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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
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
https://cdn.kscope.io/fb6d264164fd4fd7e54a6d19f4f39d89-moh-20200630_g1.jpg
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,California90802
(Address of principal executive offices) (Zip Code)
(562) 435-3666
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 Par Value MOHNew York Stock Exchange
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      No  
Indicate by check mark whether the registrant has submitted electronically 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      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   Accelerated Filer Non-Accelerated Filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of July 24, 2020, was approximately 59,300,000.


Table of Contents
MOLINA HEALTHCARE, INC. FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

TABLE OF CONTENTS
ITEM NUMBERPage
PART I
1.
2.
3.
4.
PART II
1.
1A.
2.
3.Defaults Upon Senior SecuritiesNot Applicable.
4.Mine Safety DisclosuresNot Applicable.
5.Other InformationNot Applicable.
6.


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
(In millions, except per-share amounts)
(Unaudited)
Revenue:
Premium revenue$4,372  $4,049  $8,676  $8,001  
Premium tax revenue157  110  307  248  
Health insurer fees reimbursed71    137    
Investment income and other revenue18  34  47  63  
Total revenue4,618  4,193  9,167  8,312  
Operating expenses:
Medical care costs3,598  3,466  7,314  6,837  
General and administrative expenses345  328  662  630  
Premium tax expenses157  110  307  248  
Health insurer fees71    139    
Depreciation and amortization21  22  41  47  
Other2  2  6  5  
Total operating expenses4,194  3,928  8,469  7,767  
Operating income424  265  698  545  
Other expenses, net:
Interest expense24  22  45  45  
Other expense (income), net5  (14) 5  (17) 
Total other expenses, net29  8  50  28  
Income before income tax expense395  257  648  517  
Income tax expense119  61  194  123  
Net income$276  $196  $454  $394  
Net income per share - Basic $4.72  $3.15  $7.65  $6.34  
Net income per share - Diluted $4.65  $3.06  $7.54  $6.04  


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
(In millions)
(Unaudited)
Net income$276  $196  $454  $394  
Other comprehensive income:
Unrealized investment income62  10  37  17  
Less: effect of income taxes
15  2  9  4  
Other comprehensive income, net of tax 47  8  28  13  
Comprehensive income$323  $204  $482  $407  
See accompanying notes.
Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 3

Table of Contents

CONSOLIDATED BALANCE SHEETS
June 30,
2020
December 31,
2019
(Dollars in millions,
except per-share amounts)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents$3,303  $2,452  
Investments1,906  1,946  
Receivables1,580  1,406  
Prepaid expenses and other current assets273  163  
Total current assets7,062  5,967  
Property, equipment, and capitalized software, net399  385  
Goodwill and intangible assets, net164  172  
Restricted investments87  79  
Deferred income taxes 65  79  
Other assets99  105  
Total assets$7,876  $6,787  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable$1,960  $1,854  
Amounts due government agencies 865  664  
Accounts payable, accrued liabilities and other876  502  
Deferred revenue54  249  
Total current liabilities3,755  3,269  
Long-term debt1,812  1,237  
Finance lease liabilities229  231  
Other long-term liabilities84  90  
Total liabilities5,880  4,827  
Stockholders’ equity:
Common stock, $0.001 par value, 150 million shares authorized; outstanding: 59 million shares at June 30, 2020, and 62 million shares at December 31, 2019
    
Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and outstanding
    
Additional paid-in capital166  175  
Accumulated other comprehensive income32  4  
Retained earnings1,798  1,781  
Total stockholders’ equity1,996  1,960  
Total liabilities and stockholders’ equity$7,876  $6,787  
See accompanying notes.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
OutstandingAmount
(In millions)
(Unaudited)
Balance at December 31, 201962  $  $175  $4  $1,781  $1,960  
Net income—  —  —  —  178  178  
Common stock purchases(3) —  (9) —  (437) (446) 
Termination of warrants—  —  (30) —  —  (30) 
Other comprehensive loss, net—  —  —  (19) —  (19) 
Share-based compensation—  —  4  —  —  4  
Balance at March 31, 202059    140  (15) 1,522  1,647  
Net income
—  —  —  —  276  276  
Other comprehensive income, net
—  —  —  47  —  47  
Share-based compensation
—  —  26  —  —  26  
Balance at June 30, 2020
59  $  $166  $32  $1,798  $1,996  

Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
OutstandingAmount
(In millions)
(Unaudited)
Balance at December 31, 201862  $  $643  $(8) $1,012  $1,647  
Net income—  —  —  —  198  198  
Adoption of new accounting standard
—  —  —  —  85  85  
Partial termination of warrants—  —  (103) —  —  (103) 
Other comprehensive income, net—  —  —  5  —  5  
Share-based compensation1  —  3  —  —  3  
Balance at March 31, 201963    543  (3) 1,295  1,835  
Net income—  —  —  —  196  196  
Partial termination of warrants—  —  (321) —  —  (321) 
Other comprehensive income, net—  —  —  8  —  8  
Share-based compensation—  —  18  —  —  18  
Balance at June 30, 201963  $  $240  $5  $1,491  $1,736  
See accompanying notes.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
 20202019
(In millions)
(Unaudited)
Operating activities:
Net income$454  $394  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization41  47  
Deferred income taxes6  19  
Share-based compensation28  19  
Loss (gain) on debt repayment 5  (17) 
Other, net(1) 7  
Changes in operating assets and liabilities:
Receivables(174) 91  
Prepaid expenses and other current assets(157) 18  
Medical claims and benefits payable106  (194) 
Amounts due government agencies 201  17  
Accounts payable, accrued liabilities and other251  (61) 
Deferred revenue(195) (181) 
Income taxes184  (3) 
Net cash provided by operating activities749  156  
Investing activities:
Purchases of investments(670) (1,162) 
Proceeds from sales and maturities of investments750  791  
Purchases of property, equipment and capitalized software(45) (20) 
Other, net3  (2) 
Net cash provided by (used in) investing activities38  (393) 
Financing activities:
Proceeds from senior notes offering, net of issuance costs 789    
Repayment of term loan facility(600)   
Common stock purchases
(453)   
Proceeds from borrowings under term loan facility380  220  
Cash paid for partial termination of warrants(30) (424) 
Cash paid for partial settlement of conversion option (27) (473) 
Cash received for partial settlement of call option27  473  
Repayment of principal amount of convertible senior notes
(12) (185) 
Other, net(3) 27  
Net cash provided by (used in) financing activities71  (362) 
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents
858  (599) 
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period
2,508  2,926  
Cash, cash equivalents, and restricted cash and cash equivalents at end of period$3,366  $2,327  
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Six Months Ended June 30,
20202019
(In millions)
(Unaudited)
Supplemental cash flow information:
Schedule of non-cash investing and financing activities:
Common stock used for share-based compensation$(8) $(7) 
Details of change in fair value of derivatives, net:
(Loss) gain on call option$(2) $166  
Gain (loss) on conversion option2  (166) 
Change in fair value of derivatives, net$  $  
See accompanying notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020

