FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, and results of operations within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Securities Exchange Act. Many of the forward-looking statements are located under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "guidance," "future," "anticipates," "believes," "estimates," "expects," "growth," "intends," "plans," "predicts," "projects," "will," "would," "could," "can," "may," and similar terms. Readers are cautioned not to place undue reliance on any forward-looking statements, as forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly due to numerous known and unknown risks and uncertainties. Those known risks and uncertainties include, but are not limited to, the risk factors identified in the section of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 , Current Reports on Form 8-K, and in this Form 10-Q, titled "Risk Factors," including without limitation the following: •the impact of the COVID-19 pandemic on our operations and financial results; •the numerous political, judicial, and market-based uncertainties associated with the Affordable Care Act (the "ACA") or "Obamacare," including the ultimate outcome of theTexas et al. v.U.S. et al. matter now pending before theU.S. Supreme Court ; •significant budget pressures on state governments from diminished tax revenues and their efforts to curtail current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria; •our expected exit fromPuerto Rico , including the successful transfer of our members to alternative health plans, the effective run-out of claims, and the return of our capital; •the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated with the elasticity of demand for our products based on our pricing, risk adjustment estimates and results, the potential for disproportionate enrollment of higher acuity members, and the discontinuation of premium tax credits; •the uncertainties associated with theNovember 2020 Presidential and Congressional election; •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; •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 general liquidity needs; •our ability to consummate, integrate, and realize benefits from acquisitions, including the announced acquisitions of Magellan Complete Care and of Passport; •effective management of our medical costs; •our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with the flu or coronavirus; •the full reimbursement of the ACA health insurer fee, or HIF; •the success of our efforts to retain existing or awarded government contracts, and the success of any requests for proposal, including our contracts inOhio ,California ,Texas , andKentucky ; •the 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 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 and requirements;Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 24 -------------------------------------------------------------------------------- Table of Contents •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 medical cost corridor, 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, ransomware attacks, or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information; •the success and renewal of our duals demonstration programs inCalifornia ,Illinois ,Michigan ,Ohio ,South Carolina , andTexas ; •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; •complications, member confusion, eligibility re-determinations, or enrollment backlogs related to the renewal of Medicaid coverage, as well as the chilling effect of the new so-called public charge rule; •government audits, reviews, comment letters, or potential investigations, and any fine, sanction, enrollment freeze, monitoring program, or premium recovery that may result therefrom; •changes with respect to our provider contracts and the loss of providers; •approval by state regulators of dividends and distributions by our health plan subsidiaries; •changes in funding under our contracts as a result of regulatory changes, programmatic adjustments, or other reforms; •high dollar claims related to catastrophic illness; •the favorable resolution of litigation, arbitration, or administrative proceedings, including litigation involving the ACA to which we are not a direct party; •the relatively small number of states in which we operate health plans, including the greater scale and revenues of ourCalifornia ,Ohio ,Texas , andWashington health plans; •the failure to comply with the financial or other covenants in the Credit Agreement or the indentures governing our outstanding notes; •the sufficiency of funds on hand to pay the amounts due upon 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 industry; •increases in government surcharges, taxes, and assessments; •the unexpected loss of the leadership of one or more of our senior executives; and •increasing competition and consolidation in the Medicaid industry. Each of the terms "Molina Healthcare, Inc. " "Molina Healthcare ," "Company," "we," "our," and "us," as used herein, refers collectively toMolina Healthcare, Inc. and its wholly owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Readers should refer to the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q, Current Reports on Form 8-K, the Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 , and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurance that any results or events projected or contemplated by our forward-looking statements will in fact occur. This Quarterly Report on Form 10-Q and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report, and the audited financial statements and Management's Discussion and Analysis appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 25 -------------------------------------------------------------------------------- Table of Contents OVERVIEWMolina Healthcare, Inc. , a FORTUNE 500 company, provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the "Marketplace"). Through our locally operated health plans in 14 states and theCommonwealth of Puerto Rico , we served approximately 3.6 million members as ofJune 30, 2020 . The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization ("HMO"). SECOND QUARTER 2020 HIGHLIGHTS We reported net income per diluted share of$4.65 for the second quarter of 2020, with net income of$276 million . This result was supported by: •Premium revenue of$4.4 billion , which increased 8.0%. •A consolidated medical care ratio ("MCR") of 82.3%, which decreased by 330 basis points compared with 85.6% in the second quarter of 2019. •A general and administrative expense ("G&A") ratio of 7.5%, which was 30 basis points lower than 2019. •An after-tax margin of 6.0%, which was higher than our expectations. The COVID-19 pandemic impacted many aspects of our quarterly results. Some of these impacts increased earnings, while others served to decrease earnings. Our medical margin in the second quarter of 2020 was impacted by two significant and conflicting impacts related to the COVID-19 pandemic. On the one hand, we had lower than expected medical costs due to COVID-related curtailment of utilization, a phenomenon that may or may not recur during the balance of the year. On the other hand, we had lower than expected Medicaid revenue related to retroactively applicable Medicaid premium refunds payable in a number of our states. We estimate that, in combined