AUDITED FINANCIAL STATEMENTS AND NOTES
Molina Healthcare, Inc. 2016 Form 10-K | 62
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions, except per-share data)
|
Revenue:
|
|
|
|
|
|
Premium revenue
|
$
|
16,392
|
|
|
$
|
13,241
|
|
|
$
|
9,023
|
|
Service revenue
|
539
|
|
|
253
|
|
|
210
|
|
Premium tax revenue
|
468
|
|
|
397
|
|
|
294
|
|
Health insurer fee revenue
|
345
|
|
|
264
|
|
|
120
|
|
Investment income and other revenue
|
38
|
|
|
23
|
|
|
20
|
|
Total revenue
|
17,782
|
|
|
14,178
|
|
|
9,667
|
|
Operating expenses:
|
|
|
|
|
|
Medical care costs
|
14,774
|
|
|
11,794
|
|
|
8,076
|
|
Cost of service revenue
|
485
|
|
|
193
|
|
|
157
|
|
General and administrative expenses
|
1,393
|
|
|
1,146
|
|
|
765
|
|
Premium tax expenses
|
468
|
|
|
397
|
|
|
294
|
|
Health insurer fee expenses
|
217
|
|
|
157
|
|
|
89
|
|
Depreciation and amortization
|
139
|
|
|
104
|
|
|
93
|
|
Total operating expenses
|
17,476
|
|
|
13,791
|
|
|
9,474
|
|
Operating income
|
306
|
|
|
387
|
|
|
193
|
|
Other expenses, net:
|
|
|
|
|
|
Interest expense
|
101
|
|
|
66
|
|
|
57
|
|
Other (income) expense, net
|
—
|
|
|
(1
|
)
|
|
1
|
|
Total other expenses, net
|
101
|
|
|
65
|
|
|
58
|
|
Income before income tax expense
|
205
|
|
|
322
|
|
|
135
|
|
Income tax expense
|
153
|
|
|
179
|
|
|
73
|
|
Net income
|
$
|
52
|
|
|
$
|
143
|
|
|
$
|
62
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
Continuing operations
|
$
|
0.93
|
|
|
$
|
2.75
|
|
|
$
|
1.34
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
|
$
|
0.93
|
|
|
$
|
2.75
|
|
|
$
|
1.33
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
Continuing operations
|
$
|
0.92
|
|
|
$
|
2.58
|
|
|
$
|
1.30
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
|
$
|
0.92
|
|
|
$
|
2.58
|
|
|
$
|
1.29
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
55
|
|
|
52
|
|
|
47
|
|
Diluted
|
56
|
|
|
56
|
|
|
48
|
|
See accompanying notes.
Molina Healthcare, Inc. 2016 Form 10-K | 63
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Net income
|
$
|
52
|
|
|
$
|
143
|
|
|
$
|
62
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Unrealized investment gain (loss)
|
3
|
|
|
(5
|
)
|
|
—
|
|
Less: effect of income taxes
|
1
|
|
|
(2
|
)
|
|
—
|
|
Other comprehensive income (loss), net of tax
|
2
|
|
|
(3
|
)
|
|
—
|
|
Comprehensive income
|
$
|
54
|
|
|
$
|
140
|
|
|
$
|
62
|
|
See accompanying notes.
Molina Healthcare, Inc. 2016 Form 10-K | 64
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(In millions,
except per-share data)
|
ASSETS
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
2,819
|
|
|
$
|
2,329
|
|
Investments
|
1,758
|
|
|
1,801
|
|
Receivables
|
974
|
|
|
597
|
|
Income taxes refundable
|
39
|
|
|
13
|
|
Prepaid expenses and other current assets
|
131
|
|
|
192
|
|
Derivative asset
|
267
|
|
|
374
|
|
Total current assets
|
5,988
|
|
|
5,306
|
|
Property, equipment, and capitalized software, net
|
454
|
|
|
393
|
|
Deferred contract costs
|
86
|
|
|
81
|
|
Intangible assets, net
|
140
|
|
|
122
|
|
Goodwill
|
620
|
|
|
519
|
|
Restricted investments
|
110
|
|
|
109
|
|
Deferred income taxes
|
10
|
|
|
18
|
|
Other assets
|
41
|
|
|
28
|
|
|
$
|
7,449
|
|
|
$
|
6,576
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
Medical claims and benefits payable
|
$
|
1,929
|
|
|
$
|
1,685
|
|
Amounts due government agencies
|
1,202
|
|
|
729
|
|
Accounts payable and accrued liabilities
|
385
|
|
|
362
|
|
Deferred revenue
|
315
|
|
|
223
|
|
Current portion of long-term debt
|
472
|
|
|
449
|
|
Derivative liability
|
267
|
|
|
374
|
|
Total current liabilities
|
4,570
|
|
|
3,822
|
|
Senior notes
|
975
|
|
|
962
|
|
Lease financing obligations
|
198
|
|
|
198
|
|
Deferred income taxes
|
15
|
|
|
—
|
|
Other long-term liabilities
|
42
|
|
|
37
|
|
Total liabilities
|
5,800
|
|
|
5,019
|
|
Stockholders’ equity:
|
|
|
|
Common stock, $0.001 par value; 150 shares authorized; outstanding: 57 shares at December 31, 2016 and 56 shares at December 31, 2015
|
—
|
|
|
—
|
|
Preferred stock, $0.001 par value; 20 shares authorized, no shares issued and outstanding
|
—
|
|
|
—
|
|
Additional paid-in capital
|
841
|
|
|
803
|
|
Accumulated other comprehensive loss
|
(2
|
)
|
|
(4
|
)
|
Retained earnings
|
810
|
|
|
758
|
|
Total stockholders’ equity
|
1,649
|
|
|
1,557
|
|
|
$
|
7,449
|
|
|
$
|
6,576
|
|
See accompanying notes.
Molina Healthcare, Inc. 2016 Form 10-K | 65
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Retained
Earnings
|
|
Total
|
|
Outstanding
|
|
Amount
|
|
|
|
|
|
(In millions)
|
Balance at January 1, 2014
|
46
|
|
|
$
|
—
|
|
|
$
|
341
|
|
|
$
|
(1
|
)
|
|
$
|
553
|
|
|
$
|
893
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
62
|
|
|
62
|
|
Convertible senior notes transactions, including issuance costs
|
2
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
Share-based compensation
|
2
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
30
|
|
Tax benefit from share-based compensation
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Balance at December 31, 2014
|
50
|
|
|
—
|
|
|
396
|
|
|
(1
|
)
|
|
615
|
|
|
1,010
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
143
|
|
|
143
|
|
Other comprehensive loss, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
Common stock offering, including issuance costs
|
6
|
|
|
—
|
|
|
373
|
|
|
—
|
|
|
—
|
|
|
373
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Tax benefit from share-based compensation
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Balance at December 31, 2015
|
56
|
|
|
—
|
|
|
803
|
|
|
(4
|
)
|
|
758
|
|
|
1,557
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52
|
|
|
52
|
|
Other comprehensive income, net
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Share-based compensation
|
1
|
|
|
—
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
36
|
|
Tax benefit from share-based compensation
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Balance at December 31, 2016
|
57
|
|
|
$
|
—
|
|
|
$
|
841
|
|
|
$
|
(2
|
)
|
|
$
|
810
|
|
|
$
|
1,649
|
|
See accompanying notes.
Molina Healthcare, Inc. 2016 Form 10-K | 66
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Operating activities:
|
|
|
|
|
|
Net income
|
$
|
52
|
|
|
$
|
143
|
|
|
$
|
62
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
182
|
|
|
126
|
|
|
134
|
|
Deferred income taxes
|
22
|
|
|
(7
|
)
|
|
(2
|
)
|
Share-based compensation
|
26
|
|
|
23
|
|
|
22
|
|
Amortization of convertible senior notes and lease financing obligations
|
31
|
|
|
30
|
|
|
27
|
|
Other, net
|
16
|
|
|
19
|
|
|
7
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Receivables
|
(348
|
)
|
|
56
|
|
|
(298
|
)
|
Prepaid expenses and other current assets
|
(69
|
)
|
|
(35
|
)
|
|
(20
|
)
|
Medical claims and benefits payable
|
226
|
|
|
482
|
|
|
531
|
|
Amounts due government agencies
|
473
|
|
|
202
|
|
|
470
|
|
Accounts payable and accrued liabilities
|
(4
|
)
|
|
84
|
|
|
11
|
|
Deferred revenue
|
92
|
|
|
24
|
|
|
74
|
|
Income taxes
|
(26
|
)
|
|
(22
|
)
|
|
42
|
|
Net cash provided by operating activities
|
673
|
|
|
1,125
|
|
|
1,060
|
|
Investing activities:
|
|
|
|
|
|
Purchases of investments
|
(1,929
|
)
|
|
(1,923
|
)
|
|
(953
|
)
|
Proceeds from sales and maturities of investments
|
1,966
|
|
|
1,126
|
|
|
633
|
|
Purchases of property, equipment and capitalized software
|
(176
|
)
|
|
(132
|
)
|
|
(115
|
)
|
Change in restricted investments
|
4
|
|
|
(6
|
)
|
|
(34
|
)
|
Net cash paid in business combinations
|
(48
|
)
|
|
(450
|
)
|
|
(44
|
)
|
Other, net
|
(19
|
)
|
|
(35
|
)
|
|
(23
|
)
|
Net cash used in investing activities
|
(202
|
)
|
|
(1,420
|
)
|
|
(536
|
)
|
Financing activities:
|
|
|
|
|
|
Proceeds from senior notes offerings, net of issuance costs
|
—
|
|
|
689
|
|
|
123
|
|
Proceeds from common stock offering, net of issuance costs
|
—
|
|
|
373
|
|
|
—
|
|
Contingent consideration liabilities settled
|
—
|
|
|
—
|
|
|
(50
|
)
|
Proceeds from employee stock plans
|
18
|
|
|
18
|
|
|
14
|
|
Principal payments on convertible senior notes
|
—
|
|
|
—
|
|
|
(10
|
)
|
Other, net
|
1
|
|
|
5
|
|
|
2
|
|
Net cash provided by financing activities
|
19
|
|
|
1,085
|
|
|
79
|
|
Net increase in cash and cash equivalents
|
490
|
|
|
790
|
|
|
603
|
|
Cash and cash equivalents at beginning of period
|
2,329
|
|
|
1,539
|
|
|
936
|
|
Cash and cash equivalents at end of period
|
$
|
2,819
|
|
|
$
|
2,329
|
|
|
$
|
1,539
|
|
See accompanying notes.
Molina Healthcare, Inc. 2016 Form 10-K | 67
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes
|
$
|
153
|
|
|
$
|
197
|
|
|
$
|
30
|
|
Interest
|
$
|
66
|
|
|
$
|
38
|
|
|
$
|
29
|
|
|
|
|
|
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
Convertible senior notes exchange transaction
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
177
|
|
Increase in non-cash lease financing obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14
|
|
Common stock used for stock-based compensation
|
$
|
(8
|
)
|
|
$
|
(15
|
)
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
Details of business combinations:
|
|
|
|
|
|
Fair value of assets acquired
|
$
|
(186
|
)
|
|
$
|
(389
|
)
|
|
$
|
(52
|
)
|
Fair value of liabilities assumed
|
28
|
|
|
41
|
|
|
—
|
|
Payable to seller
|
8
|
|
|
—
|
|
|
8
|
|
Amounts advanced for acquisitions
|
102
|
|
|
(102
|
)
|
|
—
|
|
Net cash paid in business combinations
|
$
|
(48
|
)
|
|
$
|
(450
|
)
|
|
$
|
(44
|
)
|
|
|
|
|
|
|
Details of change in fair value of derivatives, net:
|
|
|
|
|
|
(Loss) gain on 1.125% Notes Call Option
|
$
|
(107
|
)
|
|
$
|
45
|
|
|
$
|
143
|
|
Gain (loss) on 1.125% Notes Conversion Option
|
107
|
|
|
(45
|
)
|
|
(143
|
)
|
Change in fair value of derivatives, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See accompanying notes.
Molina Healthcare, Inc. 2016 Form 10-K | 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
.
Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality managed healthcare to people 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 have
three
reportable segments. These segments consist of our Health Plans segment, which comprises the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment, which includes our behavioral health and social services subsidiary, Pathways.
The Health Plans segment consists of health plans in
12
states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of
December 31, 2016
, these health plans served over
4.2 million
members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. This membership includes Affordable Care Act Marketplace (Marketplace) members, most of whom receive government premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO).
Our direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate.
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 request for proposal (RFP) open to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may be subject to non-renewal.
In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled (ABD); and regions or service areas.
The Molina Medicaid Solutions segment provides support to state government agencies in the administration of their Medicaid programs including business processing, information technology development, and administrative services. Molina Medicaid Solutions is under contract with Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and provides drug rebate administration services in Florida.
The Other segment includes primarily our Pathways behavioral health and social services provider, and corporate amounts not allocated to other reportable segments.
Recent Developments – Health Plans Segment
Proposed Medicare Acquisition.
In August 2016, we entered into substantially identical agreements with each of Aetna Inc. and Humana Inc. to acquire certain of their Medicare Advantage membership and other assets related to such Medicare Advantage business (the Proposed Medicare Acquisition), for cash. The Proposed Medicare Acquisition was subject to closing conditions including, but not limited to, the completion of the proposed acquisition of Humana by Aetna (the Aetna-Humana Merger). In January 2017, the U.S. District Court for the District of Columbia granted the request made by the U.S. Department of Justice in its civil antitrust lawsuit against Aetna and Humana, to prohibit the Aetna-Humana Merger (the District Court Order). In February 2017, the Proposed Medicare Acquisition was terminated by the parties pursuant to the terms of the transaction. Under the termination agreement, we are entitled to receive from Aetna and Humana an aggregate termination fee of
$75 million
(the breakup fee).
