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MarketScreener Homepage  >  Equities  >  Nyse  >  Molina Healthcare, Inc.    MOH

MOLINA HEALTHCARE, INC.

(MOH)
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Molina Healthcare : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

10/29/2020 | 08:34am EST
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 sections titled "Risk
Factors" in this Form 10-Q, our Annual Report on Form 10-K for the year ended
December 31, 2019, and our Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2020, and June 30, 2020, 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 the Texas et al. v. U.S. et al. matter now pending before the U.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;
•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 the November 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 Affinity;
•the outcome of the protest and appeal proceedings in Kentucky with regard to
the Medicaid contract award to our Kentucky health plan;
•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 bid submissions in response to requests for proposal,
including our contracts in Ohio, California, Texas, and Kentucky;
•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.September 30, 2020 Form 10-Q | 24
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•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 and requirements;
•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 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;
•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;
•our expected exit from Puerto Rico, including the successful transfer of our
members to alternative health plans, the effective run-out of claims, and the
return of our capital;
•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 our California, Ohio, Texas, and
Washington 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 to Molina 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, in our Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2020, and June 30, 2020, and in our Annual Report on Form 10-K
for the year ended December 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 ended December 31, 2019.

                       Molina Healthcare, Inc.September 30, 2020 Form 10-Q | 25
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OVERVIEW
Molina 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 15 states and the Commonwealth of Puerto Rico, we served approximately
4.0 million members as of September 30, 2020. The health plans are generally
operated by our respective wholly owned subsidiaries in those states and
licensed as health maintenance organizations ("HMO").
THIRD QUARTER 2020 HIGHLIGHTS
We reported net income per diluted share of $3.10 for the third quarter of 2020,
with net income of $185 million, which consisted of the following:
•Premium revenue of $4.8 billion, which increased 16.8% compared with the third
quarter of 2019;
•Consolidated medical care ratio ("MCR") of 85.9%, which decreased 40 basis
points compared with 86.3% in the third quarter of 2019;
•General and administrative expense ("G&A") ratio of 7.3%, which decreased 30
basis points compared with 7.6% in the third quarter of 2019; and
•After-tax margin of 3.7%.
COVID Impacts
Unlike the second quarter of 2020, in which the combined COVID-related impacts
temporarily increased our earnings, in the third quarter of 2020 the combination
of COVID-related impacts netted to a negligible to slightly positive impact on
earnings and included:
•A modest net decrease in medical costs due primarily to COVID-related
utilization curtailment;
•Premium refunds to a number of our state Medicaid customers in response to the
COVID-related utilization curtailment, which we experienced in both the second
and third quarters of 2020;
•An increase in our G&A spending on activities related to COVID; and
•A meaningful increase to our Medicaid membership.
As we work through this unprecedented period of the COVID pandemic, we remain
focused on executing on the underlying fundamentals of our business to continue
to produce solid results, regardless of the short-term COVID-related impacts on
our reported financial metrics and results.
Growth Initiatives
We made another major stride in the third quarter of 2020 related to the
activation of our growth strategy. In September 2020, we signed a definitive
agreement to purchase the net assets of Affinity Health Plan in New York for
approximately $380 million, which we currently expect to close as early as the
second quarter of 2021. We believe this purchase is another milestone in a
growth-oriented 2020. Our growth initiatives continue to be anchored by our
capital allocation priorities: first, organic growth of our core businesses;
second, inorganic growth through accretive acquisitions; and third,
programmatically returning excess capital to shareholders.