effect, all the COVID-related impacts resulted in an increase in net income in a range of approximately$65 million to$100 million , or$1.10 to$1.65 in net income per diluted share. Also impacting our second quarter results was the performance of our Marketplace business, where results were slightly lower than expected due to risk scores that were not commensurate with the higher acuity of some new members we now serve. In summary, the core earnings and growth trajectory of our business have not been disrupted by the short-term impacts of COVID. We continue to perform well across the many fundamentals of managed care, which has been our hallmark, and we are continuing to increase our revenues as a result of our focus on top-line growth. Balance Sheet OnJune 2, 2020 , we completed the private offering of$800 million aggregate principal amount of senior notes (the "4.375% Notes") dueJune 15, 2028 . The proceeds from the 4.375% Notes offering was used to repay$600 million principal amount outstanding under the term loan facility of the prior credit agreement, and for general corporate purposes. In addition, onJune 8, 2020 , we entered into a$1 billion credit agreement (the "Credit Agreement") that replaced our prior credit agreement. The terms of the Credit Agreement are substantially similar to the terms of the prior credit agreement, except as described in Notes to Consolidated Financial Statements, Note 7, "Debt."Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 26 --------------------------------------------------------------------------------
Table of Contents FINANCIAL SUMMARY Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (Dollars in millions, except per-share amounts) Premium revenue$ 4,372 $
4,049
157 110 307 248 Health insurer fees reimbursed 71 - 137 - Investment income and other revenue 18 34 47 63 Medical care costs$ 3,598 $
3,466
345 328 662 630 Premium tax expenses 157 110 307 248 Health insurer fees 71 - 139 - Operating income $ 424$ 265 $ 698 $ 545 Interest expense 24 22 45 45 Other expense (income), net 5 (14) 5 (17) Income before income tax expense 395 257 648 517 Income tax expense 119 61 194 123 Net income 276 196 454 394 Net income per share - Diluted$ 4.65 $
3.06
Operating Statistics: Ending total membership 3,555,000 3,370,000 3,555,000 3,370,000 MCR (1) 82.3 % 85.6 % 84.3 % 85.5 % G&A ratio (2) 7.5 % 7.8 % 7.2 % 7.6 % Premium tax ratio (1) 3.5 % 2.6 % 3.4 % 3.0 % Effective income tax rate 30.0 % 24.0 % 29.9 % 23.9 % After-tax margin (2) 6.0 % 4.7 % 5.0 % 4.7 % ________________________ (1) MCR represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium tax expenses as a percentage of premium revenue plus premium tax revenue. (2) G&A ratio represents general and administrative expenses as a percentage of total revenue. After-tax margin represents net income as a percentage of total revenue. CONSOLIDATED RESULTS NET INCOME AND OPERATING INCOME Net income in the second quarter of 2020 amounted to$276 million , or$4.65 per diluted share, compared with$196 million , or$3.06 per diluted share, in the second quarter of 2019. Operating income of$424 million in the second quarter of 2020, was higher compared with$265 million in the second quarter of 2019. Net income in the six months endedJune 30, 2020 , amounted to$454 million , or$7.54 per diluted share, compared with$394 million , or$6.04 per diluted share, in the six months endedJune 30, 2019 . Operating income of$698 million in the six months endedJune 30, 2020 , was higher compared with$545 million in the six months endedJune 30, 2019 . The improvement in operating income for both periods was mainly due to a reduction in the MCR. Net income per share in the second quarter and six months endedJune 30, 2020 , was favorably impacted by the reduction in common shares outstanding as a result of our share repurchase program that began in late 2019 and concluded in the first quarter of 2020. See further discussion in "Liquidity and Financial Condition," below. Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 27 -------------------------------------------------------------------------------- Table of Contents PREMIUM REVENUE Premium revenue increased$323 million in the second quarter of 2020, when compared with the second quarter of 2019, primarily due to increases in the Medicaid and Medicare programs, resulting mainly from an increase in member months. The increase was net of COVID-related premium refunds we expect to pay in certain markets. Premium revenue increased$675 million in the six months endedJune 30, 2020 , when compared with the six months endedJune 30, 2019 , primarily due to increases in the Medicaid and Medicare programs. MEDICAL CARE RATIO The consolidated MCR for the second quarter of 2020 decreased to 82.3%, compared to 85.6% for the second quarter of 2019, reflecting the impact of reduced demand for medical services across all programs due to the COVID-19 pandemic, partially offset by COVID-related premium refunds and related actions, and the impact of lower premiums in the Marketplace program. In the second quarter of 2020, the lower medical costs and the retroactive rate refunds combined reduced our reported MCR by an estimated 300 to 400 basis points. The consolidated MCR for the six months endedJune 30, 2020 , decreased to 84.3%, compared to 85.5% for the six months endedJune 30, 2019 . Reserve development for the first six months of 2020 was not material. The comparable period in the prior year was positively impacted by 110 basis points of favorable reserve development, primarily in the Medicaid program. PREMIUM TAX REVENUE AND EXPENSES The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue) was 3.5% in the second quarter of 2020, compared with 2.6% the second quarter of 2019; and 3.4% compared with 3.0% for the six months endedJune 30, 2020 and 2019, respectively. The current year ratio increases are mainly due to the state ofIllinois' implementation of a managed care organization provider assessment in the third quarter of 2019. INVESTMENT INCOME AND OTHER REVENUE Investment income and other revenue decreased to$18 million in the second quarter of 2020, compared with$34 million in the second quarter of 2019, and decreased to$47 million in the six months endedJune 30, 2020 , compared with$63 million in the six months endedJune 30, 2019 . We expect investment income to decline in 2020 compared with 2019, due to the low interest rate environment. G&A EXPENSES The G&A expense ratio decreased to 7.5% in the second quarter of 2020, from 7.8% in the second quarter of 2019, and decreased to 7.2% in the six months endedJune 30, 2020 , compared with the 7.6% in the six months endedJune 30, 2019 . These decreases were mainly due to increased revenues. The second quarter and six months endedJune 30, 2020 also reflect approximately$25 million and$31 million , respectively, of incremental expense associated with a variety of new COVID-related operational protocols, technology implementations, and benefits for our employees. HEALTH INSURER FEES ("HIF") In the second quarter of 2020 and the six months endedJune 30, 2020 , HIF expense amounted to$71 million and$139 million , respectively, and HIF reimbursements amounted to$71 million and$137 million , respectively. Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. The HIF is reinstated in 2020, but the Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020. INTEREST EXPENSE Interest expense increased to$24 million in the second quarter of 2020, compared with$22 million in the second quarter of 2019. Additional interest expense relating to the 4.375% Notes issued in the second quarter of 2020, was partially offset by the decrease in interest expense resulting from the settlement of the convertible senior notes. Interest expense was$45 million in the six months endedJune 30, 2020 , and was unchanged compared with the six months endedJune 30, 2019 . As further described below in "Liquidity," a portion of the proceeds from the 4.375% Notes offering was used to repay$600 million principal amount outstanding under the term loan facility of the prior credit agreement. See further discussion in Notes to Consolidated Financial Statements, Note 7, "Debt." Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 28 -------------------------------------------------------------------------------- Table of Contents OTHER EXPENSE (INCOME), NET In the second quarter and six months endedJune 30, 2020 , we recognized losses on debt repayment of$5 million , in connection with repayment of our term loan facility and other financing transactions. In the second quarter and six months endedJune 30, 2019 , we recognized gains on debt repayment of$14 million and$17 million , respectively, in connection with convertible senior notes repayment transactions. INCOME TAXES Income tax expense amounted to$119 million in the second quarter of 2020, or 30.0% of pretax income, compared with income tax expense of$61 million , or 24.0% of pretax income in the second quarter of 2019. Income tax expense amounted to$194 million in the six months endedJune 30, 2020 , or 29.9% of pretax income, compared with income tax expense of$123 million , or 23.9% of pretax income in the six months endedJune 30, 2019 . The effective tax rate is higher in 2020 due to higher nondeductible expenses in 2020, primarily related to the nondeductible HIF. The HIF was not applicable in 2019 due to the moratorium as noted above. REPORTABLE SEGMENTS We currently have two reportable segments: the Health Plans segment and the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve. HOW WE ASSESS PERFORMANCE We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid agencies and the federal government. The key metrics used to assess the performance of our Health Plans segment are premium revenue, margin and MCR. MCR represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying margin, or the amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most important measure of earnings reviewed by management. Margin for our Health Plans segment is referred to as "Medical Margin." Medical Margin amounted to$774 million in the second quarter of 2020, and$583 million in the second quarter of 2019. Medical Margin amounted to$1,362 million in the six months endedJune 30, 2020 , and$1,164 million in the six months endedJune 30, 2019 . Management's discussion and analysis of the changes in the individual components of Medical Margin follows. See Notes to Consolidated Financial Statements, Note 9, "Segments," for more information on our reportable segments. HEALTH PLANS The Health Plans segment consists of health plans operating in 14 states and theCommonwealth of Puerto Rico . As ofJune 30, 2020 , these health plans served approximately 3.6 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies. TRENDS AND UNCERTAINTIES COVID-19 Pandemic As the COVID-19 pandemic continues to evolve, its ultimate impact to our business, results of operations, financial condition and cash flows is uncertain and difficult to predict. Specific trends and uncertainties related to our Health Plans segment follow. Federal Economic Stabilization Programs As a result of the pandemic, various stabilization programs were enacted beginning inMarch 2020 , which may impact our business directly or indirectly, including the following: Phase 1 - Coronavirus Preparedness and Response Supplemental Appropriations Act. Enacted onMarch 6, 2020 , this legislation provided$8.3 billion in COVID-19 response funding for developing a vaccine and preventing further spread of the virus. Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 29 -------------------------------------------------------------------------------- Table of Contents Phase 2 - Families First Coronavirus Response Act. Enacted onMarch 18, 2020 , this legislation provided$100 billion in worker assistance, temporarily increased each qualifying state and territory's federal medical assistance percentage ("FMAP") by 6.2% beginningJanuary 1, 2020 , and waived cost sharing for COVID-19 testing. The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state's FMAP. Phase 3 - Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Enacted onMarch 27, 2020 , the CARES Act provided an estimated$2 trillion to fight the COVID-19 pandemic and stimulate theU.S. economy. This assistance included loans and support to major industries including airlines and small businesses, direct payments to individuals and families, and$175 billion in relief funds to hospitals and other healthcare providers. Phase 3b - Paycheck Protection Program and Health Care Enhancement Act. Enacted onApril 24, 2020 , this legislation provided$310 billion for the depleted Paycheck Protection Program, and additional funding for hospitals and testing. The Phase 4 stimulus package is currently under consideration byCongress . Due to the uncertainty as to the duration and breadth of the COVID-19 pandemic, we are unable to reasonably estimate the ultimate impact of the economic stabilization programs to our business, financial condition, and operating results at this time. Health Plan Operations The pandemic has impacted our business, and we currently expect it to further impact our business in the following areas: Member Enrollment. In the second quarter of 2020, we enrolled 151,000 additional members, primarily in the Medicaid program, and mainly due to the suspension of member redeterminations. As ofJune 30, 2020 , we believe that newly unemployed individuals have not yet enrolled in Medicaid managed care in material numbers. While Medicaid eligibility and enrollment are likely to increase due to increased unemployment, it remains unclear how high the membership peak will be, how quickly it will be attained, how quickly it will fall as the economy recovers, and where it will ultimately settle. Therefore, we are currently unable to predict the timing or amount of the expected increases in enrollment. Increased membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs. We believe that we have the scalability necessary to serve the wave of new membership enrollment, and be an able partner to our state customers. Demand for Healthcare Services. The pandemic, along with the related quarantine and social distancing measures, has reduced demand for certain routine and non-critical medical services, while at the same time increased demand for other medical services, such as COVID-19 testing and emergency services. Early in the second quarter, we experienced significantly lower utilization in a variety of cost categories, representing approximately two-thirds of our total spend, with utilization levels increasing slowly as the quarter progressed. By the end of the quarter, utilization in these categories was still