1. Organization and Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). We currently have two reportable segments: the Health Plans segment and the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
The Health Plans segment consists of health plans operating in 14 states and the Commonwealth of Puerto Rico. As of June 30, 2020, these health plans served approximately 3.6 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies. The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (“HMO”).
Our state Medicaid contracts typically have terms of three to five years, 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. Such contracts are subject to risk of loss in states that issue requests for proposal (“RFPs”) 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 not be renewed.
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.
Recent Developments – Health Plans Segment
New York. On July 1, 2020, we completed the acquisition of certain assets of YourCare Health Plan, Inc. The purchase price of $42 million was funded with cash on hand.
Kentucky. In May 2020, our Kentucky health plan was selected as an awardee pursuant to the statewide Medicaid managed care RFP issued by the Kentucky Cabinet for Health and Family Services, Department for Medicaid Services. The contract is expected to begin on January 1, 2021, and runs through December 31, 2024, with six additional two-year renewal options.
In addition, on July 17, 2020, we entered into a definitive agreement to acquire certain assets of Passport Health Plan in Kentucky. The purchase price for the transaction is approximately $20 million, plus contingent consideration that is payable in 2021 based on our Kentucky health plan’s open enrollment results for the 2021 plan year. We intend to fund this purchase with cash on hand. The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close before the end of 2020.
Acquisition of Magellan Complete Care. On April 30, 2020, we entered into a definitive agreement to acquire the Magellan Complete Care (“MCC”) line of business of Magellan Health, Inc. Net of certain tax benefits, the purchase price for the transaction is approximately $820 million, which we intend to fund with cash on hand. The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close by the first quarter of 2021. In connection with this transaction, Magellan Health, Inc. has agreed to provide certain transition services following the closing.
Texas. In March 2020, the Texas Health and Human Services Commission (“HHSC”) notified our Texas health plan that HHSC had upheld our protest and had canceled all previously awarded contracts associated with the re-procurement awards announced in October 2019 for the ABD program (known in Texas as “STAR+PLUS”). In addition, HHSC canceled the pending re-procurement associated with the TANF and CHIP programs (known in Texas as “STAR/CHIP”). HHSC further indicated that it was deliberating next steps with respect to both re-procurements.
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Puerto Rico. We are exiting Puerto Rico’s Medicaid program when our current contract expires in October 2020. We will work closely with the regulatory authorities and the provider community in a manner designed to ensure that our members in Puerto Rico are cared for and have reliable continuity of care.
Illinois. In March 2020, we terminated our agreement to acquire all of the capital stock of NextLevel Health Partners, Inc. due to the seller’s stated unwillingness to close pursuant to the terms of the acquisition agreement.
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. 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 six months ended June 30, 2020, are not necessarily indicative of the results for the entire year ending December 31, 2020.
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, 2019. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in our December 31, 2019, audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended December 31, 2019.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include:
The determination of medical claims and benefits payable of our Health Plans segment;
Health Plans segment contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;
Health Plans segment quality incentives that allow us to recognize incremental revenue if certain quality standards are met;
Settlements under risk or savings sharing programs;
The assessment of long-lived and intangible assets, and goodwill for impairment;
The determination of reserves for potential absorption of claims unpaid by insolvent providers;
The determination of reserves for the outcome of litigation;
The determination of valuation allowances for deferred tax assets; and
The determination of unrecognized tax benefits.