                       Molina Healthcare, Inc.September 30, 2020 Form 10-Q | 26
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FINANCIAL SUMMARY
                                                   Three Months Ended September 30,               Nine Months Ended September 30,
                                                       2020                   2019                   2020                    2019

                                                                   (Dollars in millions, except per-share amounts)
Premium revenue                                 $        4,768$     4,084$        13,444$    12,085
Premium tax revenue                                        170                   119                      477                   367
Health insurer fees reimbursed                              69                     -                      206                     -
Investment income and other revenue                         14                    40                       61                   103

Medical care costs                              $        4,098$     3,523$        11,412$    10,360
General and administrative expenses                        368                   323                    1,030                   953
Premium tax expenses                                       170                   119                      477                   367
Health insurer fees                                         70                     -                      209                     -

Operating income                                $          289           $       257          $           987           $       802
Interest expense                                            27                    22                       72                    67
Other expense (income), net                                  -                     2                        5                   (15)
Income before income tax expense                           262                   233                      910                   750
Income tax expense                                          77                    58                      271                   181
Net income                                                 185                   175                      639                   569
Net income per share - Diluted                  $         3.10           $      2.75          $         10.65           $      8.80

Operating Statistics:
Ending total membership                              4,033,000             3,346,000                4,033,000             3,346,000
MCR (1)                                                   85.9  %               86.3  %                  84.9  %               85.7  %
G&A ratio (2)                                              7.3  %                7.6  %                   7.3  %                7.6  %
Premium tax ratio (1)                                      3.4  %                2.8  %                   3.4  %                2.9  %
Effective income tax rate                                 29.5  %               24.7  %                  29.8  %               24.1  %
After-tax margin (2)                                       3.7  %                4.1  %                   4.5  %                4.5  %


________________________
(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 third quarter of 2020 amounted to $185 million, or $3.10 per
diluted share, compared with $175 million, or $2.75 per diluted share, in the
third quarter of 2019. Operating income of $289 million in the third quarter of
2020, was higher compared with $257 million in the third quarter of 2019.
Net income in the nine months ended September 30, 2020, amounted to $639
million, or $10.65 per diluted share, compared with $569 million, or $8.80 per
diluted share, in the nine months ended September 30, 2019. Operating income of
$987 million in the nine months ended September 30, 2020, was higher compared
with $802 million in the nine months ended September 30, 2019.
The improvement in operating income for both periods was mainly due to higher
premium revenues and a reduction in the MCR.
Net income per share in the third quarter and nine months ended September 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.
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PREMIUM REVENUE
Premium revenue increased $684 million in the third quarter of 2020, when
compared with the third quarter of 2019, and increased $1,359 million in the
nine months ended September 30, 2020, when compared with the nine months ended
September 30, 2019.
In both periods, the higher premium revenue reflected the increase in
membership, primarily in Medicaid, and included the impact from the YourCare and
Passport acquisitions. In the third quarter of 2020, we added 325,000 members
from our acquisition of the Kentucky Passport business on September 1, 2020, and