In addition, we are entitled to reimbursement of reasonable and documented out-of-pocket expenses incurred by us and our affiliates in connection with the Proposed Medicare Acquisition. We will record the breakup fee as other income in the first quarter of 2017.
Completed acquisitions. S
ee Note
4
, “
Business Combinations
,” for further information regarding Health Plans segment acquisitions completed during 2016.
Molina Healthcare, Inc. 2016 Form 10-K | 69
Consolidation and Presentation
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. See Note
18
, “
Variable Interest Entities (VIEs)
,” for more information regarding these variable interest entities. All significant inter-company balances and transactions have been eliminated in consolidation. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition.
In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the periods presented have been included; such adjustments consist of normal recurring adjustments.
Use of Estimates
The preparation of consolidated financial statements in conformity with 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:
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The determination of medical claims and benefits payable of our Health Plans segment;
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Health plan contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;
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Health plan quality incentives that allow us to recognize incremental revenue if certain quality standards are met;
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Molina Medicaid Solutions segment revenue and cost recognition;
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Settlements under risk or savings sharing programs;
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The assessment of deferred contract costs, deferred revenue, long-lived and intangible assets, and goodwill for impairment;
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The determination of reserves for potential absorption of claims unpaid by insolvent providers;
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The determination of reserves for the outcome of litigation;
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The determination of valuation allowances for deferred tax assets; and
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The determination of unrecognized tax benefits.
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2
.
Significant Accounting Policies
Certain of our significant accounting policies are discussed within the note to which they specifically relate.
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.
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 securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income, net of applicable income taxes. Held-to-maturity 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 judged to be other than temporary with respect to available-for-sale and held-to-maturity 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 of our investments have final maturities of
10
years or less (excluding variable rate securities where interest rates may be periodically reset), and that the average maturity be
three
years or less. 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.
Molina Healthcare, Inc. 2016 Form 10-K | 70
In general, our available-for-sale 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 other-than-temporary impairment. For comprehensive discussions of the fair value and classification of our current and non-current investments, see Note
5
, “
Fair Value Measurements
,” Note
6
, “
Investments
,” and Note
10
, “
Restricted Investments
.”
Long-Lived Assets, including Intangible Assets
Long-lived assets consist primarily of property, equipment, capitalized software (see Note
8
, “
Property, Equipment, and Capitalized Software
”), and intangible assets (see Note
9
, “
Goodwill and Intangible Assets
”).
Business Combinations
Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values.
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations.
While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the final determination of the values of assets acquired or liabilities assumed, or one year after the date of acquisition, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income. Refer to Note
4
, “
Business Combinations
,” for further details regarding our 2016 acquisitions.
Premium Revenue - Health Plans
Premium revenue is generated primarily from our Medicaid, Medicare and Marketplace contracts, including agreements with other managed care organizations for which we operate as a subcontractor. 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 health care 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.
The following table summarizes premium revenue for the periods indicated:
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Year Ended December 31,
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2016
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2015
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2014
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Amount
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% of Total
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Amount
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% of Total
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Amount
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% of Total
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(Dollars in millions)
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California
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$
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2,370
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14.5
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%
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$
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2,200
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16.6
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%
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$
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1,523
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16.9
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%
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Florida
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1,926
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11.7
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1,199
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9.0
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439
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4.9
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Illinois
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601
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3.7
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397
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3.0
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153
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1.7
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Michigan
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1,520
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9.3
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1,067
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8.1
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781
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8.7
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New Mexico
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1,304
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7.9
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1,237
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9.3
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1,076
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11.9
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New York
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82
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0.5
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—
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—
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—
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—
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Ohio
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1,961
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12.0
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2,034
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15.4
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1,553
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17.2
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Puerto Rico
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726
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4.4
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567
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4.3
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—
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—
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South Carolina
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378
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2.3
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348
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2.6
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381
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4.2
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Texas
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2,454
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15.0
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1,961
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14.8
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1,318
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14.6
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Utah
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444
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2.7
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331
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2.5
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310
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3.4
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Washington
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2,218
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13.5
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1,602
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12.1
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1,305
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14.5
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Wisconsin
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395
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2.4
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261
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2.0
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156
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1.7
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Direct delivery
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13
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0.1
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37
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0.3
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28
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0.3
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$
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16,392
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100.0
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%
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$
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13,241
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100.0
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%
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$
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9,023
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100.0
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%
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Molina Healthcare, Inc. 2016 Form 10-K | 71
Certain components of premium revenue are subject to accounting estimates and fall into the following categories:
Contractual Provisions That May Adjust or Limit Revenue or Profit
Medicaid
Medical Cost Floors (Minimums), 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. In the aggregate, we recorded a liability under the terms of such contract provisions of
$272 million
and
$214 million
at
December 31, 2016
and
December 31, 2015
, respectively, to amounts due government agencies. Approximately
$244 million
and
$208 million
of the liability accrued at
December 31, 2016
and
December 31, 2015
, respectively, relates to our participation in Medicaid Expansion programs.
In
February 2017, the New Mexico Human Services Department (HSD) notified us that it has disallowed certain medically related administrative expenses and other items in the computation of its Medicaid Expansion risk corridor; this corridor was effective January 1, 2014, through December 31, 2016. Although we disagree with their contractual interpretations, we deferred premium revenue amounting to approximately
$45 million
for the year ended December 31, 2016, as a result of this communication, because such revenue is presently subject to refund or adjustment.
Of this amount,
$29 million
relates to dates of service prior to 2016.
At December 31, 2016, our aggregate Medicaid Expansion risk corridor payable to HSD is
$145 million
. We intend to appeal HSD’s ruling on this matter.
In the fourth quarter of 2016, our
California health plan received a contract amendment from the California Department of Healthcare Services that allowed us to deduct certain tax expenses in the computation of its Medicaid Expansion minimum medical loss ratio; this minimum medical loss ratio was effective January 1, 2014, through June 30, 2016. As a result of this contract amendment, we increased premium revenue for the year ended December 31, 2016, by approximately
$68 million
, of which
$35 million
related to periods prior to 2016.
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold. Receivables relating to such provisions were insignificant at
December 31, 2016
and
December 31, 2015
.
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, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. Liabilities for profits in excess of the amount we are allowed to retain under these provisions were insignificant at
December 31, 2016
and
December 31, 2015
.
Retroactive Premium Adjustments.
In the first quarter of 2016, our Florida health plan recorded a retroactive increase to Medicaid premium revenue of approximately
$18 million
relating to dates of service prior to 2016.
Medicare
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. Consolidated balance sheet amounts related to anticipated Medicare risk adjustment premiums and Medicare Part D settlements were insignificant at
December 31, 2016
and
December 31, 2015
.
Minimum MLR
. Additionally, federal regulations have established a minimum annual medical loss ratio (Minimum MLR) of 85% for the Medicare. The medical loss ratio represents medical costs as a percentage of premium revenue. Federal regulations specifically 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
Premium Stabilization Programs.
The Affordable Care Act (ACA) established Marketplace premium stabilization programs effective January 1, 2014. These programs, commonly referred to as the “3R’s,” include a permanent risk adjustment program, a transitional reinsurance program, and a temporary risk corridor program. We record receivables or payables related to the 3R programs and the Minimum MLR when the amounts are reasonably
Molina Healthcare, Inc. 2016 Form 10-K | 72
estimable as described below, and, for receivables, collection is reasonably assured. Our receivables (payables) for each of these programs, as of the dates indicated, were as follows:
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December 31, 2016
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December 31, 2015
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Current Benefit Year
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Prior Benefit Years
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Total
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(In millions)
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Risk adjustment
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$
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(522
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)
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$
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—
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$
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(522
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)
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$
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(214
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)
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Reinsurance
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51
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4
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55
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36
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Risk corridor
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(1
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)
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—
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(1
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)
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(10
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)
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Minimum MLR
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(1
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—
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(1
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(3
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)
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•
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Risk adjustment: Under this permanent 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 transfer payment into the pool if their composite risk scores are below the average risk score, and will receive a risk transfer payment from the pool if their composite risk scores are above the average risk score. We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our consolidated statements of income. On June 30, 2016, CMS released the final update on risk transfer and reinsurance payments for the 2015 benefit year, and we adjusted our accruals accordingly. Our risk transfer payment was approximately
$40 million
more than our estimate as of December 31, 2015.
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Reinsurance: This program is designed to provide reimbursement to insurers for high cost members. Our health plans pay an annual contribution on a per-member basis, and are eligible for recoveries if claims for individual members exceed a specified threshold, up to a maximum amount. We recognize the assessments to fund the transitional reinsurance program as a reduction to premium revenue in our consolidated statements of income. We recognize recoveries under the reinsurance program as a reduction to medical care costs in our consolidated statements of income. This three-year program ended December 31, 2016.
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Risk corridor: This program is intended to limit gains and losses of insurers by comparing allowable costs to a target amount as defined by CMS. Variances from the target amount exceeding certain thresholds may result in amounts due to or receivables due from CMS. Due to uncertainties as to the amount of federal funding available to support the risk corridor program, we do not recognize amounts receivable under this program. Our estimate of the unrecorded receivable for the Marketplace risk corridor amounted to approximately
$142 million
as of
December 31, 2016
. Of this total amount,
$52 million
relates to the 2015 benefit year and
$90 million
relates to the year ended
December 31, 2016
. All liabilities are recognized as incurred. We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk corridor program as an adjustment to premium revenue in our consolidated statements of income. This three-year program ended December 31, 2016.
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Additionally, the ACA established a Minimum MLR of 80% for the Marketplace. The medical loss ratio represents medical costs as a percentage of premium revenue. Federal regulations specifically define what constitutes medical costs and premium revenue. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace policyholders. Each of the 3R programs 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 several of our health plans, revenue ranging from approximately
1%
to
3%
of certain health plan premiums is earned only if certain performance measures are met.
During the second quarter of 2016, we were informed by the Texas Department of Health and Human Services that it will not recoup any quality revenue for calendar years 2014, 2015, and 2016. Therefore, we recognized previously deferred quality revenue amounting to approximately
$51 million
in the second quarter of 2016. Of the
$51 million
total adjustment,
$44 million
related to dates of service in 2015 and earlier.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the periods presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of
December 31, 2016
are not known, we have
Molina Healthcare, Inc. 2016 Form 10-K | 73
no reason to believe that the adjustments to prior periods noted below are not indicative of the potential future changes in our estimates as of
December 31, 2016
, other than the Texas quality revenue recognized in the second quarter of 2016 described above.
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Year Ended December 31,
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2016
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2015
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2014
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(In millions)
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Maximum available quality incentive premium - current period
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$
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147
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$
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118
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$
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90
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Amount of quality incentive premium revenue recognized in current period:
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Earned current period
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$
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104
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$
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66
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$
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40
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Earned prior periods
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47
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13
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4
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Total
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$
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151
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$
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79
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$
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44
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Quality incentive premium revenue recognized as a percentage of total premium revenue
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0.9
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%
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0.6
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%
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0.5
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%
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Medical Care Costs - Health Plans
Expenses related to medical care services are captured in the following categories:
Fee-for-service expenses.
Nearly all hospital services and the majority of our primary care and physician specialist services and LTSS costs are paid on a fee-for-service basis. 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. The costs of drugs administered in a physician or hospital setting that are not billed through our pharmacy benefit manager are included in fee-for-service costs.
Pharmacy expenses.
All drug, injectibles, and immunization costs paid through our pharmacy benefit manager are classified as pharmacy expenses. As noted above, drugs and injectibles not paid through our pharmacy benefit manager are included in fee-for-service costs, except in those limited instances where we capitate drug and injectible costs.
Capitation expenses.
Many of our primary care physicians and a small portion of our specialists and hospitals are paid on a capitated basis. 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. Under capitated arrangements, we remain liable for the provision of certain health care services. Capitation payments are fixed in advance of the periods covered and are not subject to significant accounting estimates. These payments are expensed in the period the providers are obligated to provide services. The financial risk for pharmacy services for a small portion of our membership is delegated to capitated providers.
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, and other health care expenses are classified as other medical expenses. Medically related administrative costs include, for example, expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Salary and benefit costs are a substantial portion of these expenses. For the years ended
December 31, 2016
,
2015
, and
2014
, medically related administrative costs were
$488 million
,
$398 million
,
and
$263 million
,
respectively.
Molina Healthcare, Inc. 2016 Form 10-K | 74
The following table provides the details of our consolidated medical care costs for the periods indicated (dollars in millions, except PMPM amounts):
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Year Ended December 31,
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2016
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2015
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2014
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Amount
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PMPM
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% of
Total
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Amount
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PMPM
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% of
Total
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Amount
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PMPM
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% of
Total
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Fee-for-service
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$
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10,993
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$
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217.84
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|
74.4
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%
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$
|
8,572
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$
|
218.35
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|
72.7
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%
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$
|
5,673
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$
|
202.87
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|
70.2
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%
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Pharmacy
|
2,213
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|
43.84
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|
15.0
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|
1,610
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|
41.01
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|
13.7
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1,273
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45.54
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15.8
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Capitation
|
1,218
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|
24.13
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8.2
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|
982
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|
25.02
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|
8.3
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|
748
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26.77
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|
9.3
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Direct delivery
|
78
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|
1.55
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|
|
0.5
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|
|
128
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|
|
3.26
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|
|
1.1
|
|
|
96
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|
|
3.44
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|
1.2
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Other
|
272
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|
|
5.39
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|
|
1.9
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|
|
502
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|
|
12.79
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|
|
4.2
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|
|
286
|
|
|
10.22
|
|
|
3.5
|
|
Total
|
$
|
14,774
|
|
|
$
|
292.75
|
|
|
100.0
|
%
|
|
$
|
11,794
|
|
|
$
|
300.43
|
|
|
100.0
|
%
|
|
$
|
8,076
|
|
|
$
|
288.84
|
|
|
100.0
|
%
|
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. Such medical care cost liabilities include, among other items, unpaid fee-for-service claims, capitation payments owed providers, unpaid pharmacy invoices, and various medically related administrative costs that have been incurred but not paid. We use judgment to determine the appropriate assumptions for determining the required estimates.
