illinois, and Ohio offered coverage beginning in 2014; our MMPs in South Carolina and Texas offered coverage beginning in the first quarter of 2015; and we expect to begin offering MMP coverage in Michigan in the second quarter of 2015. At March 31, 2015, our membership included approximately 34,000 integrated MMP members.
Health Insurer Fee Update
Our results continue to be adversely affected by delays in reimbursement of the ACA's Health Insurer Fee (HIF) by some states. Due to progress made in securing agreements for the reimbursement of the HIF with various state Medicaid agencies in 2014, we recognized approximately 73% of the Medicaid-related reimbursement revenue associated with HIF expense in the first quarter of 2015, compared with only 51% in the first quarter of 2014.
Delay in recognition of the HIF expense reimbursement from California, Michigan and Utah reduced income before taxes by approximately $16 million, or $0.20 per diluted share in the first quarter of 2015.
The comparable amount of HIF reimbursement not recognized in the first quarter of 2014 was approximately $16 million, which reduced net income per diluted share, continuing operations, by approximately $0.21 per diluted share.
During the first quarter of 2015, we did not recognize any of the $20 million of outstanding HIF reimbursement related to 2014.
For further discussion of the risks and uncertainties relating to the HIF, refer to the subheading below, "Liquidity and Capital Resources—Financial Condition."
Market Updates - Health Plans Segment
Florida. In the first quarter of 2015, our Florida health plan enrolled 185,000 Marketplace members, more than doubling its total membership as of December 31, 2014.
Puerto Rico. On April 1, 2015, our Puerto Rico health plan became operational, enrolling approximately 350,000 members.
Market Updates - Molina Medicaid Solutions Segment
New Jersey. On April 9, 2015, the state of New Jersey announced its selection of Molina Medicaid Solutions to design and operate its new Medicaid management information system (MMIS). The new contract is effective May 1, 2015, and has a term of 10 years with three one-year renewal options. Molina Medicaid Solutions was the state's previous MMIS provider, and was awarded the new contract as a result of Molina Medicaid Solutions' submission in response to the state of New Jersey's request for proposals.
Composition of Revenue and Membership
Health Plans Segment
Our Health Plans segment derives its revenue, in the form of premiums, chiefly from our health plans' Medicaid contracts and, to a lesser degree, from Medicare contracts entered into with the Centers for Medicare and Medicaid Services (CMS), a federal government agency.
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. Our health plan subsidiaries have generally been successful in retaining their contracts, but such contracts are subject to risk of loss when a state issues a new 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; and regions or service areas. The state Medicaid programs and the federal Medicare program periodically adjust premium rates.
Premium revenue is fixed in advance of the periods covered and is not generally subject to significant accounting estimates, except as described in Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 2, "Significant Accounting Policies." These premium revenues are recognized in the month that members are entitled to receive health care services. Premiums received in advance are deferred.

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The amount of the premiums paid to us 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 three months ended March 31, 2015. The "Consolidated" column represents the weighted-average amounts for our total membership by program.
 
PMPM Premiums
 
Low
 
High
 
Consolidated
Temporary Assistance for Needy Families (TANF), CHIP (1)
$
110.00

 
$
300.00

 
$
180.00

Medicaid Expansion
310.00

 
500.00

 
400.00

Aged, Blind or Disabled (ABD)
420.00

 
1,470.00

 
900.00

Marketplace
220.00

 
400.00

 
330.00

Medicare Special Needs Plans (Medicare)
820.00

 
1,070.00

 
1,010.00

Medicare-Medicaid Plan (MMP) – Integrated (2)
1,240.00

 
3,160.00

 
2,210.00

_________________________
(1)
CHIP stands for Children's Health Insurance Program.
(2)
MMP members who receive both Medicaid and Medicare coverage from Molina Healthcare.
The following tables set forth our Health Plans segment membership as of the dates indicated:
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Ending Membership by Health Plan:
 
 
 
 
 
California
574,000

 
531,000

 
418,000

Florida
352,000

 
164,000

 
91,000

Illinois
102,000

 
100,000

 
5,000

Michigan
256,000

 
242,000

 
218,000

New Mexico
222,000

 
212,000

 
183,000

Ohio
350,000

 
347,000

 
260,000

South Carolina
111,000

 
118,000

 
126,000

Texas
268,000

 
245,000

 
246,000

Utah
90,000

 
83,000

 
80,000

Washington
533,000

 
497,000

 
434,000

Wisconsin
107,000

 
84,000

 
90,000

 
2,965,000

 
2,623,000

 
2,151,000

 
 