approximately 10% percent lower than we would have normally expected. The medical cost categories most impacted were elective surgeries, services in ambulatory settings, ER visits, behavioral services and wellness and preventive services. We also have incurred the direct costs to care for COVID patients, with just over 4,100 hospitalizations, which represents an average in-patient episode cost of$9,000 , plus the cost of outpatient and other professional services. The cost per COVID episode varies widely depending on the acuity of the patient. Since our book of business is heavily weighted towards Medicaid; the effect on us of elective procedure curtailment is therefore less pronounced. Medicaid Premium Actions. Due to the reduced demand for medical services described above, the level of utilization that was expected when capitation rates were developed has not occurred. Consequently, various states are implementing or proposing temporary premium rate refunds, profit corridors, and related actions in response to the reduced demand for medical services stemming from COVID-19, which are resulting in a reduction of our medical margin. In some cases, these premium refunds and related actions are retroactive to earlier periods in 2020, or as early as the beginning of the states' fiscal years in 2019. We have accrued approximately$75 million in the second quarter of 2020 for certain of these retroactive premium refunds and related actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. There is potential for additional near-term premium actions, however, these proposals have not yet been finalized or enacted, the outcomes are subject to significant uncertainties, and there are still wide variations in the formulas and methodologies to be potentially employed. Due to these uncertainties, the probability and ultimate impact of the changes cannot be reasonably estimated at this time. We do not expect the uncertainties related to these proposals to become known until the third or fourth quarter of 2020. The facts for one or more of these pending matters could subsequently change as a result Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 30 -------------------------------------------------------------------------------- Table of Contents of further developments, and the ultimate outcome could differ materially from our estimates, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows. Capital and Financial Resources. Refer to "Liquidity and Financial Condition" below for a discussion of our capital and financial resources. We continue to monitor and assess the estimated operating and financial impact of the COVID-19 pandemic. As the pandemic evolves, we continue to process, assemble, and assess utilization information. We believe that our cash resources, borrowing capacity available under the Credit Agreement, and cash flow generated from operations will be sufficient to withstand the financial impact of the pandemic, and will enable us to continue to support our operations, regulatory requirements, debt repayment obligations, and capital expenditures for the foreseeable future. Affordable Care Act InDecember 2018 , in a case brought by the state ofTexas and nineteen other states, a federal judge inTexas held that the ACA's individual mandate is unconstitutional. He further held that since the individual mandate is inseverable from the entire body of the ACA, the entire ACA is unconstitutional. The effect of his ruling was stayed pending the appeal of the ruling to theFifth Circuit Court of Appeals . InDecember 2019 , a three-judge panel of theFifth Circuit Court of Appeal , in a two to one decision, affirmed the District Court's ruling that the individual mandate is unconstitutional, but remanded the case back to the District Court for additional analysis and findings regarding severability and the consideration of additional arguments.The U.S. Supreme Court has accepted the appeal of theFifth Circuit Court's decision. TheSupreme Court's decision is expected byJune 2021 . The ACA remains in effect until judicial review of the decision is concluded. Any final, non-appealable determination that the ACA is unconstitutional could have a material adverse effect on our business, financial condition, cash flows, or results of operations. As ofJune 30, 2020 , we served a significant number of members enrolled in programs created by the ACA, including approximately 669,000 Medicaid Expansion members and 325,000 Marketplace members. In the six months endedJune 30, 2020 , premium revenue associated with these members amounted to$2.4 billion , and contributed Medical Margin of$477 million . Other Recent DevelopmentsNew York . OnJuly 1, 2020 , we completed the acquisition of certain assets ofYourCare Health Plan, Inc. The purchase price of$42 million was funded with cash on hand.Kentucky . InMay 2020 , ourKentucky health plan was selected as an awardee pursuant to the statewide Medicaid managed care RFP issued by theKentucky Cabinet for Health andFamily Services ,Department for Medicaid Services . The contract is expected to begin onJanuary 1, 2021 , and runs throughDecember 31, 2024 , with six additional two-year renewal options. In addition, onJuly 17, 2020 , we entered into a definitive agreement to acquire certain assets of Passport Health Plan inKentucky . The purchase price for the transaction is approximately$20 million , plus contingent consideration that is payable in 2021 based on ourKentucky health plan's open enrollment results for the 2021 plan year. We intend to fund this purchase with cash on hand. The acquisition of Passport allows us to enhance operational readiness and promote continuity of care for members in advance of our new contract award in the Kentucky Medicaid market. We believe the anticipated reduction in health plan startup costs and the positive margin impact from incremental revenue will allow us to recover the purchase price from positive cash flow within the first year following the acquisition. The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close before the end of 2020. Acquisition of Magellan Complete Care. OnApril 30, 2020 , we entered into a definitive agreement to acquire the Magellan Complete Care ("MCC") line of business of Magellan Health, Inc. Net of certain tax benefits, the purchase price for the transaction is approximately$820 million , which we intend to fund with cash on hand. MCC is a managed care organization serving members in six states, including Medicaid members inArizona and statewide inVirginia , and Integrated Acute Care members inFlorida . Through itsSenior Whole Health branded plans, MCC provides fully integrated plans for Medicaid and Medicare dual beneficiaries inMassachusetts , as well as Managed Long Term Care inNew York . MCC also provides consultative services to participants who self-direct their care throughWisconsin's long-term services and supports ("LTSS") program. As ofDecember 31, 2019 , MCC served approximately 155,000 members in managed care plans and provided services to 25,000 LTSS program participants inWisconsin , with full year 2019 revenues over$2.7 billion . Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 31 -------------------------------------------------------------------------------- Table of Contents The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close by the first quarter of 2021. In connection with this transaction, Magellan Health, Inc. has agreed to provide certain transition services following the closing. Marketplace Risk Corridor Ruling. OnApril 27, 2020 , theUnited States Supreme Court issued its opinion in Maine Community Health Options v.United States . TheSupreme Court held that §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute, that such payment obligations survivedCongress' appropriations riders, and that impacted insurers may sue the federal government in theU.S. Court of Federal Claims to recover damages for breach of that obligation. OnJune 18, 2020 , the Claims Court granted us judgment in the amount of$128.1 million for our 2014, 2015, and 2016 Marketplace risk corridor claims. This favorable judgment does not create additional minimum MLR rebates. We had not recognized the judgment as ofJune 30, 2020 , because the timing of collection of the judgment award is uncertain.Illinois . InMarch 2020 , we terminated our agreement to acquire all of the capital stock ofNextLevel Health Partners, Inc. due to the seller's stated unwillingness to close pursuant to the terms of the acquisition agreement.Puerto Rico . We are exitingPuerto Rico's Medicaid program when our current contract expires inOctober 2020 . We will work closely with the regulatory authorities and the provider community in a manner designed to ensure that our members inPuerto Rico are cared for and have reliable continuity of care. Update on Status of Significant Medicaid ContractsCalifornia . Our managed care contracts with theCalifornia Department of Health Care Services ("DHCS") cover six regions in central and southernCalifornia (including theLos Angeles region covered under a separate subcontract withHealth Net, LLC ). These contracts are effective throughDecember 31, 2020 , which we expect to be renewed annually until the effectiveness of new forms of contract following RFP awards. DHCS has publicly indicated it expects to release the final Medicaid RFP in 2021, for implementation inJanuary 2024 .Ohio . Our managed care contract with theOhio Department of Medicaid ("ODM") covers the entire state ofOhio , and is effective throughJuly 1, 2021 . In early 2019, the governor ofOhio asked ODM to initiate a process to re-procure the Ohio Medicaid program related to this contract. The re-procurement of theOhio Medicaid program is currently projected to be released before the end of 2020, although ODM has not committed to or confirmed a specific timeline at this time.Texas . OnMarch 25, 2020 , theTexas Health and Human Services Commission ("HHSC"), notified ourTexas health plan that HHSC had upheld our protest and had canceled all previously awarded contracts associated with the re-procurement awards announced inOctober 2019 for the ABD program (known inTexas as "STAR+PLUS"). In addition, HHSC canceled the pending re-procurement associated with the TANF and CHIP programs (known inTexas as "STAR/CHIP"). HHSC further indicated that it was deliberating next steps with respect to both re-procurements. We do not expect the HHSC to re-issue the RFPs in the near future. Update on Status of MMP Contracts Our currentMichigan ,South Carolina and Texas MMP contracts are active throughDecember 31, 2020 . These contracts represented aggregate revenues of approximately$398 million in six months endedJune 30, 2020 . The current status of these contracts is as follows:Michigan . The state has filed an extension request with theCenters for Medicare & Medicaid Services ("CMS"), which is under review. We expect the extension to be completed in two phases: a one-year extension throughDecember 31, 2021 ; and a two-year extension throughDecember 31, 2023 .South Carolina . CMS has granted a three-year extension through 2023; the contract is pending execution.Texas . A three-year extension amendment, throughDecember 31, 2023 , is under development by CMS and HHSC. For a discussion of additional Health Plans segment trends, uncertainties and other developments, refer to our 2019 Annual Report on Form 10-K, "Item 1. Business-Our Business," and "-Legislative and Political Environment." Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 32 -------------------------------------------------------------------------------- Table of Contents MEMBERSHIP The following tables set forth our Health Plans segment membership as of the dates indicated: June 30, December 31, June 30, 2020 2019 2019 Ending Membership by Government Program: Medicaid 3,122,000 2,956,000 2,962,000 Medicare 108,000 101,000 100,000 Marketplace 325,000 274,000 308,000 Total 3,555,000 3,331,000 3,370,000 Ending Membership by Health Plan: California 572,000 565,000 590,000 Florida 131,000 132,000 142,000 Illinois 242,000 224,000 221,000 Michigan 377,000 362,000 360,000 Ohio 329,000 288,000 297,000 Puerto Rico 167,000 176,000 200,000 South Carolina 145,000 131,000 130,000 Texas 352,000 341,000 360,000 Washington 913,000 832,000 811,000 Other (1) 327,000 280,000 259,000 Total 3,555,000 3,331,000 3,370,000 _________________________
(1)"Other" includes the
FINANCIAL PERFORMANCE The tables in the section below summarize premium revenue, Medical Margin, and MCR by state health plan and by government program for the periods indicated (dollars in millions): HEALTH PLANS Three Months Ended June 30, 2020 2019 Medical Medical Premium Revenue Margin MCR Premium Revenue Margin MCR California $ 559$ 111 80.2 % $ 560$ 110 80.4 % Florida 162 25 85.0 176 26 85.7 Illinois 306 50 83.6 242 27 89.0 Michigan 415 106 74.4 413 75 81.8 Ohio 751 119 84.2 654 82 87.3 Puerto Rico 122 25 79.7 122 13 89.2 South Carolina 157 23 85.4 140 15 89.0 Texas 731 83 88.6 765 97 87.3 Washington 775 137 82.2 662 92 86.1 Other (1) 394 95 76.0 315 46 85.5 Total$ 4,372 $ 774 82.3 %$ 4,049 $ 583 85.6 % Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 33
-------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2020 2019 Premium Revenue Medical Margin MCR Premium Revenue Medical Margin MCR California$ 1,110 $ 196 82.3 %$ 1,115 $ 184 83.5 % Florida 316 55 82.8 399 96 76.0 Illinois 614 84 86.4 469 69 85.2 Michigan 826 180 78.2 818 149 81.8 Ohio 1,471 202 86.3 1,274 150 88.2 Puerto Rico 227 23 89.8 224 25 88.7 South Carolina 314 42 86.6 276 36 87.1 Texas 1,474 174 88.1 1,512 203 86.6 Washington 1,548 250 83.8 1,323 138 89.5 Other (1) 776 156 79.9 591 114 80.7 Total$ 8,676 $ 1,362 84.3 %$ 8,001 $ 1,164 85.5 % __________________ (1)"Other" includes theIdaho ,Mississippi ,New Mexico ,New York ,Utah andWisconsin health plans, which are not individually significant to our consolidated operating results. As discussed in "Trends and Uncertainties" above, the COVID-19 pandemic had a significant impact on many aspects of our quarterly results. Some of these impacts increased earnings, such as the lower than expected medical costs from the curtailment of utilization, while others served to decrease earnings, such as the temporary, retroactive Medicaid premium rate refunds, profit corridors, and related actions enacted by certain states. All our state health plans benefited from the lower than expected medical costs, while certain of our state customers enacted Medicaid premium rate refunds and related actions. Comments relating to the performance of our health plans inCalifornia ,Ohio ,Texas andWashington , which represent our largest health plans from a premium revenue