47,000 members from our acquisition of the New York YourCare business on July 1,
2020. The increase in premium revenues from these acquisitions was slightly
offset by the decline in membership, in the third quarter of 2020, associated
with our announced exit of operations in Puerto Rico. The increase in premium
revenue was net of COVID-related premium refunds that were enacted in several
states.
MEDICAL CARE RATIO
The consolidated MCR in the third quarter of 2020 decreased to 85.9%, compared
to 86.3% in the third quarter of 2019, reflecting improved operating performance
in Medicaid and Medicare, partially offset by underperformance in the
Marketplace program. Additionally, the net effect of all of the COVID-related
impacts, such as the reduced demand for medical services and the premium
refunds, profit corridors and related actions, had a slightly favorable impact
on our overall financial results.
The consolidated MCR in the nine months ended September 30, 2020, decreased to
84.9%, compared to 85.7% in the nine months ended September 30, 2019. Reserve
development for the first nine months of 2020 was not material. The comparable
period in the prior year was positively impacted by 100 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 3.4% in the third quarter of 2020, compared with
2.8% the third quarter of 2019; and 3.4% compared with 2.9% for the nine months
ended September 30, 2020 and 2019, respectively. The current year ratio increase
was mainly due to the state of Illinois' 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 $14 million in the third
quarter of 2020, compared with $40 million in the third quarter of 2019, and
decreased to $61 million in the nine months ended September 30, 2020, compared
with $103 million in the nine months ended September 30, 2019. The
year-over-year decrease was consistent with our expectation and was due to the
low interest rate environment.
G&A EXPENSES
The G&A expense ratio decreased to 7.3% in the third quarter of 2020, from 7.6%
in the third quarter of 2019, and decreased to 7.3% in the nine months ended
September 30, 2020, compared with 7.6% in the nine months ended September 30,
2019. In both periods, the ratio improved due to increased revenues, partially
offset by increased costs associated with the COVID-19 pandemic. The third
quarter and nine months ended September 30, 2020, reflected approximately $7
million and $38 million, respectively, of net incremental expenses associated
with a variety of new COVID-related operational protocols, technology
implementations, and benefits for our employees.
HEALTH INSURER FEES ("HIF")
In the third quarter of 2020 and the nine months ended September 30, 2020, HIF
expense amounted to $70 million and $209 million, respectively, and HIF
reimbursements amounted to $69 million and $206 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 was reinstated in 2020, but the
Further Consolidated Appropriations Act, 2020, repealed the HIF effective for
years after 2020.
INTEREST EXPENSE
Interest expense increased to $27 million in the third quarter of 2020, compared
with $22 million in the third quarter of 2019, and increased to $72 million in
the nine months ended September 30, 2020, compared with $67 million in
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the nine months ended September 30, 2019. Additional interest expense relating
to the 4.375% Notes issued in June 2020 was partially offset by the decrease in
interest expense resulting from the settlement of the convertible senior notes
in January 2020. As further described below in "Liquidity," a portion of the net
proceeds from the 4.375% Notes offering was used to repay $600 million principal
amount outstanding under the term loan facility of our prior credit agreement.
See further discussion in Notes to Consolidated Financial Statements, Note 8,
"Debt."
OTHER EXPENSE (INCOME), NET
In the nine months ended September 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 third quarter and nine months ended
September 30, 2019, we recognized a loss on debt repayment of $2 million, and a
gain on debt repayment of $15 million, respectively, in connection with
convertible senior notes repayment transactions.
INCOME TAXES
Income tax expense amounted to $77 million in the third quarter of 2020, or
29.5% of pretax income, compared with income tax expense of $58 million, or
24.7% of pretax income in the third quarter of 2019. Income tax expense amounted
to $271 million in the nine months ended September 30, 2020, or 29.8% of pretax
income, compared with income tax expense of $181 million, or 24.1% of pretax
income in the nine months ended September 30, 2019. The effective tax rate has
been higher in 2020 due to higher nondeductible expenses in 2020, primarily
related to the nondeductible HIF. As discussed above, the HIF was not applicable
in 2019 and has been repealed for years after 2020.

