Molina Healthcare Announces Second Quarter Results and Restructuring Plan

Molina Healthcare Announces Second Quarter Results and Restructuring Plan

Molina Healthcare, Inc. (NYSE: MOH):

• Net loss of $230 million for the quarter, or $4.10 per diluted share.
• Restructuring plan now underway is expected to reduce annualized run-rate expenses by $300 million to $400 million upon completion in 2018.
• $200 million total reduction to annualized run-rate expenses resulting from staff reductions expected to be achieved by the end of 2017 in time for full realization in 2018.
• Annualized salary eliminations of $55 million achieved so far in the third quarter of 2017.
• Direct delivery operations will be restructured during the second half of 2017.
• 2018 Marketplace participation to be terminated in Utah and Wisconsin; additional states in review.
• 2017 earnings per share guidance withdrawn.

Molina Healthcare, Inc. (NYSE: MOH) today reported its financial results for the second quarter of 2017.

“We are disappointed with our bottom-line results for this quarter and have taken aggressive and urgent steps to substantially improve our financial performance going forward,” said Joseph White, chief financial officer and interim president and chief executive officer of Molina Healthcare, Inc. “Following a thorough review of our business operations, we have begun to implement a Company-wide restructuring plan that we expect will reduce annualized run-rate expenses by between $300 million and $400 million by late 2018 when fully implemented, with approximately $200 million of these run-rate reductions expected to be achieved by the end of 2017 and in time for full realization in 2018. In the past, we have been focused on top line growth, often at the expense of bottom line results. While we expect to enjoy continued RFP and organic growth in our Medicaid managed care business, we are now intensively focused on improved operating performance and efficiency as the path to greater profitability and shareholder returns.”

Second Quarter 2017 Compared with Second Quarter 2016

Net loss per diluted share was $4.10 in the second quarter of 2017 compared with net income per diluted share of $0.58 reported for the second quarter of 2016. Loss before income tax benefit for the second quarter of 2017 was $314 million.

Certain significant items increased loss before income tax benefit in the second quarter of 2017 by approximately $330 million. Specifically:

• We recorded $72 million in non-cash impairment losses for goodwill and intangibles, primarily relating to our Pathways subsidiary. In the course of developing our restructuring and profitability improvement plan, we determined that future benefits to be derived from Pathways (including integration with our health plans) will be less than previously anticipated. While such impairment losses have a short-term impact on profitability, there is no impact to our cash flows. Pathways experienced operating losses of $8 million for the quarter ended June 30, 2017 and $12 million for the six months ended June 30, 2017.

• Medical care costs related to 2016 service dates were significantly in excess of what the Company usually experiences for out-of-period claims development, particularly at the Florida, Illinois, New Mexico, and Puerto Rico health plans. In total, we experienced out-of-period claims development that was approximately $85 million higher than expected at December 31, 2016.
• We recorded $44 million for Marketplace changes in estimates, including risk transfer and cost sharing subsidies, related to 2016 service dates. Liabilities for risk transfer payments and cost sharing subsidies that were estimated at December 31, 2016 were finalized during the second quarter of 2017.
• Loss before income tax benefit increased by $78 million as a result of an increase to the premium deficiency reserve established for the Marketplace program. The reserve, which was $22 million at March 31, 2017, increased to $100 million as of June 30, 2017. Based upon revenue and cost trends observed in the second quarter of 2017, we now believe that Marketplace performance in the second half of 2017 will fall substantially short of previous expectations. Marketplace performance has been most disappointing in Florida, Utah, Washington, and Wisconsin.
• We recorded $43 million in restructuring and separation costs in the second quarter of 2017 related primarily to contractually required termination benefits paid to our former chief executive officer and chief financial officer. Also included in these costs are consulting fees incurred for the development and implementation of our corporate restructuring initiatives.

In addition to the items noted above, ongoing poor performance at our Florida, Illinois, New Mexico and Puerto Rico health plans in 2017 all contributed to our disappointing financial performance in the second quarter of 2017.

The table below summarizes the impact of these significant items on the Company’s financial performance.

Income Tax (Benefit) Expense

The effective tax rate benefit for 2017 was less than the statutory tax rate benefit due to the relatively large amount of our reported expenses that are not deductible for tax purposes.

Restructuring and Profit Improvement Plan

As a result of our poor operating performance and catalyzed by our change in management, we accelerated the implementation of a comprehensive restructuring and profitability improvement plan (the Restructuring Plan). Under the Restructuring Plan, we are taking the following actions:

1. We are streamlining our organizational structure, including the elimination of redundant layers of management, the consolidation of regional support services, and other reductions to our workforce, to improve efficiency as well as the speed and quality of our decision-making.
2. We are re-designing core operating processes such as provider payment, utilization management, quality monitoring and improvement, and information technology to achieve more effective and cost efficient outcomes.
3. We are remediating high cost provider contracts and building around high quality, cost-effective networks.
4. We are restructuring our existing direct delivery operations.
5. We are reviewing our vendor base to ensure that we are partnering with the lowest-cost, most-effective vendors.
6. Throughout this process, we are taking precautions to ensure that our actions do not impede our ability to continue to deliver quality health care, retain existing managed care contracts, and to secure new managed care contracts.