The most important element in estimating our medical care costs is our estimate for fee-for-service claims which have been incurred but not paid by us. These fee-for-service costs that have been incurred but have not been paid at the reporting date are collectively referred to as medical costs that are incurred but not paid (IBNP). Our IBNP claims reserve, as reported in our balance sheet, 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. For further information, see Note
11
, “
Medical Claims and Benefits Payable
.”
We report reinsurance premiums as a reduction to premium revenue, while related reinsurance recoveries are reported as a reduction to medical care costs. We limit our risk of catastrophic losses by maintaining high deductible reinsurance coverage. Such reinsurance coverage does not relieve us of our primary obligation to our policyholders. We do not consider this coverage to be material because the cost is not significant and the likelihood that coverage will apply is low.
Taxes Based on Premiums
Health Insurer Fee (HIF).
The federal government under the ACA imposes an annual fee, or excise tax, on health insurers for each calendar year. The HIF is based on a company’s share of the industry’s net premiums written during the preceding calendar year, and is non-deductible for income tax purposes. We recognize expense for the HIF over the year on a straight-line basis. Within our Medicaid program, we must secure additional reimbursement from our state partners for this added cost. We recognize the related revenue when we have obtained a contractual commitment or payment from a state to reimburse us for the HIF; such HIF revenue is recognized ratably throughout the year.
The Consolidated Appropriations Act of 2016 provided for a HIF moratorium in 2017. Therefore, there will be no HIF revenue or expenses in 2017.
Premium and Use Tax.
Certain of our health plans are assessed a tax based on premium revenue collected. The premium revenues we receive from these states include the premium tax assessment. We have reported these taxes on a gross basis, as premium tax revenue and as premium tax expenses in the consolidated statements of income.
Premium Deficiency Reserves on Loss Contracts
We assess the profitability of our medical care policies to identify groups of contracts where current operating results or forecasts indicate probable future losses. If anticipated future variable costs exceed anticipated future premiums and investment income, a premium deficiency reserve is recognized.
In the fourth quarter of 2016, we recorded a premium deficiency reserve of
$30 million
for our Marketplace contracts in California and Washington.
No premium deficiency reserve was recorded as of
December 31, 2015
.
Molina Healthcare, Inc. 2016 Form 10-K | 75
Service Revenue and Cost of Service Revenue — 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 a Medicaid management information system (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.
We have evaluated our Molina Medicaid Solutions contracts to determine if such arrangements include a software element. Based on this evaluation, we have concluded that these arrangements do not include a software element, and are therefore multiple-element service arrangements.
Additionally, we evaluate each required deliverable under our multiple-element service arrangements to determine whether it qualifies as a separate unit of accounting. Such evaluation is generally based on whether the deliverable has standalone value to the customer. If the deliverable has standalone value, the arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent.
We have concluded that the various service elements in our Molina Medicaid Solutions contracts represent a single unit of accounting due to the fact that DDI, which is the only service performed in advance of the other services (all other services are performed over an identical period), does not have standalone value because our DDI services are not sold separately by any vendor and the customer could not resell our DDI services. Further, we have no objective and reliable evidence of fair value for any of the individual elements in these contracts, and at no point in the contract will we have objective and reliable evidence of fair value for the undelivered elements in the contracts. We lack objective and reliable evidence of the fair value of the individual elements of our Molina Medicaid Solutions contracts for the following reasons:
|
|
•
|
Each contract calls for the provision of its own specific set of services. While all contracts support the system of record for state MMIS, the actual services we provide vary significantly between contracts; and
|
|
|
•
|
The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe systems) and our new contracts (commercial off-the-shelf technology solutions).
|
Because we have determined the services provided under our Molina Medicaid Solutions contracts represent a single unit of accounting, and because we are unable to determine a pattern of performance of services during the contract period, we recognize all revenue (both the DDI and BPO elements) associated with such contracts on a straight-line basis over the period during which BPO, hosting, and support and maintenance services are delivered. Therefore, absent any contingencies as discussed in the following paragraph, or contract extensions, we would recognize all revenue associated with those contracts over the initial contract period. When a contract is extended, we generally consider the extension to be a continuation of the single unit of accounting; therefore, the deferred revenue as of the extension date is recognized prospectively over the new remaining term of the contract. In cases where there is no DDI element associated with our contracts, BPO revenue is recognized on a monthly basis as specified in the applicable contract or contract extension.
Provisions specific to each contract may, however, lead us to modify this general principle. In those circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right of the state to refuse acceptance) has been removed. In those circumstances, we defer recognition of any contingent revenue (whether DDI, BPO services, hosting, and support and maintenance services) until the contingency has been removed.
Costs associated with our Molina Medicaid Solutions contracts include software related costs and other costs. With respect to software related costs, we apply the guidance for internal-use software and capitalize external direct costs of materials and services consumed in developing or obtaining the software, and payroll and payroll-related costs associated with employees who are directly associated with and who devote time to the computer software project. With respect to all other direct costs, such costs are expensed as incurred, unless corresponding revenue is being deferred. If revenue is being deferred, direct costs relating to delivered service elements are deferred as well and are recognized on a straight-line basis over the period of revenue recognition, in a manner consistent with our recognition of revenue that has been deferred. Such direct costs can include:
|
|
•
|
Transaction processing costs;
|
|
|
•
|
Employee costs incurred in performing transaction services;
|
Molina Healthcare, Inc. 2016 Form 10-K | 76
|
|
•
|
Vendor costs incurred in performing transaction services;
|
|
|
•
|
Costs incurred in performing required monitoring of and reporting on contract performance;
|
|
|
•
|
Costs incurred in maintaining and processing member and provider eligibility; and
|
|
|
•
|
Costs incurred in communicating with members and providers.
|
The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, the deferred contract costs are written down by the amount of the cash flow deficiency. If a cash flow deficiency remains after reducing the balance of the deferred contract costs to zero, any remaining long-lived assets are evaluated for impairment. Any such impairment recognized would equal the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.
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 a maximum maturity of
10
years and an average duration of
three
years or less. Restricted investments are invested principally in certificates of deposit and U.S. treasury securities. Concentration of credit risk with respect to accounts receivable is limited because our payors consist principally of the governments of each state in which our health plan subsidiaries operate.
Risks and Uncertainties
Our profitability depends in large part on our ability to accurately predict and effectively manage medical care costs. We continually review our medical costs in light of our underlying claims experience and revised actuarial data. However, several factors could adversely affect medical care costs. These factors, which include changes in health care practices, inflation, new technologies, major epidemics, natural disasters, and malpractice litigation, are beyond our control and may have an adverse effect on our ability to accurately predict and effectively control medical care costs. Costs in excess of those anticipated could have a material adverse effect on our financial condition, results of operations, or cash flows.
We operate health plans primarily as a direct contractor with the states (or Commonwealth), and in Los Angeles County, California, as a subcontractor to another health plan holding a direct contract with the state. We are therefore dependent upon a small number of contracts to support our revenue. The loss of any one of those contracts could have a material adverse effect on our financial position, results of operations, or cash flows. Our ability to arrange for the provision of medical services to our members is dependent upon our ability to develop and maintain adequate provider networks. Our inability to develop or maintain such networks might, in certain circumstances, have a material adverse effect on our financial position, results of operations, or cash flows.
Recent Accounting Pronouncements Not Yet Adopted
Goodwill Impairment.
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04,
Simplifying the Test for Goodwill Impairment
, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, impairment charges will be based on the first step in the two-step impairment test under Accounting Standards Codification (ASC) 350,
Intangibles - Goodwill and Other
. ASU 2017-04 is effective for us beginning January 1, 2020; early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We are evaluating the effect of this guidance.
Business Combinations.
In January 2017, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business
, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business. ASU 2017-01 is effective for us beginning January 1, 2018, and interim periods thereafter on a prospective basis. Adoption of this guidance may be significant to us depending on the size and nature of potential future acquisitions. For future Health Plans segment acquisitions under which the fair value of the assets acquired is concentrated in a single identifiable asset, such as contract rights, the acquisitions will be recorded as asset acquisitions rather than business combinations. The chief difference between an asset acquisition and a business combination is that goodwill only arises in business combinations.
Molina Healthcare, Inc. 2016 Form 10-K | 77
Credit Losses.
In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments
. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 is effective for us beginning January 1, 2020, and must be adopted as a cumulative effect adjustment to retained earnings; early adoption is permitted. We are evaluating the effect of this guidance.
Stock Compensation.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends ASC Topic 718,
Compensation – Stock Compensation
. ASU 2016-09 simplifies several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax and classification in the statement of cash flows. We will adopt ASU 2016-09 in the first quarter of 2017. We are unable to quantify the impact of adoption, however, because such impact is dependent on future stock prices which cannot be predicted. However, we expect that adoption will not have a significant impact on net income, basic and diluted earnings per share, deferred tax assets and net cash from operations, or our effective tax rate.
Leases.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
as modified by ASU 2017-03,
Transition and Open Effective Date Information
. Under ASU 2016-02, an entity will be required to recognize assets and liabilities for the rights and obligations created by leases on the entity’s balance sheet for both finance and operating leases. For leases with a term of 12 months or less, an entity can elect to not recognize lease assets and lease liabilities and expense the lease over a straight-line basis for the term of the lease. ASU 2016-02 will require new disclosures that depict the amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. ASU 2016-02 is effective for us beginning January 1, 2019 and must be adopted using a modified retrospective approach for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. Under this guidance, we will record assets and liabilities relating primarily to our long-term office leases, and are currently evaluating the effect to our consolidated financial statements.
Revenue Recognition.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, as modified by:
|
|
•
|
ASU 2015-14,
Deferral of the Effective Date
;
|
|
|
•
|
ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
;
|
|
|
•
|
ASU 2016-10,
Identifying Performance Obligations and Licensing
;
|
|
|
•
|
ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
;
|
|
|
•
|
ASU 2016-20,
Technical corrections and improvements to Topic 606; and
|
|
|
•
|
ASU 2017-03,
Overall Transition and Open Effective Date Information
.
|
ASU 2014-09 will supersede existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The new model requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required.
We have determined that our Health Plans segment, which comprises the vast majority of our operations, is excluded from the scope of ASU 2014-09, because the recognition of revenue under our Health Plans segment insurance contracts is dictated by other accounting standards governing insurers.
For our Molina Medicaid Solutions segment, we have determined that certain revenue and costs will no longer be deferred and recognized over the service delivery period. Rather, revenue will be recognized based on the expected cost plus gross margin method, and costs will be recognized as incurred. We are currently in the process of quantifying the impact to our consolidated financial position, results of operations, and cash flows.
Two adoption methods are permitted under ASU 2014-09. Under the full retrospective method, the financial statement adjustments are applied to each reporting period presented. Under the modified retrospective method, the cumulative effect of initially applying the guidance is reflected as an adjustment to beginning retained earnings as of the date of adoption. We intend to adopt this standard on January 1, 2018, using the modified retrospective approach.
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
Molina Healthcare, Inc. 2016 Form 10-K | 78
have, or are not believed by management to have, a significant impact on our present or future consolidated financial statements.
Accounting Pronouncements Adopted
Short-Duration Contracts.
In the fourth quarter of 2016, we adopted ASU 2015-09,
Disclosures about Short-Duration Contracts
, which requires additional disclosure on the liability for unpaid claims and claim adjustment expenses. It requires additional disclosure only and had an insignificant impact to our consolidated financial statements. The new disclosures are reported in Note
11
, “
Medical Claims and Benefits Payable
.”
3
.
Net Income per Share
The following table sets forth the calculation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions, except net income per share)
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
52
|
|
|
$
|
143
|
|
|
$
|
62
|
|
Denominator:
|
|
|
|
|
|
Shares outstanding at the beginning of the period
|
55
|
|
|
49
|
|
|
46
|
|
Weighted-average number of shares issued:
|
|
|
|
|
|
Common stock offering
|
—
|
|
|
3
|
|
|
—
|
|
Convertible senior notes
|
—
|
|
|
—
|
|
|
1
|
|
Denominator for basic net income per share
|
55
|
|
|
52
|
|
|
47
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Share-based compensation
|
—
|
|
|
1
|
|
|
—
|
|
Convertible senior notes
(1)
|
—
|
|
|
1
|
|
|
1
|
|
1.125% Warrants
(1)
|
1
|
|
|
2
|
|
|
—
|
|
Denominator for diluted net income per share
|
56
|
|
|
56
|
|
|
48
|
|
|
|
|
|
|
|
Net income per share:
(2)
|
|
|
|
|
|
Basic
|
$
|
0.93
|
|
|
$
|
2.75
|
|
|
$
|
1.33
|
|
Diluted
|
$
|
0.92
|
|
|
$
|
2.58
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
Potentially dilutive common shares excluded from calculations:
(3)
|
|
|
|
|
|
1.125% Warrants
|
—
|
|
|
—
|
|
|
13
|
|
_______________________________
|
|
(1)
|
For more information regarding the convertible senior notes, refer to Note
12
, “
Debt
.” For more information regarding the 1.125% Warrants, refer to Note
15
, “
Stockholders' Equity
.”
|
|
|
(2)
|
Source data for calculations in thousands.
|
|
|
(3)
|
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 year ended December 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.
|
Molina Healthcare, Inc. 2016 Form 10-K | 79
4
.