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 $670 million in the third quarter of 2020, and $561 million
in the third quarter of 2019. Medical Margin amounted to $2,032 million in the
nine months ended September 30, 2020, and $1,725 million in the nine months
ended September 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 10, "Segments," for more
information on our reportable segments.

HEALTH PLANS
As of September 30, 2020, the Health Plans segment consisted of health plans
operating in 15 states and the Commonwealth of Puerto Rico, and served
approximately 4.0 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.
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Federal Economic Stabilization Programs
As a result of the pandemic, various stabilization programs were enacted
beginning in March 2020, which may impact our business directly or indirectly,
including the following:
Phase 1 - Coronavirus Preparedness and Response Supplemental Appropriations Act.
Enacted on March 6, 2020, this legislation provided $8.3 billion in COVID-19
response funding for developing a vaccine and preventing further spread of the
virus.
Phase 2 - Families First Coronavirus Response Act. Enacted on March 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% beginning January 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.
Effective October 23, 2020, the U.S. Department of Health and Human Services
("HHS") announced that it has extended the COVID public health emergency for
another 90 days. The renewal extends the emergency period until late January
2021. As a result, the enhanced FMAP rate will be extended through the end of
the first quarter of 2021. The accompanying requirement that bans the loss of
coverage from state eligibility redeterminations would be extended through the
end of January 2021. Redetermination is the process through which Medicaid
enrollees demonstrate whether they continue to meet the requirements for
participation in the Medicaid program, in particular maximum household income.
This is likely a positive indicator for continued membership gains, and to
provide more support for an actuarially sound rate environment.
Phase 3 - Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").
Enacted on March 27, 2020, the CARES Act provided an estimated $2 trillion to
fight the COVID-19 pandemic and stimulate the U.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
on April 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 by Congress.
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.
Health Plan Operations
The pandemic has impacted our business, and we currently expect it to further
impact our business in the areas described below. As noted above, in the third
quarter of 2020 the combination of COVID-related impacts netted to a negligible
to slightly positive impact on earnings.
Medical Care Costs and Demand for Healthcare Services. Beginning in early 2020
the pandemic, along with the related quarantine and social distancing measures,
initially 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 of 2020, we
experienced significantly lower utilization in a variety of cost categories,
representing approximately two-thirds of our total medical cost spend, with
utilization levels increasing slowly as the quarter progressed. We experienced
several significant COVID-related impacts on medical care costs in the third
quarter of 2020 as follows:
•At the beginning of the third quarter of 2020, utilization was still moderately
curtailed, but rebounded to more normal levels during the quarter.
•We attracted approximately 300,000 new Medicaid members since March 31, 2020,
and we believe that the acuity of that population is lower than our average.
•Direct costs to care for COVID patients totaled $35 million in the third
quarter of 2020, as a resurgence of COVID infections and episodes has occurred
in places such as Texas and California, and also disproportionately impacted
certain of our Marketplace members.
In the third quarter of 2020, the net effect of these three factors reduced
medical care costs and increased pretax earnings by a range of approximately $95
million to $105 million.
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Medicaid Premium Actions. Various states have implemented temporary premium
refunds 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 actions are retroactive to earlier
periods in 2020, or as early as the beginning of the states' fiscal years in
2019. In the second quarter of 2020, we recognized approximately $75 million for
certain of these retroactive premium actions that we believe to be probable, and
where the ultimate premium amount is reasonably estimable. In most of those
states, the refund period extended into the third quarter of 2020, and one
additional state, Michigan, enacted a premium refund mechanism in the third
quarter of 2020. Consequently, we recognized an additional $88 million related
to these retroactive premium actions in the third quarter of 2020, resulting in
$163 million recognized in the nine months ended September 30, 2020.
It is possible that certain states could increase the level of existing premium
refunds, and it is also possible that other states could implement some form of
retroactive premium refund during the fourth quarter of 2020. Due to these
uncertainties, the ultimate outcomes could differ materially from our estimates
as a result of changes in facts or further developments, which could have an
adverse effect on our consolidated financial position, results of operations, or
cash flows.
Our position on rate adequacy has been consistent:
•We do not intend, nor do we want, to keep state Medicaid money that was
supposed to be spent on medical benefits but was not due to utilization
curtailment caused by COVID;
•In many of our Medicaid states, there are already mechanisms in place to
protect against a surplus margin, as there are Minimum MLRs in seven of our
states and profit caps in two others; and
•Once the COVID-19 pandemic abates, we believe that the traditional process of
establishing prospective actuarially sound rates based on a credible medical
cost baseline and cost trend off that baseline will resume.
Member Enrollment. We added 625,000 Medicaid members as of September 30, 2020,