standpoint, follow:California . For the second quarter of 2020, Medical Margin was relatively flat year-over-year, as the lower medical costs from the curtailment of utilization was offset by Medicaid premium actions and underperformance in Marketplace. For the six months endedJune 30, 2020 , Medical Margin improved compared with the prior year due to lower MCRs in the Medicaid and Medicare businesses, due to a net favorable overall impact from COVID-19, partially offset by the underperformance in Marketplace.Ohio . For the second quarter and six months endedJune 30, 2020 , Medical Margin was higher when compared with the same periods in 2019 due to stronger performance in Medicaid. The lower medical costs from the curtailment of utilization due to COVID-19 were offset by retroactive Medicaid premium rate refunds and related actions. Premium revenues were higher year-over-year, mainly due to program changes and rate increases in Medicaid.Texas . For the second quarter and six months endedJune 30, 2020 , performance declined year-over-year, with a lower Medical Margin compared with the same periods in 2019. The decline resulted mainly from underperformance in Marketplace, due primarily to lower premiums and higher acuity for some of the new members we now serve, partially offset by lower MCRs in Medicaid and Medicare.Washington . For the second quarter and six months endedJune 30, 2020 , Medical Margin was higher when compared with the same periods in 2019, mainly driven by improved results in Medicaid. Medicaid premium revenues increased in both the second quarter and six months endedJune 30, 2020 , due to membership growth. In addition, lower medical costs from the curtailment of utilization driven by COVID-19 were partially offset by related Medicaid premium refund actions by the state. Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 34 -------------------------------------------------------------------------------- Table of Contents PROGRAMS Three Months Ended June 30, 2020 2019 Medical Premium Medical Premium Revenue Margin MCR Revenue Margin MCR Medicaid$ 3,375 $ 553 83.6 %$ 3,067 $ 364 88.1 % Medicare 630 125 80.0 572 84 85.2 Marketplace 367 96 74.0 410 135 67.2 Total$ 4,372 $ 774 82.3 %$ 4,049 $ 583 85.6 % Six Months Ended June 30, 2020 2019 Premium Revenue Medical Margin MCR Premium Revenue Medical Margin MCR Medicaid$ 6,661 $ 918 86.2 %$ 6,071 $ 710 88.3 % Medicare 1,264 242 80.8 1,123 169 85.0 Marketplace 751 202 73.1 807 285 64.7 Total$ 8,676 $ 1,362 84.3 %$ 8,001 $ 1,164 85.5 % Medicaid Medicaid premium revenue increased$308 million in the second quarter of 2020 when compared with the second quarter of 2019, and increased$590 million in the six months endedJune 30, 2020 , when compared with the six months endedJune 30, 2019 . The increase in both periods was mainly due to membership growth and premium increases in several states, partially offset by premium refunds and related actions related to COVID-19. As described above in "Health Plans," and "Trends and Uncertainties," we accrued$75 million in the second quarter of 2020 for certain states that are implementing premium rate refunds, profit corridors, and related actions in response to the lower utilization of medical services resulting from COVID-19. The Medical Margin in our Medicaid program increased$189 million , or 52%, in the second quarter of 2020 when compared with the second quarter of 2019, and increased$208 million , or 29% in the six months endedJune 30, 2020 , when compared with the six months endedJune 30, 2019 . The increase in both periods was mainly driven by the reduction in the MCR. The Medicaid MCR decreased to 83.6% in the second quarter of 2020, from 88.1% in the second quarter of 2019, or 450 basis points. The Medicaid MCR decreased to 86.2% in the six months endedJune 30, 2020 , from 88.3% in the six months endedJune 30, 2019 , or 210 basis points. The year-over-year comparisons are impacted primarily by the lower utilization of medical services stemming from COVID-19, as elective and discretionary healthcare services have been postponed and deferred, and the premium rate refunds, new risk corridors and related actions. In the second quarter of 2020, the MCR for TANF and CHIP decreased 730 basis points, and decreased 180 basis points in the ABD program, due mainly to lower utilization of medical services stemming from COVID-19. The MCR for TANF and CHIP decreased 60 basis points in the six months endedJune 30, 2020 , due to the lower utilization of medical services stemming from COVID-19, partially offset by unfavorable year-over-year changes in prior year reserve development. The decrease in the Medicaid Expansion MCR in the second quarter of 2020, when compared with the second quarter of 2019, was mainly due to lower utilization of medical services stemming from COVID-19. The decrease in the Medicaid Expansion MCR in the six months endedJune 30, 2020 , when compared with the six months endedJune 30, 2019 , was mainly due to lower utilization of medical services stemming from COVID-19, partially offset by unfavorable year-over-year changes in prior year reserve development. Medicare Medicare premium revenue increased by$58 million in the second quarter of 2020 and$141 million in the six months endedJune 30, 2020 , primarily due to increases in premium revenue PMPM and member months. PMPMs improved due to increased revenue resulting from risk scores that are more commensurate with the acuity of our population and increases in quality incentive premium revenues. Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 35 -------------------------------------------------------------------------------- Table of Contents The Medical Margin for Medicare increased$41 million , or 49%, in the second quarter of 2020 when compared with the second quarter of 2019, and was mainly attributed to increased revenues described above and lower utilization of medical services stemming from COVID-19. The Medical Margin for Medicare increased$73 million , or 43%, in the six months endedJune 30, 2020 , when compared with the six months endedJune 30, 2019 , and resulted primarily from the increased revenues described above. The Medicare MCR decrease for the second quarter and six months endedJune 30, 2020 , when compared with the same periods in 2019, was due to the same factors impacting the year-over-year changes in Medical Margin as discussed above. Marketplace Marketplace premium revenue decreased$43 million in the second quarter of 2020 and$56 million in the six months endedJune 30, 2020 , mainly due to lower pricing in an effort to be more competitive, lower risk scores that were not commensurate with the risk of the population, and the impact of more health plans being subject to minimum medical loss ratio rebates when compared with the prior year. The Marketplace Medical Margin decreased$39 million in the second quarter of 2020, when compared with the second quarter of 2019, and decreased$83 million in the six months endedJune 30, 2020 , when compared with the six months endedJune 30, 2019 . In both periods, the Medical Margin decrease was primarily due to the decrease in premium revenues. The Marketplace MCR increased in the second quarter and the six months endedJune 30, 2020 , which was mainly attributable to lower premium revenues. Medical cost PMPM was slightly lower compared with the same periods in 2019.