Business Combinations
Health Plans Segment
In 2016, we closed on several business combinations in the Health Plans segment, consistent with our strategy to grow in our existing markets and expand into new markets. For all of these transactions, we applied the acquisition method of accounting, where the total purchase price was allocated, or preliminarily allocated, to tangible and intangible assets acquired, and liabilities assumed, based on their respective fair values. For the Health Plans acquisitions described below, except New York, only intangible assets were acquired. All of the transactions were funded using available cash, and acquisition-related costs were insignificant.
The individual transactions were as follows:
Illinois.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business of, Accountable Care Chicago, LLC, also known as MyCare Chicago. The final purchase price was approximately
$30 million
, and the Illinois health plan added approximately
50,000
Medicaid members as a result of this transaction.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business, of Loyola Physician Partners, LLC. The final purchase price was approximately
$12 million
, and the Illinois health plan added approximately
18,000
Medicaid members as a result of this transaction.
On March 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business, of Better Health Network, LLC. The final purchase price was approximately
$15 million
, and the Illinois health plan added approximately
28,000
Medicaid members as a result of this transaction.
Michigan.
On January 1, 2016, our Michigan health plan closed on its acquisition of the Medicaid and MIChild membership, and certain Medicaid and MIChild assets, of HAP Midwest Health Plan, Inc. The final purchase price was approximately
$31 million
, and the Michigan health plan added approximately
68,000
Medicaid and MIChild members as a result of this transaction.
New York.
On August 1, 2016, we closed on our acquisition of the outstanding equity interests of Today’s Options of New York, Inc., which operates the Total Care Medicaid plan. The initial purchase price was approximately
$38 million
, and we now serve approximately
35,000
Medicaid members in upstate New York as a result of the transaction. The purchase price allocation was finalized, and final purchase price adjustments as provided in the stock purchase agreement were recorded, in the first quarter of 2017.
Washington.
On January 1, 2016, our Washington health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the operation of the Medicaid business, of Columbia United Providers, Inc. The final purchase price was approximately
$28 million
, and the Washington health plan added approximately
57,000
Medicaid members as a result of this transaction.
For these acquisitions, we recorded goodwill to the Health Plans segment amounting to
$96 million
in the aggregate, which relates to future economic benefits arising from expected synergies to be achieved. Such synergies include use of our existing infrastructure to support the added membership. In general, the amount recorded as goodwill is deductible for income tax purposes.
For the transactions that closed on January 1, 2016 (a holiday), approximately
$101 million
of the purchase price consideration was funded to the sellers in December 2015, and was recorded to prepaid expenses and other assets as of December 31, 2015. Such amounts were reported in investing activities in the accompanying consolidated statements of cash flows for the year ended December 31, 2015.
Molina Healthcare, Inc. 2016 Form 10-K | 80
The following table presents the intangible assets identified in the transactions described above. The weighted-average amortization period, in the aggregate, is
5.7 years
.
|
|
|
|
|
|
|
|
Fair Value
|
|
Life
|
|
(In millions)
|
|
(Years)
|
Intangible asset type:
|
|
|
|
Contract rights - member list
|
$
|
38
|
|
|
5
|
Provider network
|
7
|
|
|
10
|
|
$
|
45
|
|
|
|
Other Segment
Pathways.
On November 1, 2015, we acquired the outstanding ownership interests in Pathways Health and Community Support LLC (Pathways). In 2016, we recorded a pre-acquisition contingent liability and corresponding indemnification asset in the amount of
$14 million
in connection with the Rodriguez Litigation matter defined and described further in Note
19
, “
Commitments and Contingencies
.” Also in 2016, certain tax elections were made such that approximately
50%
of the goodwill recorded in this transaction is deductible for income tax purposes. In the fourth quarter of 2016, the purchase price allocation was finalized, which included a
$5 million
increase to goodwill primarily in connection with certain tax-related gross-up payments.
5
.
Fair Value Measurements
We consider the carrying amounts of cash and cash equivalents and other current assets and current liabilities (not including derivatives and the current portion of long-term debt) 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 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 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.
Level 3 financial instruments are valued using unobservable inputs that represent management’s best estimate of what market participants would use in pricing the financial instrument at the measurement date. Our Level 3 financial instruments include 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
December 31, 2016
included the price of our common stock, the 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
13
, “
Derivatives
,” the 1.125% Call Option asset and the 1.125% Conversion Option liability were designed such that changes in their fair values 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.
The net changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the year ended
December 31, 2016
.
Molina Healthcare, Inc. 2016 Form 10-K | 81
Our financial instruments measured at fair value on a recurring basis at
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In millions)
|
Corporate debt securities
|
$
|
1,179
|
|
|
$
|
—
|
|
|
$
|
1,179
|
|
|
$
|
—
|
|
Government-sponsored enterprise securities (GSEs)
|
231
|
|
|
231
|
|
|
—
|
|
|
—
|
|
Municipal securities
|
142
|
|
|
—
|
|
|
142
|
|
|
—
|
|
U.S. treasury notes
|
84
|
|
|
84
|
|
|
—
|
|
|
—
|
|
Asset-backed securities
|
69
|
|
|
—
|
|
|
69
|
|
|
—
|
|
Certificates of deposit
|
53
|
|
|
—
|
|
|
53
|
|
|
—
|
|
Subtotal - current investments
|
1,758
|
|
|
315
|
|
|
1,443
|
|
|
—
|
|
1.125% Call Option derivative asset
|
267
|
|
|
—
|
|
|
—
|
|
|
267
|
|
Total assets measured at fair value on a recurring basis
|
$
|
2,025
|
|
|
$
|
315
|
|
|
$
|
1,443
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
1.125% Conversion Option derivative liability
|
$
|
267
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
267
|
|
Total liabilities measured at fair value on a recurring basis
|
$
|
267
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
267
|
|
Our financial instruments measured at fair value on a recurring basis at
December 31, 2015
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In millions)
|
Corporate debt securities
|
$
|
1,184
|
|
|
$
|
—
|
|
|
$
|
1,184
|
|
|
$
|
—
|
|
GSEs
|
211
|
|
|
211
|
|
|
—
|
|
|
—
|
|
Municipal securities
|
185
|
|
|
—
|
|
|
185
|
|
|
—
|
|
U.S. treasury notes
|
78
|
|
|
78
|
|
|
—
|
|
|
—
|
|
Asset-backed securities
|
63
|
|
|
—
|
|
|
63
|
|
|
—
|
|
Certificates of deposit
|
80
|
|
|
—
|
|
|
80
|
|
|
—
|
|
Subtotal - current investments
|
1,801
|
|
|
289
|
|
|
1,512
|
|
|
—
|
|
1.125% Call Option derivative asset
|
374
|
|
|
—
|
|
|
—
|
|
|
374
|
|
Total assets measured at fair value on a recurring basis
|
$
|
2,175
|
|
|
$
|
289
|
|
|
$
|
1,512
|
|
|
$
|
374
|
|
|
|
|
|
|
|
|
|
1.125% Conversion Option derivative liability
|
$
|
374
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
374
|
|
Total liabilities measured at fair value on a recurring basis
|
$
|
374
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
374
|
|
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our senior notes, which are classified as Level 2 financial instruments, are indicated in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Carrying
|
|
Fair Value
|
|
Carrying
|
|
Fair Value
|
|
Value
|
|
|
Value
|
|
|
(In millions)
|
5.375% Notes
|
$
|
691
|
|
|
$
|
714
|
|
|
$
|
689
|
|
|
$
|
700
|
|
1.125% Convertible Notes
|
471
|
|
|
792
|
|
|
448
|
|
|
865
|
|
1.625% Convertible Notes
|
284
|
|
|
344
|
|
|
273
|
|
|
365
|
|
|
$
|
1,446
|
|
|
$
|
1,850
|
|
|
$
|
1,410
|
|
|
$
|
1,930
|
|
Molina Healthcare, Inc. 2016 Form 10-K | 82
6
.
Investments
The following tables summarize our investments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized
|
|
Gross
Unrealized
|
|
Estimated
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
(In millions)
|
Corporate debt securities
|
$
|
1,180
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1,179
|
|
GSEs
|
232
|
|
|
—
|
|
|
1
|
|
|
231
|
|
Municipal securities
|
143
|
|
|
—
|
|
|
1
|
|
|
142
|
|
U.S. treasury notes
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
Asset-backed securities
|
69
|
|
|
—
|
|
|
—
|
|
|
69
|
|
Certificates of deposit
|
53
|
|
|
—
|
|
|
—
|
|
|
53
|
|
|
$
|
1,761
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
1,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized Cost
|
|
Gross
Unrealized
|
|
Estimated Fair Value
|
|
|
Gains
|
|
Losses
|
|
|
(In millions)
|
Corporate debt securities
|
$
|
1,189
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
1,184
|
|
GSEs
|
212
|
|
|
—
|
|
|
1
|
|
|
211
|
|
Municipal securities
|
186
|
|
|
—
|
|
|
1
|
|
|
185
|
|
U.S. treasury notes
|
78
|
|
|
—
|
|
|
—
|
|
|
78
|
|
Asset-backed securities
|
63
|
|
|
—
|
|
|
—
|
|
|
63
|
|
Certificates of deposit
|
80
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
$
|
1,808
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
1,801
|
|
The contractual maturities of our investments as of
December 31, 2016
are summarized below:
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
(In millions)
|
Due in one year or less
|
$
|
930
|
|
|
$
|
930
|
|
Due after one year through five years
|
806
|
|
|
803
|
|
Due after five years through ten years
|
25
|
|
|
25
|
|
|
$
|
1,761
|
|
|
$
|
1,758
|
|
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 years ended
December 31, 2016
,
2015
and
2014
were insignificant.
We have determined that unrealized gains and losses at
December 31, 2016
and
2015
are temporary in nature, because the change in market value for these securities resulted from fluctuating interest rates, rather than a deterioration of the creditworthiness of the issuers. So long as we maintain the intent and ability to 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 insignificant.
Molina Healthcare, Inc. 2016 Form 10-K | 83
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, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 millions)
|
Corporate debt securities
|
$
|
542
|
|
|
$
|
2
|
|
|
378
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
GSEs
|
198
|
|
|
1
|
|
|
73
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal securities
|
101
|
|
|
1
|
|
|
129
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
841
|
|
|
$
|
4
|
|
|
580
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
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, 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 millions)
|
Corporate debt securities
|
$
|
825
|
|
|
$
|
4
|
|
|
588
|
|
|
$
|
119
|
|
|
$
|
1
|
|
|
87
|
|
GSEs
|
182
|
|
|
1
|
|
|
77
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal securities
|
128
|
|
|
1
|
|
|
181
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
1,135
|
|
|
$
|
6
|
|
|
846
|
|
|
$
|
119
|
|
|
$
|
1
|
|
|
87
|
|
Molina Healthcare, Inc. 2016 Form 10-K | 84
7
.
Receivables
Receivables consist primarily of amounts due from government 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 insignificant. Any amounts determined to be uncollectible are charged to expense when such determination is made. The information below is presented by segment.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(In millions)
|
California
|
$
|
180
|
|
|
$
|
104
|
|
Florida
|
97
|
|
|
22
|
|
Illinois
|
134
|
|
|
35
|
|
Michigan
|
60
|
|
|
39
|
|
New Mexico
|
57
|
|
|
51
|
|
New York
|
26
|
|
|
—
|
|
Ohio
|
82
|
|
|
66
|
|
Puerto Rico
|
37
|
|
|
33
|
|
South Carolina
|
11
|
|
|
6
|
|
Texas
|
79
|
|
|
56
|
|
Utah
|
19
|
|
|
18
|
|
Washington
|
71
|
|
|
53
|
|
Wisconsin
|
33
|
|
|
22
|
|
Direct delivery and other
|
1
|
|
|
6
|
|
Total Health Plans segment
|
887
|
|
|
511
|
|
Molina Medicaid Solutions segment
|
34
|
|
|
37
|
|
Other segment
|
53
|
|
|
49
|
|
|
$
|
974
|
|
|
$
|
597
|
|
8
.
Property, Equipment, and Capitalized Software
Property and equipment are stated at historical cost. Replacements and major improvements are capitalized, and repairs and maintenance are charged to expense as incurred. Furniture and equipment are generally depreciated using the straight-line method over estimated useful lives ranging from
three
to
seven
years. Software developed for internal use is capitalized. Software is generally amortized over its estimated useful life of
three
years. Leasehold improvements are amortized over the term of the lease, or over their useful lives from
five
to
10
years, whichever is shorter. Buildings are depreciated over their estimated useful lives of
31.5
to
40
years.
The costs associated with certain of our Molina Medicaid Solutions segment equipment and software are capitalized and recorded as deferred contract costs. Such costs are amortized on a straight-line basis over the shorter of the useful life or the contract period, and the amortization is recorded within the heading “Cost of service revenue.”
