Molina Healthcare Inc (MOH)

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Molina Healthcare (MOH)

Q3 2012 Earnings Call

October 23, 2012 5:00 pm ET

Executives

Joseph Mario Molina - Chairman, Chief Executive Officer and President

John C. Molina - Chief Financial Officer, Executive Vice President of Financial Affairs, Treasurer, Director and Member of Compliance Committee

Joseph W. White - Chief Accounting Officer

Terry P. Bayer - Chief Operating Officer

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

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

Melissa McGinnis - Morgan Stanley, Research Division

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

Carl R. McDonald - Citigroup Inc, Research Division

Scott J. Green - BofA Merrill Lynch, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Presentation

Operator

Welcome to the Molina Healthcare Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, October 23, 2012. And I would now like to turn the conference over to Mr. Juan José Orellana, VP of Investor Relations. Please go ahead, sir.

Joseph Mario Molina

Thank you, Chantal. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the third quarter ended September 30, 2012. The company's earnings release reporting its results was issued today after the market closed and is now posted for viewing on our company website.

Participating for Molina today will be Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer.

After the completion of our prepared remarks, we will open the call to take your questions. [Operator Instructions]

Our comments today contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act regarding our Texas cost-containment efforts and year-end profitability, our Ohio Duals expansion, our transition of ABD members into managed care at our California, Washington and Texas health plants, our MMS operations and other matters. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report for fiscal year 2011, our Form 10-Q quarterly reports and our Form 8-K current reports. These reports can be accessed under the Investor Relations tab of our company's website or on the SEC's website.

All forward-looking statements made during today's call represent our judgment as of October 23, 2012, and we disclaim any obligation to update such statements.

This call is being recorded, and a 30-day replay of the conference call will be available over the Internet through the company's website at molinahealthcare.com.

I would now like to turn the call over to Dr. Mario Molina.

Joseph Mario Molina

Thank you, Juan José. Hello, everyone.

Today, we reported earnings of $3 million or $0.07 per diluted share for the third quarter of 2012. We are pleased with the progress we made during the third quarter. Both revenue and enrollment were strong, which bodes well for our company's future as we improve our margins. More importantly, in Texas, we saw incremental improvement this quarter as the implementation of our utilization and unit cost initiatives gained momentum. We are seeing continued stability in our Molina Medicaid Solutions business, and it is making the kind of contribution we expected when we made the acquisition.

So let's start with Texas. Since reporting our second quarter results, we have made considerable progress toward achieving our objective of reaching a breakeven run rate by the end of the year. Our medical care ratio in Texas decreased from 109% in the second quarter to 90% in the third quarter. This improvement is even better than the medical care ratio we reported in Texas for the second -- third quarter of 2011. However, we are not yet out of the woods. There is still a considerable amount of work to be done and we must remember that this early success does not constitute trend.

The improvement in our Texas medical care ratio was due to the implementation of initiatives aimed at reducing utilization and unit costs. As Terry Bayer outlined at our Investor Day in September, this included changes to contracts with providers to lower unit costs and the implementation of state-required changes to fee schedules. In addition, a blended 4% premium rate increase that went into effect on September 1 also contributed to the improvement.

Ohio was also in the headlines this past quarter. Molina Healthcare Ohio was selected to participate in Ohio's Integrated Care Delivery System for dual eligibles. As a reminder, we were awarded the maximum number of regions allowed per health plan and the awarded regions are within our existing service areas. This service area overlap is important during a transition from fee-for-service to managed care. If we assume that premium rates are set adequately to cover medical costs, then having an established provider network and experience in a given market can ease the transition to managed care for members.

In addition to Texas, Washington and California are the 2 other states where we continue to transition thousands of ABD members from fee-for-service to managed care. In California, our health plan has experienced a considerable change in our member mix, adding about 20,000 ABD members over the past year and nearly doubling our ABD enrollment. Accordingly, our medical care ratio also increased during the same period because these members require more medical care. The California Department of Health Care Services recently asked for health plan input in a review of premium rates for ABD members. Our California health plan has already provided input in support of that review. In addition, we will be exiting an area in Northern Los Angeles County where there is only 1 hospital and costs are extremely high. We expect this will reduce our enrollment by about 6,000 members, but lead to lower medical costs.

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