 
 
 
 
Ending Membership by Program:
 
 
 
 
 
TANF/CHIP
1,825,000

 
1,809,000

 
1,659,000

Medicaid Expansion (1)
437,000

 
385,000

 
133,000

ABD
358,000

 
347,000

 
310,000

Marketplace (1)
266,000

 
15,000

 
8,000

Medicare
45,000

 
49,000

 
41,000

MMP–Integrated
34,000

 
18,000

 

 
2,965,000

 
2,623,000

 
2,151,000

_________________________
(1)
Medicaid expansion membership phased in, and the Marketplace became available for consumers to access coverage, beginning
January 1, 2014.
Molina Medicaid Solutions Segment
The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the performance of multiple services. The first of these is the design, development and implementation (DDI) of an MMIS. An additional service, following completion of DDI, is the operation of the MMIS under a business process outsourcing (BPO) arrangement. When providing BPO services (which include claims payment and eligibility processing) we also provide the state with other services including both hosting and support, and maintenance. Because we have determined the services provided under our Molina Medicaid Solutions contracts represent a single unit of accounting, we recognize revenue associated with such contracts on a

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straight-line basis over the contract term during which BPO, hosting, and support and maintenance services are delivered. There may be certain contractual provisions containing contingencies, however that require us to delay recognition of all or part of our service revenue until such contingencies have been removed.
Composition of Expenses
Health Plans Segment
Operating expenses for the Health Plans segment include expenses related to the provision of medical care services (including long-term services and supports, or LTSS), general and administrative expenses, premium tax and health insurer fee expenses. Our results of operations are impacted by our ability to effectively manage expenses related to medical care services and to accurately estimate medical costs incurred. Expenses related to medical care services are captured in the following categories:
Fee-for-service expenses: Under fee-for-service arrangements, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of services. Such expenses are recorded in the period in which the related services are dispensed. Nearly all hospital services and the majority of our primary care and physician specialist services are paid on a fee-for-service basis.
Pharmacy expenses: All drug, injectables, and immunization costs paid through our pharmacy benefit manager are classified as pharmacy expenses.
Capitation expenses: Under capitation arrangements, we pay a fixed amount PMPM to the provider without regard to the frequency, extent, or nature of the medical services actually furnished.
Direct delivery expenses: All costs associated with our direct delivery of medical care are separately identified.
Other medical expenses: All medically related administrative costs, certain provider incentive costs, reinsurance costs and other health care expenses are classified as other medical expenses.
Our medical care costs include amounts that have been paid by us through the reporting date as well as estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. See Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements in Note 10, "Medical Claims and Benefits Payable," for further information on how we estimate such liabilities.
Molina Medicaid Solutions Segment
Cost of service revenue consists primarily of the costs incurred to provide BPO and technology outsourcing services under our MMIS contracts. General and administrative costs consist primarily of indirect administrative costs and business development costs. In some circumstances we may defer recognition of incremental direct costs (such as direct labor, hardware, and software) associated with a contract if revenue recognition is also deferred. Such deferred contract costs are amortized on a straight-line basis over the contract term, consistent with the revenue recognition period.

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Financial Performance Summary, Continuing Operations
The following table briefly summarizes our financial and operating performance from continuing operations for the three months ended March 31, 2015 and 2014 (in thousands, except per-share data and percentages):
 
Three Months Ended
 
 
 
March 31,
 
% Change 2014 - 2015
 
2015
 
2014
 
Revenue:
 
 
 
 
 
Premium revenue
$
2,970,652

 
$
1,940,337

 
53.1
 %
Service revenue
51,858

 
53,630

 
(3.3
)
Premium tax revenue
95,347

 
51,693

 
84.4

Health insurer fee revenue
47,948

 
18,696

 
156.5

Investment income
3,015

 
1,629

 
85.1

Other revenue
2,303

 
3,258

 
(29.3
)
Total revenue
3,171,123

 
2,069,243

 
53.3

Operating expenses:
 
 
 
 
 
Medical care costs
2,635,784

 
1,721,658

 
53.1

Cost of service revenue
35,902

 
40,657

 
(11.7
)
General and administrative expenses
256,090

 
188,087

 
36.2

Premium tax expenses