Molina Healthcare, Inc. 2016 Form 10-K | 85
A summary of property, equipment, and capitalized software is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(In millions)
|
Capitalized software
|
$
|
443
|
|
|
$
|
336
|
|
Furniture and equipment
|
301
|
|
|
250
|
|
Building and improvements
|
159
|
|
|
153
|
|
Land
|
16
|
|
|
16
|
|
|
919
|
|
|
755
|
|
Less: accumulated amortization for capitalized software
|
(259
|
)
|
|
(195
|
)
|
Less: accumulated depreciation and amortization on building and improvements, furniture and equipment
|
(206
|
)
|
|
(167
|
)
|
|
(465
|
)
|
|
(362
|
)
|
Property, equipment, and capitalized software, net
|
$
|
454
|
|
|
$
|
393
|
|
The following table presents all depreciation and amortization recorded in our consolidated statements of income, regardless of whether the item appears as depreciation and amortization, or as cost of service revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Recorded in depreciation and amortization:
|
|
|
|
|
|
Amortization of capitalized software
|
$
|
62
|
|
|
$
|
37
|
|
|
$
|
41
|
|
Depreciation of property and equipment
|
45
|
|
|
50
|
|
|
34
|
|
Amortization of intangible assets
|
32
|
|
|
17
|
|
|
18
|
|
|
139
|
|
|
104
|
|
|
93
|
|
Recorded in cost of service revenue:
|
|
|
|
|
|
Amortization of capitalized software
|
22
|
|
|
15
|
|
|
18
|
|
Amortization of deferred contract costs
|
21
|
|
|
6
|
|
|
20
|
|
|
43
|
|
|
21
|
|
|
38
|
|
Other
|
—
|
|
|
1
|
|
|
3
|
|
|
$
|
182
|
|
|
$
|
126
|
|
|
$
|
134
|
|
Molina Center.
In 2011, we acquired two coterminous office buildings in Long Beach, California, known as the Molina Center. In 2013, we entered into a sale-leaseback transaction for the Molina Center. Due to our continuing involvement with the leased property, the sale did not qualify for sales recognition and we remain the “accounting owner” of the property. For further information, see Note
12
, “
Debt
.” Sublease income from third party tenants of the Molina Center is reported as investment income and other revenue in our consolidated statements of income. As of December 31, 2016, future sublease income was insignificant.
9
.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations.
Goodwill is not amortized, but is subject to an annual impairment test. We are required to test at least annually for impairment, or more frequently if adverse events or changes in circumstances indicate that the asset may be impaired.
When testing goodwill for impairment, we may first assess qualitative factors, such as industry and market factors, cost factors, and changes in overall performance, to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform additional quantitative analysis. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing.
Under the quantitative test we first measure the fair values of our reporting units and compare them to the carrying values of the respective units, including goodwill. Second, if the fair value is less than the carrying value of the
Molina Healthcare, Inc. 2016 Form 10-K | 86
reporting unit, then the implied value of goodwill would be calculated and compared with the carrying amount of goodwill to determine the impairment charge, if any.
We estimate the fair values of our reporting units using discounted cash flows.
In the discounted cash flow analyses, we must make assumptions about a wide variety of internal and external factors. Significant assumptions include financial projections of free cash flow (including significant assumptions about operations, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods, and discount rates.
No
impairment charges relating to goodwill were recorded in the years ended
December 31, 2016
,
2015
, and
2014
.
The following table presents the balances of goodwill as of
December 31, 2016
and
2015
. The Health Plans segment addition relates to the business combinations described in Note
4
, “
Business Combinations
.” The Other segment addition relates to the final purchase price allocation adjustments for our Pathways acquisition in 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Plans
|
|
Molina Medicaid Solutions
|
|
Other
|
|
Total
|
|
(In millions)
|
Historical goodwill
|
$
|
349
|
|
|
$
|
71
|
|
|
$
|
157
|
|
|
$
|
577
|
|
Accumulated impairment losses
|
(58
|
)
|
|
—
|
|
|
—
|
|
|
(58
|
)
|
Balance, December 31, 2015
|
291
|
|
|
71
|
|
|
157
|
|
|
519
|
|
Acquisitions
|
96
|
|
|
—
|
|
|
—
|
|
|
96
|
|
Purchase price allocation adjustments
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Balance at December 31, 2016
|
$
|
387
|
|
|
$
|
71
|
|
|
$
|
162
|
|
|
$
|
620
|
|
Intangible Assets.
Finite-lived, separately-identified intangible assets acquired in business combinations are assets that represent future expected benefits but lack physical substance (such as purchased contract rights and provider contracts).
Intangible assets are initially recorded at fair value and are then amortized on a straight-line basis over their expected useful lives, generally between
two
and
15
years.
Our intangible assets are subject to impairment tests when events or circumstances indicate that a finite-lived intangible asset’s (or asset group’s) carrying value may not be recoverable.
Consideration is given to a number of potential impairment indicators. For example, our health plan subsidiaries have generally been successful in obtaining the renewal by amendment of their contracts in each state prior to the actual expiration of their contracts. However, there can be no assurance that these contracts will continue to be renewed.
Following the identification of any potential impairment indicators, to determine whether an impairment exists, we would compare the carrying amount of a finite-lived intangible asset with the undiscounted cash flows that are expected to result from the use of the asset or related group of assets.
If it is determined that the carrying amount of the asset is not recoverable, the amount by which the carrying value exceeds the estimated fair value is recorded as an impairment.
No significant impairment charges relating to long-lived assets, including intangible assets, were recorded in the years ended
December 31, 2016
,
2015
, and
2014
.
Based on the balances of our identifiable intangible assets as of
December 31, 2016
, we estimate that our intangible asset amortization will be
$35 million
in
2017
,
$33 million
in
2018
,
$27 million
in
2019
,
$19 million
in
2020
, and
$8 million
in
2021
. For a presentation of our goodwill and intangible assets by reportable segment, refer to Note
20
, “
Segment Information
.”
Molina Healthcare, Inc. 2016 Form 10-K | 87
The following table provides the details of identified intangible assets, by major class, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Carrying Amount
|
|
(In millions)
|
Intangible assets:
|
|
|
|
|
|
Contract rights and licenses
|
$
|
267
|
|
|
$
|
148
|
|
|
$
|
119
|
|
Customer relationships
|
25
|
|
|
24
|
|
|
1
|
|
Provider networks
|
34
|
|
|
14
|
|
|
20
|
|
Balance at December 31, 2016
|
$
|
326
|
|
|
$
|
186
|
|
|
$
|
140
|
|
Intangible assets:
|
|
|
|
|
|
Contract rights and licenses
|
$
|
224
|
|
|
$
|
120
|
|
|
$
|
104
|
|
Customer relationships
|
25
|
|
|
23
|
|
|
2
|
|
Provider networks
|
27
|
|
|
11
|
|
|
16
|
|
Balance at December 31, 2015
|
$
|
276
|
|
|
$
|
154
|
|
|
$
|
122
|
|
The changes in the carrying amounts of goodwill and intangible assets, at cost, in
2016
were due to the acquisitions described in Note
4
, “
Business Combinations
.”
10
.
Restricted Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities primarily in certificates of deposit and U.S. treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. The use of these funds is limited to specific purposes as required by regulation in the various states in which we operate, or as protection against the insolvency of capitated providers. We have the ability to hold our restricted investments until maturity, and as a result, we would not expect the value of these investments to decline significantly due to a sudden change in market interest rates. The following table presents the balances of restricted investments:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(In millions)
|
Florida
|
$
|
22
|
|
|
$
|
34
|
|
Illinois
|
3
|
|
|
—
|
|
Michigan
|
1
|
|
|
1
|
|
New Mexico
|
43
|
|
|
43
|
|
New York
|
9
|
|
|
—
|
|
Ohio
|
12
|
|
|
12
|
|
Puerto Rico
|
10
|
|
|
10
|
|
Texas
|
4
|
|
|
4
|
|
Utah
|
4
|
|
|
4
|
|
Wisconsin
|
1
|
|
|
1
|
|
Other
|
1
|
|
|
—
|
|
Total Health Plans segment
|
$
|
110
|
|
|
$
|
109
|
|
Molina Healthcare, Inc. 2016 Form 10-K | 88
The contractual maturities of our restricted investments, which are designated as held-to-maturity and are carried at amortized cost, which approximates fair value, as of
December 31, 2016
are summarized below.
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
(In millions)
|
Due in one year or less
|
$
|
100
|
|
|
$
|
100
|
|
Due after one year through five years
|
10
|
|
|
10
|
|
|
$
|
110
|
|
|
$
|
110
|
|
11
.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Fee-for-service claims incurred but not paid (IBNP)
|
$
|
1,352
|
|
|
$
|
1,191
|
|
|
$
|
871
|
|
Pharmacy payable
|
112
|
|
|
88
|
|
|
71
|
|
Capitation payable
|
37
|
|
|
140
|
|
|
28
|
|
Other
|
428
|
|
|
266
|
|
|
231
|
|
|
$
|
1,929
|
|
|
$
|
1,685
|
|
|
$
|
1,201
|
|
“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. Non-risk provider payables amounted to
$225 million
,
$167 million
and
$119 million
, as of
December 31, 2016
,
2015
and
2014
, respectively.
The following table presents the components of the change in our medical claims and benefits payable 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Medical claims and benefits payable, beginning balance
|
$
|
1,685
|
|
|
$
|
1,201
|
|
|
$
|
670
|
|
Components of medical care costs related to:
|
|
|
|
|
|
Current period
|
14,966
|
|
|
11,935
|
|
|
8,123
|
|
Prior periods
|
(192
|
)
|
|
(141
|
)
|
|
(46
|
)
|
Total medical care costs
|
14,774
|
|
|
11,794
|
|
|
8,077
|
|
|
|
|
|
|
|
Change in non-risk provider payables
|
58
|
|
|
48
|
|
|
(32
|
)
|
|
|
|
|
|
|
Payments for medical care costs related to:
|
|
|
|
|
|
Current period
|
13,304
|
|
|
10,448
|
|
|
7,064
|
|
Prior periods
|
1,284
|
|
|
910
|
|
|
450
|
|
Total paid
|
14,588
|
|
|
11,358
|
|
|
7,514
|
|
Medical claims and benefits payable, ending balance
|
$
|
1,929
|
|
|
$
|
1,685
|
|
|
$
|
1,201
|
|
Reinsurance recoverables of
$61 million
,
$46 million
, and
$9 million
, as of December 31, 2016, 2015, and 2014, respectively, are included in receivables.
Molina Healthcare, Inc. 2016 Form 10-K | 89
The following tables provide information about incurred and paid claims development as of
December 31, 2016
, as well as cumulative claims frequency and the total of incurred but not paid claims liabilities. The information is inclusive of the New York health plan we acquired in 2016. The cumulative claim frequency is measured by claim event, and includes claims covered under capitated arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred Claims and Allocated Claims Adjustment Expenses
|
|
Total IBNP
|
|
Cumulative number of reported claims
|
Benefit Year
|
|
2014
(1)
|
|
2015
(1)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2014
|
|
$
|
8,284
|
|
|
$
|
8,139
|
|
|
$
|
8,138
|
|
|
$
|
3
|
|
|
57
|
|
2015
|
|
|
|
12,113
|
|
|
11,928
|
|
|
22
|
|
|
83
|
|
2016
|
|
|
|
|
|
15,064
|
|
|
1,327
|
|
|
102
|
|
|
|
|
|
|
|
$
|
35,130
|
|
|
$
|
1,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claims Adjustment Expenses
|
|
Benefit Year
|
|
2014
(1)
|
|
2015
(1)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2014
|
|
$
|
7,220
|
|
|
$
|
8,123
|
|
|
$
|
8,135
|
|
|
2015
|
|
|
|
10,615
|
|
|
11,906
|
|
|
2016
|
|
|
|
|
|
13,403
|
|
|
|
|
|
|
|
|
$
|
33,444
|
|
|
The following table represents a reconciliation of claims development to the aggregate carrying amount of the liability for medical claims and benefits payable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
(In millions)
|
|
Incurred claims and allocated claims adjustment expenses
|
|
$
|
35,130
|
|
|
Less: cumulative paid clams and allocated claims adjustment expenses
|
|
(33,444
|
)
|
|
Non-risk provider payables and other
|
|
243
|
|
|
Medical claims and benefits payable
|
|
$
|
1,929
|
|
|
_______________________________
|
|
(1)
|
Data presented for these calendar years is required supplementary information, which is unaudited.
|
That portion of our total medical claims and benefits payable liability that is most subject to variability in the estimate is 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 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
Molina Healthcare, Inc. 2016 Form 10-K | 90
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
2016
,
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 serve to 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.