In total, we estimate that the Restructuring Plan will reduce annualized run-rate expenses by approximately $300 million to $400 million upon its completion in late 2018. $200 million of these run-rate reductions, which are a result of staff reductions, will be in place by December 2017, and therefore will fully contribute to our 2018 results. Since the close of the second quarter, we have already achieved $55 million of our annualized run-rate reduction target as a result of staff reductions taken on July 27^th. All savings targets discussed in regards to the Restructuring Plan represent annualized run-rate savings that we expect to achieve during the year following the indicated implementation date. One-time costs associated with the Restructuring Plan are expected to exceed the benefits realized in 2017 due to the upfront payment of implementation costs and the delayed benefit of full savings until the beginning of 2018.

We estimate that total pre-tax costs associated with the Restructuring Plan will be approximately $130 million to $150 million for the second half of 2017, with an additional $40 million to be incurred in 2018.

As part of the Restructuring Plan, we are reducing our corporate and health plans workforce by approximately 10%, or 1,500 full-time-equivalent employees. This workforce rightsizing, which represents 7% of the total number of our employees, is expected to be completed by the end of 2017. Affected employees will be offered severance and outplacement assistance.

“This reduction in our workforce is a difficult, but necessary, step as we concentrate our efforts on achieving operational excellence and improved efficiency. By transforming the entire enterprise into a leaner, more streamlined organization, we can enhance our decision-making, improve our operating performance, and grow our margins,” said Mr. White.

Actions Taken to Remediate 2018 Marketplace Performance

In addition to the Restructuring Plan, we are taking these further steps to improve profitability in 2018:

1. We are exiting the Utah and Wisconsin ACA Marketplaces effective December 31, 2017. For the three months ended June 30, 2017, these two health plans reported a total of $127 million in Marketplace premium revenue (16% of consolidated Marketplace premium revenue), and a combined Marketplace medical care ratio of 128%.
2. In our remaining Marketplace plans, we are increasing 2018 premiums by 55%. The increase takes into account the absence of cost sharing reduction subsidies. Had we assumed that cost sharing reduction subsidies would be funded for 2018, the premium increase would have been 30%.
3. We are also reducing the scope of our 2018 participation in the Washington Marketplace.
4. We continue to closely monitor the current political and programmatic developments pertaining to our 2018 participation in other Marketplace states, and subject to those developments, will withdraw from 2018 participation as may be necessary.

Withdrawing 2017 Outlook

We are withdrawing our previously issued 2017 full-year earnings per diluted share and adjusted earnings per diluted share guidance. Among the reasons for withdrawing guidance are:

• Our results for the quarter ended June 30, 2017.
• Uncertain medical cost trends in the Florida, Illinois, New Mexico, and Puerto Rico health plans.
• Uncertainty around the funding of Marketplace cost sharing subsidies.
• Potential variability in the timing of benefits achieved and costs incurred as a result of the Restructuring Plan.

Update on Search for Permanent Chief Executive Officer

Our search for a permanent chief executive officer is well underway and we are encouraged by the response.

Conference Call

Management will host a conference call and webcast to discuss Molina Healthcare’s second quarter results at 5:00 p.m. Eastern time on Wednesday, August 2, 2017. The number to call for the interactive teleconference is (212) 231-2909. A telephonic replay of the conference call will be available from 7:00 p.m. Eastern time on Wednesday, August 2, 2017, through 6:00 p.m. Eastern Time on Thursday, August 3, 2017, by dialing (800) 633-8284 and entering confirmation number 21855049. A live audio broadcast of Molina Healthcare’s conference call will be available on our website, molinahealthcare.com. A 30-day online replay will be available approximately an hour following the conclusion of the live broadcast.

About Molina Healthcare

Molina Healthcare, Inc., a FORTUNE 500 company, provides managed health care services under the Medicaid and Medicare programs and through the state insurance marketplaces. Through our health plans operating in 12 states across the nation and in the Commonwealth of Puerto Rico, Molina currently serves approximately 4.7 million members. Dr. C. David Molina founded our company in 1980 to serve low-income families in Southern California. Today, we continue his mission of providing high quality and cost-effective health care to those who need it most. For more information about Molina Healthcare, please visit our website at molinahealthcare.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This earnings release contains “forward-looking statements” regarding our plans, expectations, and anticipated future events. Actual results could differ materially due to numerous known and unknown risks and uncertainties. Those known risks and uncertainties include, but are not limited to, the following:

• the success of the Restructuring Plan, including the timing of the benefits realized;
• the numerous political and market-based uncertainties associated with the Affordable Care Act (the “ACA”) or “Obamacare,” including any potential repeal and replacement of the law, amendment of the law, or move to state block grants for Medicaid;
• the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated with risk transfer requirements, the potential for disproportionate enrollment of higher acuity members, the withdrawal of cost sharing subsidies and/or premium tax credits, the adequacy of agreed rates, and potential disruption associated with market withdrawal;
• subsequent adjustments to reported premium revenue based upon subsequent developments or new information, including changes to estimated amounts payable or receivable related to Marketplace risk adjustment/risk transfer, risk corridors, and reinsurance;
• effective management of our medical costs;
• our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with seasonal flu patterns or other newly emergent diseases;
• significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria, including the payment of all amounts due to our Illinois health plan following the resolution of the Illinois budget impasse;
• the success of our efforts to retain existing government contracts, including those in Florida, Illinois, New Mexico, Puerto Rico, and Texas, and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states;
• any adverse impact resulting from the significant changes to our executive leadership team and the rightsizing of our workforce;
• the impact of our decision to exit the Utah and Wisconsin ACA Marketplace markets effective December 31, 2017;
• our ability to manage our operations, including maintaining and creating adequate internal systems and controls relating to authorizations, approvals, provider payments, and the overall success of our care management initiatives;
• our ability to consummate and realize benefits from acquisitions or divestitures;
• our receipt of adequate premium rates to support increasing pharmacy costs, including costs associated with specialty drugs and costs resulting from formulary changes that allow the option of higher-priced non-generic drugs;
• our ability to operate profitably in an environment where the trend in premium rate increases lags behind the trend in increasing medical costs;
• the interpretation and implementation of federal or state medical cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit sharing arrangements, and risk adjustment provisions;
• our estimates of amounts owed for such cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit-sharing arrangements, and risk adjustment provisions;
• the Medicaid expansion cost corridors in California, New Mexico, and Washington, and any other retroactive adjustment to revenue where methodologies and procedures are subject to interpretation or dependent upon information about the health status of participants other than Molina members;
• the interpretation and implementation of at-risk premium rules and state contract performance requirements regarding the achievement of certain quality measures, and our ability to recognize revenue amounts associated therewith;
• cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;
• the success of our health plan in Puerto Rico, including the resolution of the Puerto Rico debt crisis, payment of all amounts due under our Medicaid contract, the effect of the PROMESA law, and our efforts to better manage the health care costs of our Puerto Rico health plan;
• the success and renewal of our duals demonstration programs in California, Illinois, Michigan, Ohio, South Carolina, and Texas;
• the accurate estimation of incurred but not reported or paid medical costs across our health plans;
• efforts by states to recoup previously paid and recognized premium amounts;
• the continuation and renewal of the government contracts of our health plans, Molina Medicaid Solutions, and Pathways, and the terms under which such contracts are renewed;
• complications, member confusion, or enrollment backlogs related to the annual renewal of Medicaid coverage;
• government audits and reviews, or potential investigations, and any fine, sanction, enrollment freeze, monitoring program, or premium recovery that may result therefrom, including any potential demand by the state of New Mexico to recover purportedly underpaid premium taxes;
• changes with respect to our provider contracts and the loss of providers;
• approval by state regulators of dividends and distributions by our health plan subsidiaries;
• changes in funding under our contracts as a result of regulatory changes, programmatic adjustments, or other reforms;
• high dollar claims related to catastrophic illness;
• the favorable resolution of litigation, arbitration, or administrative proceedings;
• the relatively small number of states in which we operate health plans;
• the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity and meet our liquidity needs, including the interest expense and other costs associated with such financing;
• our failure to comply with the financial or other covenants in our credit agreement or the indentures governing our outstanding notes;
• the sufficiency of our funds on hand to pay the amounts due upon conversion or maturity of our outstanding notes;
• the failure of a state in which we operate to renew its federal Medicaid waiver;
• changes generally affecting the managed care or Medicaid management information systems industries;
• increases in government surcharges, taxes, and assessments, including but not limited to the deductibility of certain compensation costs;
• newly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated public alarm;
• increasing competition and consolidation in the Medicaid industry;

and numerous other risk factors, including those discussed in our periodic reports and filings with the Securities and Exchange Commission. These reports can be accessed under the investor relations tab of our website or on the SEC’s website at sec.gov . Given these risks and uncertainties, we can give no assurances that our forward-looking statements will prove to be accurate, or that any other results or events projected or contemplated by our forward-looking statements will in fact occur, and we caution investors not to place undue reliance on these statements. All forward-looking statements in this release represent our judgment as of August 2, 2017, and we disclaim any obligation to update any forward-looking statements to conform the statement to actual results or changes in our expectations.