2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily convertible into known amounts of cash and have a maturity of three months or less on the date of purchase. The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows. The restricted cash and cash equivalents presented below are included in “Restricted investments” in the accompanying consolidated balance sheets.
June 30,
 20202019
(In millions)
Cash and cash equivalents$3,303  $2,253  
Restricted cash and cash equivalents63  74  
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the consolidated statements of cash flows
$3,366  $2,327  
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Investments
Our investments are principally held in debt securities, which are grouped into two separate categories for accounting and reporting purposes: available-for-sale securities, and held-to-maturity securities. Available-for-sale (“AFS”) securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income (loss), net of applicable income taxes. Held-to-maturity (“HTM”) securities are recorded at amortized cost, which approximates fair value, and unrealized holding gains or losses are not generally recognized. Realized gains and losses, and unrealized losses arising from credit-related factors with respect to AFS and HTM securities are included in the determination of net income. The cost of securities sold is determined using the specific-identification method.
Our investment policy requires that all our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Investments and restricted investments are subject to interest rate risk and will decrease in value if market rates increase. Declines in interest rates over time will reduce our investment income.
In general, our AFS securities are classified as current assets without regard to the securities’ contractual maturity dates because they may be readily liquidated. We monitor our investments for credit-related impairment. For comprehensive discussions of the fair value and classification of our investments, see Note 4, “Fair Value Measurements,” and Note 5, “Investments.”
Accrued interest receivable relating to our AFS and HTM securities is presented within “Prepaid expenses and other current assets” in the accompanying consolidated balance sheets, and amounted to $10 million and $12 million at June 30, 2020, and December 31, 2019, respectively. We do not measure an allowance for credit losses on accrued interest receivable. Instead, we write off accrued interest receivable that has not been collected within 90 days of the interest payment due date. We recognize such write offs as a reversal of interest income. No accrued interest was written off during the six months ended June 30, 2020.
Premium Revenue Recognition and Premiums Receivable
Premium revenue is generated from our Health Plans segment contracts related to our Medicaid, Medicare and Marketplace programs. Premium revenue is generally received based on per member per month (“PMPM”) rates established in advance of the periods covered. These premium revenues are recognized in the month that members are entitled to receive healthcare services, and premiums collected in advance are deferred. The state Medicaid programs and the federal Medicare program periodically adjust premiums. Additionally, many of our contracts contain provisions that may adjust or limit revenue or profit, as described below. Consequently, we recognize premium revenue as it is earned under such provisions. Liabilities accrued for premiums to be returned under such provisions are recognized as amounts due government agencies in our consolidated balance sheets.
A summary of the categories of amounts due government agencies is as follows:
June 30,
2020
December 31,
2019
(In millions)
Medicaid program:
Minimum MLR and profit sharing$85  $92  
Other105  95  
Medicare program:
Risk adjustment and Part D risk sharing38  14  
Minimum MLR and profit sharing 16  36  
Other24  21  
Marketplace program:
Risk adjustment529  368  
Minimum MLR41  15  
Other27  23  
Total amounts due government agencies$865  $664  
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Contractual Provisions That May Adjust or Limit Revenue or Profit
Medicaid Program
Minimum MLR and Medical Cost Corridors. A portion of our premium revenue may be returned if certain minimum amounts are not spent on defined medical care costs. Under certain medical cost corridor provisions, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold.
Profit Sharing. Our contracts with certain states contain profit sharing provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any.
Retroactive Premium Adjustments. State Medicaid programs periodically adjust premium rates on a retroactive basis. In these cases, we adjust our premium revenue in the period in which we determine that the adjustment is probable and reasonably estimable, and is based on our best estimate of the ultimate premium we expect to realize for the period being adjusted.
Various states are implementing or proposing temporary premium rate refunds, profit corridors, and related actions in response to the reduced demand for medical services stemming from COVID-19, which are resulting in a reduction of our medical margin. In some cases, these premium refunds and related actions are retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal years in 2019. We have accrued approximately $75 million in the second quarter of 2020 for certain of these retroactive premium refunds and related actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. There is potential for additional near-term premium actions, however, these proposals have not yet been finalized or enacted, the outcomes are subject to significant uncertainties, and there are still wide variations in the formulas and methodologies to be potentially employed. Due to these uncertainties, the probability and ultimate impact of the changes cannot be reasonably estimated at this time. We do not expect the uncertainties related to these proposals to become known until the third or fourth quarter of 2020. The facts for one or more of these pending matters could subsequently change as a result of further developments, and the ultimate outcome could differ materially from our estimates, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.
Medicare Program
Risk Adjustment. Our Medicare premiums are subject to retroactive increase or decrease based on the health status of our Medicare members (as measured by member risk score). We estimate our members’ risk scores and the related amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health status, risk scores and Centers for Medicare & Medicaid Services (“CMS”) practices.
Minimum MLR. The Affordable Care Act (“ACA”) has established a minimum annual medical loss ratio (“Minimum MLR”) of 85% for Medicare. The medical loss ratio represents medical costs as a percentage of premium revenue. Federal regulations define what constitutes medical costs and premium revenue. If the Minimum MLR is not met, we may be required to pay rebates to the federal government. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income.
Marketplace Program
Risk Corridor Settlement. On April 27, 2020, the United States Supreme Court issued its opinion in Maine Community Health Options v. United States. The Supreme Court held that §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute, that such payment obligations survived Congress’ appropriations riders, and that impacted insurers may sue the federal government in the U.S. Court of Federal Claims to recover damages for breach of that obligation. On June 18, 2020, the Claims Court granted us judgment in the amount of $128.1 million for our 2014, 2015, and 2016 Marketplace risk corridor claims. This favorable judgment does not create additional minimum MLR rebates. We had not recognized the judgment as of June 30, 2020, because the timing of collection of the judgment award is uncertain.