2016
We believe that the most significant uncertainties relating to our IBNP estimates at
December 31, 2016
are as follows:
|
|
•
|
Our New York health plan acquisition closed on August 1, 2016, which added approximately
35,000
new members. Because these members are new to Molina and we have little insight into their claims history, our estimates of the liability we have incurred for services provided to these members are subject to more than the usual amount of uncertainty.
|
|
|
•
|
At our Florida, New Mexico, Puerto Rico, Utah and Washington health plans, we overpaid certain inpatient and outpatient facility claims. We adjusted our claims payment history to reflect the claims payment pattern that would have occurred without these overpayments. For this reason, our liability estimates for these health plans are subject to more than the usual amount of uncertainty.
|
|
|
•
|
Fluctuations in the volume of claims received in a paper format (rather than an electronic format) during the third quarter of 2016 have created more than the usual amount of uncertainty regarding our estimate of the liability for our California health plan.
|
|
|
•
|
At our Illinois health plan, certain claims with dates of service in 2014 and 2015 were paid in December 2016. Because of these claims with unusually old dates of service, our liability estimate for the Illinois health plan is subject to more than the usual amount of uncertainty.
|
We recognized favorable prior period claims development in the amount of
$192 million
for the year ended
December 31, 2016
. This amount represents our estimate, as of
December 31, 2016
, of the extent to which our initial estimate of medical claims and benefits payable at
December 31, 2015
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:
|
|
•
|
A new version of diagnostic codes was required for all claims with dates of service on October 1, 2015, and later. As a result, payment was delayed or denied for a significant number of claims due to provider submission of claims with diagnostic codes that were no longer valid. Once providers were able to submit claims with the correct diagnostic codes, our actual costs were ultimately less than expected.
|
|
|
•
|
At our New Mexico health plan, we overestimated the impact of several pending high-dollar claims, and our actual costs were ultimately less than expected.
|
|
|
•
|
At our Washington health plan, we overpaid certain outpatient facility claims in 2015 when the state converted to a new payment methodology. We did not include an estimate in our December 31, 2015 reserves for this potential recovery.
|
|
|
•
|
At our California health plan, we enrolled approximately
55,000
new Medicaid Expansion members in 2015. For these new members, our actual costs were ultimately less than expected.
|
2015
We recognized favorable prior period claims development in the amount of
$141 million
for the year ended
December 31, 2015
. This amount represented our estimate as of
December 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 was ultimately paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
Molina Healthcare, Inc. 2016 Form 10-K | 91
|
|
•
|
At our Ohio and California health plans, approximately
61,000
and
100,000
members, respectively, were enrolled in the new Medicaid expansion program during 2014. Also in Ohio, approximately
17,000
members were enrolled in the new MMP program in 2014. Because we lacked sufficient historical claims data, we initially estimated the reserves for these new members based upon a number of factors that included pricing assumptions provided by the state; our expectations regarding pent up demand; our beliefs about the speed at which new members would utilize health care services; and other factors. Our actual costs were ultimately less than expected.
|
|
|
•
|
At our New Mexico health plan, the state implemented a retroactive increase to the provider fee schedules in mid-2014. As a result, many claims that were previously settled were reopened, and subject to, additional payment. Because our reserving methodology is most accurate when claims payment patterns are consistent and predictable, the payment of additional amounts on claims that in some cases had been settled more than six months before added a substantial degree of complexity to our liability estimation process. Due to the difficulties in addressing that added complexity, liabilities recorded as of December 31, 2014 were in excess of amounts ultimately paid.
|
|
|
•
|
At our Washington health plan, we collected amounts in 2015 related to certain claims paid in 2013. Such collections were not anticipated in our reserves as of December 31, 2014.
|
2014
We recognized favorable prior period claims development in the amount of
$46 million
for the year ended
December 31, 2014
. This amount represented our estimate as of
December 31, 2014
, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2013 was more than the amount that was ultimately paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
|
|
•
|
At our Ohio health plan, we entered new regions in the state, and a new product, ABD Kids, in July 2013. Because we lacked sufficient historical claims data, we initially estimated the reserves for these new members based upon a number of factors that included pricing assumptions provided by the state; our beliefs about the speed at which new members would utilize health care services; and other factors. Our actual costs were ultimately less than expected.
|
|
|
•
|
At our Michigan health plan, we overestimated the impact of certain unpaid potentially high-dollar claims. In addition, we overestimated the impact of the flu season on the outpatient claims for November and December 2013, which caused an overestimation in our outpatient reserve liability as of December 31, 2013.
|
12
.
Debt
As of
December 31, 2016
, contractual maturities of debt for the years ending December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
5.375% Notes
|
$
|
700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
700
|
|
1.125% Convertible Notes
|
550
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
550
|
|
|
—
|
|
|
—
|
|
1.625% Convertible Notes
(1)
|
302
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
302
|
|
|
$
|
1,552
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
550
|
|
|
$
|
—
|
|
|
$
|
1,002
|
|
|
|
(1)
|
The 1.625% Notes have a contractual maturity date in 2044; however, on contractually specified dates beginning in 2018, 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.
|
Molina Healthcare, Inc. 2016 Form 10-K | 92
Substantially all of our debt is held at the parent, which is reported in the Other segment. The principal amounts, unamortized discount (net of premium related to the 1.625% Notes), unamortized issuance costs, and net carrying amounts of debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Balance
|
|
Unamortized Discount
|
|
Unamortized Issuance Costs
|
|
Net Carrying Amount
|
|
(In millions)
|
December 31, 2016:
|
|
|
|
|
|
|
|
5.375% Notes
|
$
|
700
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
691
|
|
1.125% Convertible Notes
|
550
|
|
|
73
|
|
|
6
|
|
|
471
|
|
1.625% Convertible Notes
|
302
|
|
|
16
|
|
|
2
|
|
|
284
|
|
|
$
|
1,552
|
|
|
$
|
89
|
|
|
$
|
17
|
|
|
$
|
1,446
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
5.375% Notes
|
$
|
700
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
689
|
|
1.125% Convertible Notes
|
550
|
|
|
95
|
|
|
7
|
|
|
448
|
|
1.625% Convertible Notes
|
302
|
|
|
25
|
|
|
4
|
|
|
273
|
|
Other
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
$
|
1,553
|
|
|
$
|
120
|
|
|
$
|
22
|
|
|
$
|
1,411
|
|
Interest cost recognized relating to our convertible senior notes for the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Contractual interest at coupon rate
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
13
|
|
Amortization of the discount
|
30
|
|
|
29
|
|
|
26
|
|
|
$
|
41
|
|
|
$
|
40
|
|
|
$
|
39
|
|
Debt Commitment Letter
On August 2, 2016, in connection with the Proposed Medicare Acquisition, we entered into a debt commitment letter with Barclays Bank PLC (Barclays). The primary terms of the debt commitment letter provided that, subject to satisfaction of certain conditions, including consummation of the Proposed Medicare Acquisition, Barclays would provide us with debt financing up to
$400 million
. The debt commitment letter automatically terminated in February 2017 as a result of the termination of the Proposed Medicare Acquisition. See Note
1
, “
Basis of Presentation
” for further discussion regarding the termination of the Proposed Medicare Acquisition.
5.375% Notes due 2022
On November 10, 2015, we completed the private offering of
$700 million
aggregate principal amount of senior notes (
5.375%
Notes) due November 15, 2022, unless earlier redeemed. In September 2016, we completed a registration rights agreement to exchange the 5.375% Notes for registered notes having substantially identical terms, including guarantees. Interest on the 5.375% Notes is payable semiannually in arrears on May 15 and November 15.
The 5.375% Notes contain customary non-financial covenants and change of control provisions. At
December 31, 2016
, we were in compliance with all financial covenants under the 5.375% Notes. Certain of our wholly owned subsidiaries jointly and severally guarantee our obligations under the 5.375% Notes. See Note
23
, “
Supplemental Condensed Consolidating Financial Information
,” for more information on the guarantors.
Credit Facility
In January 2017, we
entered into an amended unsecured
$500 million
r
evolving credit facility (the Credit Facility).
Outstanding letters of credit amounting to
$6 million
reduce the borrowing capacity to
$494 million
.
The Credit Facility has a term of
five years
and all amounts outstanding will be due and payable on January 31, 2022. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to
$650 million
.
Molina Healthcare, Inc. 2016 Form 10-K | 93
Borrowings under our Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), plus in each case the applicable margin.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Facility, we are required to pay a
quarterly
commitment fee.
Certain of our wholly owned subsidiaries jointly and severally guarantee our obligations under the Credit Facility.
The Credit Facility contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio.
At
December 31, 2016
, we were not in compliance with the financial covenants under the Credit Facility.
In February 2017, we entered into a Second Amendment to the Credit Facility (the Second Amendment). The Second Amendment modified the Credit Facility’s definition of the earnings measure used in the covenant computations to: a) allow us to receive credit for risk corridor payments owed to, but not received or accrued by us during 2016; and b) account for the difference between the amount of actual risk transfer payments made or accrued by us during 2016, and the amount of risk transfer payments that would have been due to us under the federal government’s proposed 2018 risk adjustment payment transfer formula. The Second Amendment also provides for a waiver by the lenders of our non-compliance with the Credit Facility debt covenants at December 31, 2016.
As of
December 31, 2016
,
no
amounts were outstanding under the Credit Facility.
1.125% Cash Convertible Senior Notes due 2020
In February 2013, we issued
$550 million
aggregate principal amount of
1.125%
cash convertible senior notes (1.125% Notes) due January 15, 2020, unless earlier repurchased or converted.
Interest is payable semiannually in arrears on January 15 and July 15. 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, or 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
December 31, 2016
, and are convertible into cash through at least March 31, 2017. Because the 1.125% Notes may be converted to cash within 12 months, the
$471 million
carrying amount is reported in current portion of long-term debt as of
December 31, 2016
.
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 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 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
December 31, 2016
, the 1.125% Notes have a remaining amortization period of
3.0
years. The 1.125% Notes’ if-converted value exceeded
Molina Healthcare, Inc. 2016 Form 10-K | 94
their principal amount by approximately
$182 million
and
$332 million
as of
December 31, 2016
and
December 31, 2015
, respectively.
1.625% Convertible Senior Notes due 2044
In September 2014, we issued
$125 million
principal amount of 1.625% convertible senior notes (1.625% Notes) due August 15, 2044, unless earlier repurchased, redeemed or converted. Combined with the 1.625% Notes issued in an exchange transaction in 2014, the aggregate principal amount of 1.625% Notes issued was
$302 million
. Interest is payable
semiannually
in arrears on February 15 and August 15. 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, or 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
December 31, 2016
, 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 are net share settled and 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
Molina Healthcare, Inc. 2016 Form 10-K | 95
approximately
four
years, beginning on the issuance date and ending on the first date we may redeem the 1.625% Notes in August 2018. As of
December 31, 2016
, the 1.625% Notes have a remaining amortization period of
1.6
years. This has resulted in our recognition of interest expense on the 1.625% Notes at an effective rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued, or approximately
5%
. The outstanding 1.625% Notes’ if-converted value did not exceed their principal amount at
December 31, 2016
, and exceeded their principal amount at
December 31, 2015
by approximately
$10 million
. At
December 31, 2016
and
December 31, 2015
, the equity component of the 1.625% Notes, including the impact of deferred taxes, was $
23 million
.
Lease Financing Obligations
As a result of our continuing involvement in the leasing transactions described below, we are the “accounting owner” of the properties under the leases. The assets are therefore included in our consolidated balance sheets, and are depreciated over their remaining useful lives. The lease financing obligations are amortized over the initial lease terms, such that there will be no gain or loss recorded if the leases are not extended their expiration dates. Payments under the leases adjust the lease financing obligations, and the imputed interest is recorded to interest expense in our consolidated statements of income. Aggregate interest expense under these leases amounted to
$17 million
,
$17 million
and
$16 million
for the years ended
December 31, 2016
,
2015
and 2014, respectively. For information regarding the future minimum lease obligations, refer to Note
19
, “
Commitments and Contingencies
.”
Molina Center and Ohio Exchange.
In 2013, we entered into a sale-leaseback transaction for the Molina Center and our Ohio health plan office building located in Columbus, Ohio, also known as the Ohio Exchange. The sale of these properties did not qualify for sales recognition, because certain lease terms resulted in our continuing involvement with these leased properties. Rent increases
3%
per year through the initial term, which expires in 2038. The lease provides for
six
five
-year renewal options, with renewal rent to be the higher of the
3%
annual escalator or the then-fair market value.
6th and Pine.
Also in 2013, we entered into a construction and lease transaction for
two
office buildings in Long Beach, California (6th and Pine). Due to our participation in the construction project, we retained continuing involvement in the properties. Rent increases
3.4%
per year through the initial term, which expires in 2029. The lease provides for
two
five
-year renewal options, with renewal rent to be determined based on the then-fair market value.
13
.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Balance Sheet Location
|
|
2016
|
|
2015
|
|
|
|
(In millions)
|
Derivative asset:
|
|
|
|
|
|
1.125% Call Option
|
Current assets: Derivative asset
|
|
$
|
267
|
|
|
$
|
374
|
|
|
|
|
|
|
|
Derivative liability:
|
|
|
|
|
|
1.125% Conversion Option
|
Current liabilities: Derivative liability
|
|
$
|
267
|
|
|
$
|
374
|
|
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.
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
Molina Healthcare, Inc. 2016 Form 10-K | 96
strike prices in excess of the conversion price of the 1.125% Notes), these transactions are intended to offset cash payments in excess of the principal amount of the 1.125% Notes 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
5
, “
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
5
, “
Fair Value Measurements
.”
As of
December 31, 2016
, 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
December 31, 2016
, as described in Note
12
, “
Debt
.”
14
.
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 such as the HIF, certain 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.