OTHER
The Other segment includes certain corporate amounts not allocated to the Health Plans segment. Such amounts are immaterial to our consolidated results of operations.
LIQUIDITY AND FINANCIAL CONDITION LIQUIDITY We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy. We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company. Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, could have a negative impact on our liquidity. In the first half of 2020, we did not experience noticeable delays of, or changes in, the timing and level of premium receipts as a result of the COVID-19 pandemic, but there can be no assurances that we will not experience such delays in the future. See further discussion below regarding various states' premium actions in "Future Sources and Uses of Liquidity-Future Uses." A majority of the assets held by our regulated health plan subsidiaries is in the form of cash, cash equivalents, and investments. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general corporate purposes. In the second quarter and six months endedJune 30, 2020 , the parent received$185 million and$235 million , respectively, in dividends from the regulated health plan subsidiaries. See further discussion of dividends below in "Future Sources and Uses of Liquidity-Future Sources." To satisfy minimum statutory net worth requirements, the parent company may contribute capital to the regulated health plan subsidiaries. In the second quarter and six months endedJune 30, 2020 , the parent contributed capital of$42 million and$52 million , respectively, to the regulated health plan subsidiaries. Cash, cash equivalents and investments at the parent company amounted to$1,166 million , and$997 million as ofJune 30, 2020 , andDecember 31, 2019 , respectively. The increase in 2020 was mainly due to net proceeds of$789 Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 36 -------------------------------------------------------------------------------- Table of Contents million for the newly issued 4.375% Notes,$380 million drawn on the term loan facility in the first quarter of 2020, and$235 million of dividends received from our regulated health plan subsidiaries year to date. The increase was partially offset by the$600 million repayment of the term loan facility, purchases of our common stock amounting to$453 million ,$42 million net cash paid for the aggregate convertible notes-related transactions, and$52 million contributed to our health plan subsidiaries. Investments After considering expected cash flows from operating activities, we generally invest cash of regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to board-approved investment policies which conform to applicable state laws and regulations. Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels. We believe that the risks of the COVID-19 pandemic, as they relate to our investments, are minimal. The overall rating of our portfolio remains strong and is rated AA. Our investment policy has directives in conjunction with state guidelines to minimize risks and exposures in volatile markets. Additionally, our portfolio managers assist us in navigating the current volatility in the capital markets. Our restricted investments are invested principally in cash, cash equivalents, andU.S. Treasury securities; we have the ability to hold such restricted investments until maturity. All of our unrestricted investments are classified as current assets. Cash Flow Activities Our cash flows are summarized as follows: Six Months Ended June 30, 2020 2019 Change (In millions) Net cash provided by operating activities$ 749 $ 156 $ 593 Net cash provided by (used in) investing activities 38 (393) 431 Net cash provided by (used in) financing activities 71 (362) 433
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents
$ 858
Operating Activities We typically receive capitation payments monthly, in advance of payments for medical claims; however, government payors may adjust their payment schedules, positively or negatively impacting our reported cash flows from operating activities in any given period. For example, government payors may delay our premium payments, or they may prepay the following month's premium payment. Net cash provided by operations for the six months endedJune 30, 2020 was$749 million , compared with$156 million in the six months endedJune 30, 2019 . The$593 million increase in cash flow was due to stronger operating results in the six months endedJune 30, 2020 , and the net impact of timing differences in government receivables and payables. Investing Activities Net cash provided by investing activities was$38 million in the six months endedJune 30, 2020 , compared with$393 million used in investing activities in the six months endedJune 30, 2019 , an increase in cash flow of$431 million . The year over year increase was primarily due to decreased purchases of investments in the six months endedJune 30, 2020 .Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 37 -------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash provided by financing activities was$71 million in the six months endedJune 30, 2020 , compared with$362 million used in financing activities in the six months endedJune 30, 2019 , an increase in cash flow of$433 million . In the six months endedJune 30, 2020 , cash inflows included$789 million from the issuance of the 4.375% Notes and$380 million borrowed under the term loan facility. Cash outflows included the$600 million repayment of the term loan facility, common stock purchases of$453 million , which included$7 million to settle shares purchased in lateDecember 2019 , and net cash paid for the aggregate convertible senior notes-related transactions amounting to$42 million . In the six months endedJune 30, 2019 , net cash paid for the aggregate convertible senior notes-related transactions amounted to$609 million , partially offset by proceeds of$220 million borrowed under the term loan facility. FINANCIAL CONDITION We believe that our cash resources, borrowing capacity available under the Credit Agreement as discussed further below in "Future Sources and Uses of Liquidity-Future Sources," and internally generated funds will be sufficient to support our operations, regulatory requirements, debt repayment obligations and capital expenditures for at least the next 12 months. On a consolidated basis, atJune 30, 2020 , our working capital was$3,307 million , compared with$2,698 million atDecember 31, 2019 . AtJune 30, 2020 , our cash and investments amounted to$5,296 million , compared with$4,477 million atDecember 31, 2019 .Regulatory Capital and Dividend Restrictions Each of our regulated HMO subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To the extent our HMO subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus (net assets) requirement for these subsidiaries was estimated to be approximately$1,300 million atJune 30, 2020 , compared with$1,110 million atDecember 31, 2019 . Our HMO subsidiaries were in compliance with these minimum capital requirements as of both dates. Under applicable regulatory requirements, the amount of dividends that may be paid by our HMO subsidiaries without prior approval by regulatory authorities as ofJune 30, 2020 , is approximately$41 million in the aggregate. Our HMO subsidiaries may pay dividends over this amount, but only after approval is granted by the regulatory authorities. Based on our cash and investments balances as ofJune 30, 2020 , management believes that its regulated health plan subsidiaries remain well capitalized and exceed their regulatory minimum requirements. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with statutory capital and surplus requirements. Debt Ratings Each of our high-yield senior notes is rated "BB-" byStandard & Poor's , and "B2" byMoody's Investor Service, Inc. A downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs. Financial Covenants The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. Such ratios are computed as defined by the terms of the Credit Agreement. As ofJune 30, 2020 , we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt. In addition, the indentures governing the high-yield notes contain cross-default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture. FUTURE SOURCES AND USES OF LIQUIDITY Future Sources Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. Premium revenue is our primary sourceMolina Healthcare, Inc. June 30, 2020 Form 10-Q | 38 -------------------------------------------------------------------------------- Table of Contents of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, could have a negative impact on our liquidity. Potential Impact of COVID-19 Pandemic. While Medicaid eligibility and enrollment are likely to increase due to increased unemployment, it remains unclear how high the membership peak will be, how quickly it will be attained, how quickly it will fall as the economy recovers, and where it will ultimately settle. Therefore, we are currently unable to predict the timing or amount of the expected increases in enrollment. Increased membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs. Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent company to be used for general corporate purposes. As a result of the COVID-19 pandemic, state regulators could restrict the ability of our regulated health plan subsidiaries to pay dividends to the parent company, which would reduce the liquidity of the parent company. Credit Agreement Borrowing Capacity. As ofJune 30, 2020 , we had available borrowing capacity of approximately$1 billion under the revolving credit facility of our new Credit Agreement. In addition, the Credit Agreement provides for a$15 million swingline sub-facility and a$100 million letter of credit sub-facility, as well as incremental term loans available to finance certain acquisitions up to$500 million , plus an unlimited amount of such term loans as long as we maintain a minimum consolidated net leverage ratio. See further discussion in the Notes to Consolidated Financial Statements, Note 7, "Debt." Future Uses Potential Impact of COVID-19 Pandemic. The pandemic, along with the related quarantine and social distancing measures, has reduced demand for certain routine and non-critical medical services, while at the same time increased demand for other medical services, such as COVID-19 testing and emergency services. Increased demand for medical services, which we are presently unable to predict the timing or magnitude, could result in a significant increase in medical care costs and related provider claims payments. Also, as described above in "Health Plans Segment-Trends and Uncertainties," various states are implementing or proposing temporary premium rate refunds, profit corridors, and related actions in response to the reduced demand for medical services stemming from COVID-19, which are resulting in a reduction of our medical margin. In some cases, these premium refunds and related actions are retroactive to earlier periods in 2020, or as early as the beginning of the states' fiscal years in 2019. We have accrued approximately$75 million in the second quarter of 2020 for certain of these retroactive premium refunds and related actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. There is potential for additional near-term premium actions, however, these proposals have not yet been finalized or enacted, the outcomes are subject to significant uncertainties, and there are still wide variations in the formulas and methodologies to be potentially employed. Due to these uncertainties, the probability and ultimate impact of the changes cannot be reasonably estimated at this time. We do not expect the uncertainties related to these proposals to become known until the third or fourth quarter of 2020. The facts for one or more of these pending matters could subsequently change as a result of further developments, and the ultimate outcome could differ materially from our estimates, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows. Acquisitions. Our strategic focus has shifted to a disciplined and steady approach to growth. Organic growth, which includes leveraging our existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will consider targeted acquisitions that are a strategic fit that we believe will leverage operational synergies, and lead to incremental earnings accretion. OnApril 30, 2020 , we entered into a definitive agreement to acquire the Magellan Complete Care ("MCC") line of business of Magellan Health, Inc. Net of certain tax benefits, the purchase price for the transaction is approximately$820 million , which we intend to fund with cash on hand. The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close by the first quarter of 2021. In connection with this transaction, Magellan Health, Inc. has agreed to provide certain transition services following the closing. In addition, onJuly 17, 2020 , we entered into a definitive agreement to acquire certain assets of Passport Health Plan inKentucky . The purchase price for the transaction is approximately$20 million , plus contingent consideration that is payable in 2021 based on ourKentucky health plan's open enrollment results for the 2021 plan year. We intend to fund this purchase with cash on hand.Molina Healthcare, Inc. June 30, 2020 Form 10-Q | 39 -------------------------------------------------------------------------------- Table of Contents Outcome of ACA Litigation. As described above in "Health Plans Segment-Trends and Uncertainties," theU.S. Supreme Court has accepted the appeal of theFifth Circuit Court's decision regarding the constitutionality and severability of the individual mandate. TheSupreme Court 's decision is expected byJune 2021 . The ACA remains in effect until judicial review of the decision is concluded. Any final, non-appealable determination that the ACA is unconstitutional could have a material adverse effect on our business, financial condition, cash flows, or results of operations. Regulatory Capital Requirements and Dividend Restrictions. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with statutory capital and surplus requirements. CONTRACTUAL OBLIGATIONS A summary of future obligations under our various contractual obligations and commitments as ofDecember 31, 2019 , was disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Other than the financing transactions described in Notes to Consolidated Financial Statements, Note 7, "Debt," there were no significant changes to this previously filed information outside the ordinary course of business during the six months endedJune 30, 2020 . CRITICAL ACCOUNTING ESTIMATES When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures; actual results could differ from these estimates. Our critical accounting estimates relate to: •Medical claims and benefits payable. Refer to Notes to Consolidated Financial Statements, Note 6, "Medical Claims and Benefits Payable," for a table that presents the components of the change in medical claims and benefits payable, and for additional information regarding the factors used to determine our changes in estimates for all periods presented in the accompanying consolidated financial statements. Other than the discussion as noted above, there have been no significant changes during the six months endedJune 30, 2020 , to our disclosure reported in "Critical Accounting Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . •Contractual provisions that may adjust or limit revenue or profit. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Notes to Consolidated Financial Statements, Note 2, "Significant Accounting Policies." •Quality incentives. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Notes to Consolidated Financial Statements, Note 2, "Significant Accounting Policies." •Goodwill and intangible assets, net. There have been no significant changes, during the six months endedJune 30, 2020 , to our disclosure reported in "Critical Accounting Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
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