Risk Adjustment. Under this program, our health plans’ composite risk scores are compared with the overall average risk score for the relevant state and market pool. Generally, our health plans will make a risk adjustment payment into the pool if their composite risk scores are below the average risk score (risk adjustment payable), and will receive a risk adjustment payment from the pool if their composite risk scores are above the average risk score (risk adjustment receivable). We estimate our ultimate premium based on insurance policy year-to-date experience,
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and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our consolidated statements of income. As of June 30, 2020, Marketplace risk adjustment payables amounted to $529 million and related receivables amounted to $72 million, for a net payable of $457 million, of which $160 million relates to 2020 and $297 million relates primarily to 2019. As of December 31, 2019, Marketplace risk adjustment payables amounted to $368 million and related receivables amounted to $63 million, for a net payable of $305 million, which relates primarily to 2019 and prior periods.
Minimum MLR. The ACA has established a Minimum MLR of 80% for the Marketplace. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace policyholders. The Marketplace risk adjustment program is taken into consideration when computing the Minimum MLR. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income.
Quality Incentives
At many of our health plans, revenue ranging from approximately 1% to 4% of certain health plan premiums is earned only if certain performance measures are met. Such performance measures are generally found in our Medicaid and MMP contracts. As described in Note 1, “Organization and Basis of Presentation–Use of Estimates,” recognition of quality incentive premium revenue is subject to the use of estimates.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the periods presented and prior periods.
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
(In millions)
Maximum available quality incentive premium - current period
$65  $46  $126  $91  
Quality incentive premium revenue recognized in current period:
Earned current period$58  $37  $102  $63  
Earned prior periods7  10  19  30  
Total$65  $47  $121  93  
Quality incentive premium revenue recognized as a percentage of total premium revenue
1.5 %1.2 %1.4 %1.2 %
Receivables
Receivables consist primarily of amounts due from government agencies, which may be subject to potential retroactive adjustments. Because substantially all our receivable amounts are readily determinable and substantially all of our creditors are governmental authorities, our allowance for credit losses is insignificant.
June 30,
2020
December 31,
2019
(In millions)
Government receivables$1,056  $1,056  
Pharmacy rebate receivables161  150  
Health insurer fee reimbursement receivables137  5  
Other226  195  
Total$1,580  $1,406  
Reinsurance
We bear underwriting and reserving risks associated with our health plan subsidiaries. Until the second quarter of 2020, we limited our risk of catastrophic losses solely by maintaining high deductible reinsurance coverage with a highly-rated, unaffiliated insurance company (the “third-party reinsurer”). Beginning in the second quarter of 2020, we now retain certain of these risks through our wholly-owned, captive insurance subsidiary (the “captive”). We continue to reduce our exposure to significant catastrophic losses by insuring levels of coverage, with the third-party reinsurer, for losses in excess of what we retain with the captive. Because we remain liable to our policyholders in the event the third-party reinsurer is unable to pay its portion of the losses, we continually monitor the third-party
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reinsurer’s financial condition, including its ability to maintain high credit ratings. We report reinsurance premiums as a reduction to premium revenue, while related reinsurance recoveries are reported as a reduction to medical care costs. Intercompany transactions with our captive are eliminated in consolidation.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments, receivables, and restricted investments. Our investments and a portion of our cash equivalents are managed by professional portfolio managers operating under documented investment guidelines. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels. Our investments consist primarily of investment-grade debt securities with final maturities of less than 10 years, or less than 10 years average life for structured securities. Restricted investments are invested principally in cash, cash equivalents, and U.S. Treasury securities. Concentration of credit risk with respect to accounts receivable is limited because our payors consist principally of the federal government, and governments of each state or commonwealth in which our health plan subsidiaries operate.
Health Insurer Fee
Under the Affordable Care Act, the federal government imposes an annual fee, or excise tax, on health insurers for each calendar year (the “HIF”). Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. The HIF is reinstated in 2020, but the Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020. The HIF is allocated to health insurers based on each health insurer's share of net premiums for all U.S. health insurers in the year preceding the assessment. Our estimated HIF liability for 2020 is $277 million, of which $271 million was accrued as of January 1, 2020 and an additional $6 million was accrued in the second quarter, with a corresponding deferred expense asset that will be amortized to expense through December 31, 2020, on a straight-line basis. The HIF is not deductible for income tax purposes, and is payable by September 30, 2020. Due to the reinstatement of the HIF in 2020, our effective tax rate is higher in 2020 compared with 2019.
Under the Medicaid program, we must secure additional reimbursement from our state partners for this added cost. We have obtained a contractual commitment or are receiving payments from all states in which we operate Medicaid programs to reimburse us for the HIF, and such HIF revenue is being recognized ratably throughout the year.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which generally differs from the U.S. federal statutory rate primarily because of foreign and state taxes, nondeductible expenses such as the HIF, certain compensation, and other general and administrative expenses.
The effective tax rate may be subject to fluctuations during the year as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including projected pretax earnings, 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.
Recent Accounting Pronouncements Adopted
Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was subsequently modified by several ASUs issued in 2018 and 2019. We adopted Topic 326 effective January 1, 2020, using the modified retrospective approach. Under this method we recognized the cumulative effect of adopting the standard as an adjustment to the opening balance of retained earnings on January 1, 2020, which was immaterial.
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by a change in the reference rate from the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued, if certain conditions are met. ASU 2020-04 is effective
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immediately and expires after December 31, 2022. We are evaluating the effect of reference rate reform and this guidance on our contracts and other transactions.
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 (“SEC”) did not have, nor does management expect such pronouncements to have, a significant impact on our present or future consolidated financial statements.