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Current:
|
|
|
|
|
|
Federal
|
$
|
134
|
|
|
$
|
172
|
|
|
$
|
72
|
|
State
|
3
|
|
|
8
|
|
|
3
|
|
Foreign
|
(6
|
)
|
|
6
|
|
|
—
|
|
Total current
|
131
|
|
|
186
|
|
|
75
|
|
Deferred:
|
|
|
|
|
|
Federal
|
19
|
|
|
(10
|
)
|
|
—
|
|
State
|
2
|
|
|
4
|
|
|
(2
|
)
|
Foreign
|
1
|
|
|
(1
|
)
|
|
—
|
|
Total deferred
|
22
|
|
|
(7
|
)
|
|
(2
|
)
|
|
$
|
153
|
|
|
$
|
179
|
|
|
$
|
73
|
|
Molina Healthcare, Inc. 2016 Form 10-K | 97
A reconciliation of the U.S. federal statutory income tax rate to the combined effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Statutory federal tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
1.6
|
|
|
2.4
|
|
|
0.4
|
|
Change in unrecognized tax benefits
|
0.5
|
|
|
0.9
|
|
|
(0.1
|
)
|
Nondeductible health insurer fee (HIF)
|
37.0
|
|
|
17.0
|
|
|
22.9
|
|
Nondeductible compensation
|
3.1
|
|
|
0.6
|
|
|
(4.1
|
)
|
Change in purchase agreement that increased tax basis in assets
|
(2.2
|
)
|
|
—
|
|
|
—
|
|
Other
|
(0.2
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
Effective tax rate
|
74.8
|
%
|
|
55.5
|
%
|
|
53.8
|
%
|
Our effective tax rate is based on expected income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant management estimates and judgments are required in determining our effective tax rate. We are routinely under audit by federal, state, or local authorities regarding the timing and amount of deductions, nexus of income among various tax jurisdictions, and compliance with federal, state, foreign, and local tax laws.
During 2014, the Internal Revenue Service (IRS) issued final regulations related to compensation deduction limitations applicable to certain health insurance issuers. Pursuant to these final regulations, we reversed amounts treated as nondeductible in 2013 and recognized a tax benefit during 2014.
During
2016
,
2015
, and
2014
, excess tax benefits from share-based compensation amounted to
$2 million
,
$8 million
, and
$3 million
, respectively. These amounts were recorded as a decrease to income taxes payable and an increase to additional paid-in capital.
Deferred tax assets and liabilities are classified as non-current. Significant components of our deferred tax assets and liabilities as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(In millions)
|
Accrued expenses
|
$
|
22
|
|
|
$
|
37
|
|
Reserve liabilities
|
28
|
|
|
14
|
|
Other accrued medical costs
|
5
|
|
|
5
|
|
Net operating losses
|
13
|
|
|
7
|
|
Unrealized losses
|
1
|
|
|
2
|
|
Unearned premiums
|
27
|
|
|
21
|
|
Lease financing obligation
|
38
|
|
|
35
|
|
Deferred compensation
|
6
|
|
|
8
|
|
Tax credit carryover
|
7
|
|
|
8
|
|
Valuation allowance
|
(16
|
)
|
|
(9
|
)
|
Total deferred income tax assets, net of valuation allowance
|
131
|
|
|
128
|
|
Prepaid expenses
|
(9
|
)
|
|
(9
|
)
|
Depreciation and amortization
|
(104
|
)
|
|
(83
|
)
|
Basis in debt
|
(23
|
)
|
|
(18
|
)
|
Total deferred income tax liabilities
|
(136
|
)
|
|
(110
|
)
|
Net deferred income tax (liability) asset - long term
|
$
|
(5
|
)
|
|
$
|
18
|
|
At
December 31, 2016
, we had state net operating loss carryforwards of
$315 million
, which begin expiring in 2018.
At
December 31, 2016
, we had California enterprise zone tax credit carryovers of
$11 million
, which will begin to expire in 2024.
We evaluate the need for a valuation allowance taking into consideration the ability to carry back and carry forward tax credits and losses, available tax planning strategies and future income, including reversal of temporary differences. We have determined that as of
December 31, 2016
,
$16 million
of deferred tax assets did not satisfy the recognition criteria due to uncertainty regarding the realization of some of our state net operating loss
Molina Healthcare, Inc. 2016 Form 10-K | 98
carryforwards. Therefore, we increased our valuation allowance by
$7 million
, from
$9 million
at
December 31, 2015
, to
$16 million
as of
December 31, 2016
.
We recognize tax benefits only if the tax position is more likely than not to be sustained. We are subject to income taxes in the United States, Puerto Rico, and numerous state jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
The roll forward of our unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Gross unrecognized tax benefits at beginning of period
|
$
|
(9
|
)
|
|
$
|
(3
|
)
|
|
$
|
(8
|
)
|
Increases in tax positions for current year
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
Increases in tax positions for prior years
|
(1
|
)
|
|
(5
|
)
|
|
(1
|
)
|
Settlements
|
—
|
|
|
—
|
|
|
6
|
|
Gross unrecognized tax benefits at end of period
|
$
|
(11
|
)
|
|
$
|
(9
|
)
|
|
$
|
(3
|
)
|
The total amount of unrecognized tax benefits at
December 31, 2016
,
2015
and
2014
that, if recognized, would affect the effective tax rates is
$9 million
,
$7 million
and
$2 million
, respectively. We expect that during the next
12
months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as
$2 million
due to the expiration of statutes of limitation.
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. Amounts accrued for the payment of interest and penalties as of
December 31, 2016
,
2015
and
2014
were insignificant.
We are under examination by the IRS for calendar year 2011 and may be subject to examination for calendar years 2012 through 2015. We are under examination, or may be subject to examination, in Puerto Rico and certain state and local jurisdictions, with the major state jurisdictions being California, Michigan, and Illinois for the years 2009 through 2015.
15
.
Stockholders' Equity
Common Stock Offering.
In June 2015, we completed an underwritten public offering of
5,750,000
shares of our common stock, including the over-allotment option. Net of issuance costs, proceeds from the offering amounted to
$373 million
, or
$64.90
per share, resulting in an increase to additional paid-in capital. We are using the proceeds to finance working capital needs, acquisitions, capital expenditures, and other general corporate activities.
1.125% Warrants.
In connection with the Call Spread Overlay transaction described in Note
13
, “
Derivatives
,” in 2013, 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 (beginning on April 15, 2020) 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 exceeds the applicable strike price of the 1.125% Warrants. Refer to Note
3
, “
Net Income per Share
,” for dilution information for the periods presented. We will not receive any additional proceeds if the 1.125% Warrants are exercised.
Securities Repurchase Programs.
In December 2015, our board of directors authorized the repurchase of up to
$50 million
in aggregate of our common stock or senior notes. We did not repurchase any shares under this program, which expired without renewal on December 31, 2016.
Molina Healthcare, Inc. 2016 Form 10-K | 99
Stock Incentive Plans.
At
December 31, 2016
, we had employee equity incentives outstanding under
two
plans: (1) the 2011 Equity Incentive Plan (2011 Plan); and (2) the 2002 Equity Incentive Plan (from which equity incentives are no longer awarded).
The 2011 Plan provides for the award of restricted shares and units, performance shares and units, stock options and stock bonuses to the company’s officers, employees, directors, consultants, advisers, and other service providers. The 2011 Plan provides for the issuance of up to
4.5 million
shares of common stock.
Restricted share awards are granted with a fair value equal to the market price of our common stock on the date of grant, and generally vest in equal annual installments over periods up to
four
years from the date of grant. We recognize expense for these awards on a straight-line basis. Stock option awards have an exercise price equal to the fair market value of our common stock on the date of grant, generally vest in equal annual installments over periods up to
four
years from the date of grant, and have a maximum term of
ten
years from the date of grant.
In connection with our equity incentive plans and employee stock purchase plan, approximately
674,000
shares of common stock were purchased or vested, net of shares used to settle employees’ income tax obligations, during the year ended
December 31, 2016
.
Charged to general and administrative expenses, total share-based compensation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
|
Pretax
Charges
|
|
Net-of-Tax
Amount
|
|
Pretax
Charges
|
|
Net-of-Tax
Amount
|
|
Pretax
Charges
|
|
Net-of-Tax
Amount
|
Restricted stock and performance awards
|
$
|
20
|
|
|
$
|
17
|
|
|
$
|
19
|
|
|
$
|
13
|
|
|
$
|
19
|
|
|
$
|
12
|
|
Employee stock purchase plan and stock options
|
6
|
|
|
5
|
|
|
4
|
|
|
3
|
|
|
3
|
|
|
2
|
|
|
$
|
26
|
|
|
$
|
22
|
|
|
$
|
23
|
|
|
$
|
16
|
|
|
$
|
22
|
|
|
$
|
14
|
|
As of
December 31, 2016
, there was
$29 million
of total unrecognized compensation expense related to unvested restricted share awards, including those with performance conditions, which we expect to recognize over a remaining weighted-average period of
1.7 years
. This unrecognized compensation cost assumes an estimated forfeiture rate of
4.7%
for non-executive employees as of
December 31, 2016
. As of
December 31, 2016
, there was no unrecognized compensation expense related to unvested stock options.
Restricted stock.
Restricted and performance stock activity for the year ended
December 31, 2016
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
Performance Shares
|
|
Total Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested balance as of December 31, 2015
|
658,156
|
|
|
376,601
|
|
|
1,034,757
|
|
|
$
|
46.68
|
|
Granted
|
300,007
|
|
|
226,010
|
|
|
526,017
|
|
|
63.84
|
|
Vested
|
(352,292
|
)
|
|
—
|
|
|
(352,292
|
)
|
|
42.06
|
|
Canceled
|
—
|
|
|
(256,955
|
)
|
|
(256,955
|
)
|
|
46.24
|
|
Forfeited
|
(28,627
|
)
|
|
—
|
|
|
(28,627
|
)
|
|
53.06
|
|
Unvested balance as of December 31, 2016
|
577,244
|
|
|
345,656
|
|
|
922,900
|
|
|
$
|
58.15
|
|
The total fair value of restricted awards, including those with performance or market conditions, granted during the years ended
December 31, 2016
,
2015
, and
2014
was
$34 million
,
$28 million
, and
$25 million
, respectively. The total fair value of restricted awards, including those with performance or market conditions, which vested during the years ended
December 31, 2016
,
2015
, and
2014
was
$22 million
,
$39 million
, and
$24 million
, respectively.
Employee Stock Purchase Plan.
Under our employee stock purchase plan (ESPP), eligible employees may purchase common shares at
85%
of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. Each participant is limited to a maximum purchase of
$25,000
(as measured by the fair value of the stock acquired) per year through payroll deductions. We estimate the fair value of the stock issued using the Black-Scholes option pricing model. For the years ended
December 31, 2016
,
2015
, and
2014
, the inputs to this model were as follows: risk-free interest rates of approximately
0.1%
to
0.5%
; expected volatilities ranging from approximately
30%
to
40%
, dividend yields of
0%
, and an average expected life of
0.5
Molina Healthcare, Inc. 2016 Form 10-K | 100
years. We issued approximately
410,000
,
302,000
and
327,000
shares of our common stock under the ESPP during the years ended
December 31, 2016
,
2015
, and
2014
, respectively. The 2011 ESPP provides for the issuance of up to
three million
shares of common stock.
Stock Options.
No
stock options were granted in
2016
,
2015
and
2014
, and stock options outstanding as of
December 31, 2016
were insignificant. The total intrinsic value of options exercised during the years ended
December 31, 2016
,
2015
, and
2014
was
$1 million
,
$6 million
, and
$2 million
, respectively.
16
.
Employee Benefits
We sponsor defined contribution 401(k) plans that cover substantially all full-time salaried and hourly employees of our company and its subsidiaries. Eligible employees are permitted to contribute up to the maximum amount allowed by law. We generally match up to the first
4%
of compensation contributed by employees. Expense recognized in connection with our contributions to the 401(k) plans totaled
$36 million
,
$27 million
and
$21 million
in the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
We also have a nonqualified deferred compensation plan for certain key employees. Under this plan, eligible participants may defer up to
100%
of their base salary and
100%
of their bonus to provide tax-deferred growth for retirement. The funds deferred are invested in corporate-owned life insurance, under a rabbi trust.
17
.
Related Party Transactions
Our California health plan has entered into a provider agreement with Pacific Healthcare IPA (Pacific), which is
50%
owned by the brother-in-law of Dr. J. Mario Molina and John C. Molina. Under the terms of this provider agreement, the California health plan paid Pacific approximately
$1 million
in each of 2015 and 2014 for medical care provided to health plan members. Payments in 2016 were insignificant.
Refer to Note
18
, “
Variable Interest Entities (VIEs)
,” for a discussion of the Joseph M. Molina, M.D. Professional Corporations.
18
.
Variable Interest Entities (VIEs)
Joseph M. Molina M.D., Professional Corporations
The
Joseph M. Molina, M.D. Professional Corporations (JMMPC) were created 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. JMMPC also provides 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. For the years ended December 31, 2016, 2015 and 2014, JMMPC paid
$55 million
,
$69 million
and
$11 million
, respectively, to MMM for clinic administrative services provided by MMM to JMMPC.
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 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 amounts either paid to JMMPC or received by the health plans are generally insignificant. For the years ended
December 31, 2016
,
2015
, and
2014
, our health plans paid
$122 million
,
$117 million
and
$32 million
, respectively, to JMMPC for health care services provided by JMMPC to the health plans’ members.
Molina Healthcare, Inc. 2016 Form 10-K | 101
We have determined that JMMPC is a 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 (excluding clinical decisions) that most significantly affect JMMPC’s economic performance, and the obligation to absorb losses or the 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
December 31, 2016
, JMMPC had total assets of
$18 million
, and total liabilities of
$18 million
. As of
December 31, 2015
, JMMPC had total assets of
$17 million
, and total liabilities of
$17 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 insignificant to our consolidated operating results and cash flows for the foreseeable future.
New Markets Tax Credit
In 2011, our New Mexico data center subsidiary entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (Wells Fargo), its wholly owned subsidiary New Mexico Healthcare Data Center Investment Fund, LLC (Investment Fund), and certain of Wells Fargo’s affiliated Community Development Entities (CDEs), in connection with our participation in the federal government’s New Markets Tax Credit Program (NMTC). The credit amounts to
39%
of the original investment amount and is claimed over a period of
seven
years (
five percent
for each of the first three years, and
six percent
for each of the remaining four years). The investment in the CDE cannot be redeemed before the end of the
seven
-year period.
As a result of a series of simultaneous financing transactions, Wells Fargo contributed capital of
$6 million
to the Investment Fund, and Molina Healthcare, Inc. loaned the principal amount of $
16 million
to the Investment Fund. The Investment Fund then contributed the proceeds to certain CDEs, which, in turn, loaned the proceeds of
$21 million
to our New Mexico data center subsidiary.
We have determined that the financing arrangement with Investment Fund and CDEs is a VIE, that we are the primary beneficiary of the VIE, and we have included it in our consolidated financial statements. Wells Fargo’s contribution of
$6 million
is included in cash at
December 31, 2016
and
December 31, 2015
and the offsetting amount of Wells Fargo’s interest in the financing arrangement is included in other liabilities in the accompanying consolidated balance sheets.
19
.
Commitments and Contingencies
Regulatory Capital Requirements 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 enforce capital requirements 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 on 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
$1,492 million
at
December 31, 2016
, and
$1,229 million
at
December 31, 2015
. 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
$264 million
and
$612 million
as of
December 31, 2016
and
2015
, 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. All of the states in which our health plans operate, except California, Florida and New York, have adopted these rules. Such requirements, if adopted by California, Florida and New York, may increase the minimum capital required for those states.
Molina Healthcare, Inc. 2016 Form 10-K | 102
As of
December 31, 2016
, our health plans had aggregate statutory capital and surplus of approximately
$1,693 million
compared with the required minimum aggregate statutory capital and surplus of approximately
$1,100 million
. All of our health plans were in compliance with the minimum capital requirements at
December 31, 2016
. 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.
Legal Proceedings
The health care and Medicaid-related 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 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.
Marketplace Risk Corridor Program.
On January 19, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, Case Number 1:55-cv-01000-UNJ, on behalf of our health plans seeking recovery from the federal government of approximately
$52 million
in Marketplace risk corridor payments for calendar year 2015. Based upon current estimates, we believe our health plans are also owed approximately
$90 million
in Marketplace risk corridor payments from the federal government for calendar year 2016, and a further nominal amount for calendar year 2014. Our lawsuit seeks recovery of all of these unpaid amounts. We have not recognized revenue, nor have we recorded a receivable, for any amount due from the federal government for unpaid Marketplace risk corridor payments as of December 31, 2016. We have fully recognized all liabilities due to the federal government that we have incurred under the Marketplace risk corridor program, and have paid all amounts due to the federal government as required.
Rodriguez v. Providence Community Corrections.
On October 1, 2015,
seven
individuals, on behalf of themselves and all others similarly situated, filed a complaint in the District Court for the Middle District of Tennessee, Nashville Division, Case No. 3:15-cv-01048 (the Rodriquez Litigation), against Providence Community Corrections, Inc. (now known as Pathways Community Corrections, Inc., or PCC). Rutherford County, Tennessee formerly contracted with PCC for the administration of misdemeanor probation, which involved the collection of court costs and fees from probationers. The complaint alleges, among other things, that PCC illegally assessed fees and surcharges against probationers and made improper threats of arrest and probation revocation if the probationers did not pay such amounts. The plaintiffs in the Rodriguez Litigation seek alleged compensatory, treble, and punitive damages, plus attorneys’ fees, for alleged federal and state constitutional violations, as well as alleged violations of the Racketeer Influenced and Corrupt Organization Act. PCC’s agreement with Rutherford County terminated effective March 31, 2016. On November 1, 2015, one month after the Rodriguez Litigation commenced, we acquired PCC from The Providence Service Corporation (Providence) pursuant to a membership interest purchase agreement. In September 2016, the parties to the Rodriguez Litigation accepted a mediation proposal for settlement pursuant to which PCC would pay the plaintiffs
$14 million
. The parties are in the process of finalizing the settlement agreement. We expect to recover the full amount of the settlement under the indemnification provisions of the membership interest purchase agreement with Providence.
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. On October 22, 2015, the Relator filed a third amended complaint. On July 11, 2016, the District Court dismissed with prejudice the third amended complaint, without leave to amend. On
Molina Healthcare, Inc. 2016 Form 10-K | 103
September 23, 2016, the plaintiff filed an appeal with the Ninth Circuit Court of Appeals. The plaintiff/appellant’s opening brief is due March 6, 2017, and the defendant/appellee’s opening brief is due April 5, 2017.
State of Louisiana.
On June 26, 2014, the state of Louisiana filed a Petition for Damages against Molina Medicaid Solutions, Molina Healthcare, Inc., Unisys, 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 that, pursuant to a settlement with the state, this matter will be dismissed against Molina Medicaid Solutions with no liability.
Hospital Management Contract.
During the fourth quarter of 2015, we recorded a contract settlement charge of approximately
$15 million
as a result of our termination of a hospital management agreement.
States’ Budgets
From time to time the states in which our health plans operate may experience financial difficulties, which could lead to delays in premium payments. For example, the state of Illinois is operating without a budget for its current fiscal year. It is unclear when or if the state’s budget difficulties will be resolved. As of
December 31, 2016
, our Illinois health plan served approximately
195,000
members and recognized premium revenue of approximately
$601 million
for the year ended
December 31, 2016
. As of
February 24, 2017
, the state of Illinois owed us approximately
$68 million
for certain October, November and December 2016 premiums.
In another example, the Commonwealth of Puerto Rico’s fiscal plan, issued on October 14, 2016, reported that current revenues are insufficient to support existing current operations and debt service. While the Commonwealth reports that it will prioritize health care spending, it stresses the need to address the cap on federal matching funds it receives for its participation in the Medicaid program. Among the fiscal issues expected to further exacerbate the Commonwealth’s current debt crisis is the depletion of ACA funds, estimated to occur in the Commonwealth’s fiscal year 2018. As of
December 31, 2016
, our Puerto Rico health plan served approximately
330,000
members and recorded premium revenue of approximately
$726 million
for the year ended December 31, 2016.
As of
February 24, 2017
, the Commonwealth is current with its premium payments.
Operating Leases
We lease administrative and clinic facilities and certain equipment under non-cancelable operating leases expiring at various dates through 2027. Facility lease terms generally range from
five
to
10
years with
one
to
two
renewal options for extended terms. In most cases, we are required to make additional payments under facility operating leases for taxes, insurance and other operating expenses incurred during the lease period. Certain of our leases contain rent escalation clauses or lease incentives, including rent abatements and tenant improvement allowances. Rent escalation clauses and lease incentives are taken into account in determining total rent expense to be recognized during the lease term.
Future minimum lease payments by year and in the aggregate under operating leases and lease financing obligations consist of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Financing Obligations
|
|
Operating Leases
|
|
Total
|
|
(In millions)
|
2017
|
$
|
17
|
|
|
$
|
63
|
|
|
$
|
80
|
|
2018
|
17
|
|
|
57
|
|
|
74
|
|
2019
|
18
|
|
|
50
|
|
|
68
|
|
2020
|
19
|
|
|
33
|
|
|
52
|
|
2021
|
19
|
|
|
21
|
|
|
40
|
|
Thereafter
|
337
|
|
|
43
|
|
|
380
|
|
|
$
|
427
|
|
|
$
|
267
|
|
|
$
|
694
|
|
Rental expense related to operating leases amounted to
$64 million
,
$44 million
, and
$32 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively. The amounts reported in “Lease Financing Obligations” above represent our contractual lease commitments for the properties described in Note
12
, “
Debt
” under the subheading “Lease Financing Obligations.”
Molina Healthcare, Inc. 2016 Form 10-K | 104
Professional Liability Insurance
We carry medical professional liability insurance for health care services rendered in the primary care institutions that we manage. In addition, we also carry errors and omissions insurance for all Molina entities.
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.
Employment Agreements
In 2002, we entered into employment agreements with our Chief Executive Officer and Chief Financial Officer, which were further amended and restated in 2016. These amended and restated employment agreements had an initial
one
-year term, and are subject to automatic
one
-year extensions thereafter. Should the executives be terminated without cause or resign for good reason before a change of control, as defined, we will pay
400%
of the executive’s base salary then in effect and a prorated termination bonus (
150%
of base salary for the Chief Executive Officer and
125%
of base salary for the Chief Financial Officer), in addition to full vesting of equity compensation, and a cash payment for health and welfare benefits.
In 2013, we entered into employment agreements with our Chief Operating Officer, Chief Accounting Officer, and Chief Legal Officer. These agreements continue until terminated by us, or the executive resigns. If the executive’s employment is terminated by us without cause or the executive resigns for good reason, the executive will be entitled to receive
one
year’s base salary and termination bonus, as defined, full vesting of time-based equity compensation, and a cash payment for health and welfare benefits.
Payment of the severance benefits described above is contingent upon the executive’s signing a release agreement waiving claims against us. If the executives are terminated for cause, no further payments are due under the contracts.
20
.
Segment Information
We have
three
reportable segments. These segments consist of our Health Plans segment, which comprises the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment, which includes our behavioral health and social services subsidiary, Pathways.
Our reportable segments are consistent with how we currently manage our business and view the markets we serve.
The Health Plans segment consists of our health plans and our direct delivery business. Our health plans are operating segments that have been aggregated for reporting purposes because they share similar economic characteristics. The Molina Medicaid Solutions segment provides support to state government agencies in the administration of their Medicaid programs including business processing, information technology development, and administrative services.
The Other segment includes primarily our Pathways behavioral health and social services provider, and corporate amounts not allocated to other reportable segments.
Gross margin is the appropriate earnings measure for our reportable segments, based on how our chief operating decision maker currently reviews results, assesses performance, and allocates resources.
Gross margin for our Health Plans segment is referred to as “Medical margin,” and for our Molina Medicaid Solutions and Other segments, as “Service margin.” Medical margin represents the amount earned by the Health Plans segment after medical costs are deducted from premium revenue. The medical care ratio represents the amount of medical care costs as a percentage of premium revenue, and is one of the key metrics used to assess the performance of the Health Plans segment. Therefore, the underlying medical margin is the most important measure of earnings reviewed by the chief operating decision maker. The service margin is equal to service revenue minus cost of service revenue.
Molina Healthcare, Inc. 2016 Form 10-K | 105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Plans
|
|
Molina Medicaid Solutions
|
|
Other
|
|
Consolidated
|
|
|
(In millions)
|
2016
|
|
|
|
|
|
|
|
|
Total revenue
(1)
|
|
$
|
17,234
|
|
|
$
|
195
|
|
|
$
|
353
|
|
|
$
|
17,782
|
|
Gross margin
|
|
1,618
|
|
|
21
|
|
|
33
|
|
|
1,672
|
|
Depreciation and amortization
(2)
|
|
122
|
|
|
45
|
|
|
15
|
|
|
182
|
|
Goodwill, and intangible assets, net
|
|
513
|
|
|
72
|
|
|
175
|
|
|
760
|
|
Total assets
|
|
5,897
|
|
|
267
|
|
|
1,285
|
|
|
7,449
|
|
2015
|
|
|
|
|
|
|
|
|
Total revenue
(1)
|
|
13,917
|
|
|
195
|
|
|
66
|
|
|
14,178
|
|
Gross margin
|
|
1,447
|
|
|
55
|
|
|
5
|
|
|
1,507
|
|
Depreciation and amortization
(2)
|
|
95
|
|
|
25
|
|
|
6
|
|
|
126
|
|
Goodwill, and intangible assets, net
|
|
393
|
|
|
73
|
|
|
175
|
|
|
641
|
|
Total assets
|
|
4,707
|
|
|
213
|
|
|
1,656
|
|
|
6,576
|
|
2014
|
|
|
|
|
|
|
|
|
Total revenue
(1)
|
|
9,449
|
|
|
210
|
|
|
8
|
|
|
9,667
|
|
Gross margin
|
|
947
|
|
|
53
|
|
|
—
|
|
|
1,000
|
|
Depreciation and amortization
(2)
|
|
83
|
|
|
46
|
|
|
5
|
|
|
134
|
|
Goodwill, and intangible assets, net
|
|
286
|
|
|
75
|
|
|
—
|
|
|
361
|
|
Total assets
|
|
3,355
|
|
|
185
|
|
|
895
|
|
|
4,435
|
|
______________________
|
|
(1)
|
Total revenue consists primarily of premium revenue, premium tax revenue and health insurer fee revenue for the Health Plans segment, and service revenue for the Molina Medicaid Solutions and Other segments.
|
|
|
(2)
|
Depreciation and amortization reported in accompanying consolidated statements of cash flows.
|
The following table reconciles gross margin by segment to consolidated income before income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Gross margin:
|
|
|
|
|
|
Health Plans
|
$
|
1,618
|
|
|
$
|
1,447
|
|
|
$
|
947
|
|
Molina Medicaid Solutions
|
21
|
|
|
55
|
|
|
53
|
|
Other
|
33
|
|
|
5
|
|
|
—
|
|
Total gross margin
|
1,672
|
|
|
1,507
|
|
|
1,000
|
|
Add: other operating revenues
(1)
|
851
|
|
|
684
|
|
|
434
|
|
Less: other operating expenses
(2)
|
(2,217
|
)
|
|
(1,804
|
)
|
|
(1,241
|
)
|
Operating income
|
306
|
|
|
387
|
|
|
193
|
|
Other expenses, net
|
101
|
|
|
65
|
|
|
58
|
|
Income before income tax expense
|
$
|
205
|
|
|
$
|
322
|
|
|
$
|
135
|
|
______________________