3. Net Income per Share
The following table sets forth the calculation of net income per share:
Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
 (In millions, except net income per share)
Numerator:
Net income$276  $196  $454  $394  
Denominator:
Shares outstanding at the beginning of the period58.6  62.1  61.9  62.1  
Weighted-average number of shares issued:
Stock purchases    (2.5)   
Denominator for basic net income per share58.6  62.1  59.4  62.1  
Effect of dilutive securities: (1)
Warrants  1.3    2.4  
Stock-based compensation0.8  0.6  0.8  0.6  
Denominator for diluted net income per share59.4  64.0  60.2  65.1  
Net income per share - Basic (2)
$4.72  $3.15  $7.65  $6.34  
Net income per share - Diluted (2)
$4.65  $3.06  $7.54  $6.04  
______________________________
(1) The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method. All warrants outstanding as of December 31, 2019, were settled in the first quarter of 2020. For more information refer to Note 8, “Stockholders' Equity.”
(2) Source data for calculations in thousands.
        
4. Fair Value Measurements
We consider the carrying amounts of 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 the three-tier fair value hierarchy. For a description of the methods and assumptions that we use to a) estimate the fair value; and b) determine the classification according to the fair value hierarchy for each financial instrument, refer to our 2019 Annual Report on Form 10-K, Note 4, “Fair Value Measurements.”
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Our financial instruments measured at fair value on a recurring basis at June 30, 2020, were as follows:
Observable InputsDirectly or Indirectly Observable InputsUnobservable Inputs
Total(Level 1) (Level 2) (Level 3)
 (In millions)
Corporate debt securities$1,139  $  $1,139  $  
Mortgage-backed securities439    439    
Municipal securities