compared with our Medicaid membership as of March 31, 2020, when we first began
to report on the impacts of the pandemic. Included in this total are 325,000
members added from our acquisition of the Kentucky Passport business on
September 1, 2020. The 47,000 member increase from our acquisition of the New
York YourCare business on July 1, 2020, was offset by the decline in membership,
in the third quarter of 2020, associated with our announced exit of operations
in Puerto Rico. The remaining 300,000 increase in membership was mainly due to
the suspension of redeterminations, as we believe that unemployment-related
enrollment has not yet materially accessed managed Medicaid.
It remains unclear how high the COVID-related membership peak will be, how
quickly it will fall as the economy recovers, and where it will ultimately
settle. However it does now appear that since unemployment nationally is now
just under 8%, the initial industry estimates of unemployment-related Medicaid
membership increases were somewhat overstated. On a related note, the
declaration of the extension of the public health emergency period into next
year will also likely have an impact. 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 both serve new members, and ably partner
with our state customers for increases in membership.
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, and as it evolves, we continue to process, assemble,
and assess member 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
In December 2018, in a case brought by the state of Texas and nineteen other
states, a federal judge in Texas 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 the
Fifth Circuit Court of Appeals. In December 2019, a three-judge panel of the
Fifth Circuit Court of Appeal, in a two to one decision, affirmed the District
Court's ruling that the individual mandate
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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 the Fifth Circuit Court's
decision. Oral arguments before the Supreme Court are scheduled to take place on
November 10, 2020, and a decision is expected in the first half of 2021. The ACA
remains in effect pending the issuance of the Supreme Court's opinion.
As of September 30, 2020, we served a significant number of members enrolled in
programs created by the ACA, including approximately 730,000 Medicaid Expansion
members and 325,000 Marketplace members. In the nine months ended September 30,
2020, premium revenue associated with these members amounted to $3,644 million,
and contributed Medical Margin of $681 million. A decision by the Supreme Court
that the entirety of the ACA is unconstitutional could have a material adverse
effect on our business, financial condition, cash flows, or results of
operations.
Other Recent Developments
New York. In September 2020, we entered into a definitive agreement to acquire
substantially all of the assets of Affinity Health Plan, Inc. The net purchase
price for the transaction is approximately $380 million, subject to various
adjustments at closing, which we intend to fund with cash on hand. We currently
expect the transaction to close as early as the second quarter of 2021.
On July 1, 2020, we closed on the acquisition of certain assets of YourCare
Health Plan, Inc., a Medicaid health plan, for a cash purchase price of
$42 million. In connection with this transaction, we added approximately 47,000
Medicaid members in New York.
Kentucky. On September 1, 2020, we closed on the acquisition of certain assets
of Passport Health Plan, Inc., a Medicaid health plan. Effective on that same
date, the Kentucky Medicaid agency approved the novation of Passport's Medicaid
contract to Molina Healthcare of Kentucky, Inc. As a result, we added
approximately 325,000 Medicaid members in Kentucky.
In May 2020, our Kentucky health plan had been selected as an awardee pursuant
to the statewide Medicaid managed care RFP issued by the Kentucky Cabinet for
Health and Family Services, Department for Medicaid Services. On October 23,
2020, pursuant to a protest filing appeal with regard to the RFP awards, a court
ordered the addition of a sixth health plan to the Kentucky Medicaid program for
2021. That ruling did not rescind the Medicaid contract award to our Kentucky
health plan for 2021, nor did it have any impact on the earlier novation of the
Passport Medicaid contract to us. The new Medicaid contract is currently
expected to begin on January 1, 2021.
Acquisition of Magellan Complete Care. In April 2020, we entered into a
definitive agreement to acquire the MCC line of business of Magellan Health,
Inc. The purchase price for the transaction is approximately $820 million, net
of certain tax benefits, which we intend to fund with cash on hand.
MCC is a managed care organization serving members in six states, including
Medicaid members in Arizona and statewide in Virginia, and Integrated Acute Care
members in Florida. Through its Senior Whole Health branded plans, MCC provides
fully integrated plans for Medicaid and Medicare dual beneficiaries in
Massachusetts, as well as Managed Long-Term Care in New York. MCC also provides
consultative services to participants who self-direct their care through
Wisconsin's long-term services and supports ("LTSS") program. As of December 31,
2019, MCC served approximately 155,000 members in managed care plans and
provided services to 25,000 LTSS program participants in Wisconsin, with full
year 2019 revenues over $2.7 billion.
The transaction is subject to federal and state regulatory approvals, and other
customary closing conditions, and is expected to close around the end of 2020.
In connection with this transaction, Magellan Health, Inc. has agreed to provide
certain transition services following the closing.
Marketplace Risk Corridor Ruling. In April 2020, the United States Supreme Court
held that §1342 of the Affordable Care Act obligated the federal government to
pay participating insurers the full Marketplace risk corridor amounts calculated
by that statute, and that impacted insurers may sue the federal government in
the U.S. Court of Federal Claims to recover damages for breach of that
obligation. In June 2020, the Claims Court granted us judgment in the amount of
$128.1 million for our 2014, 2015, and 2016 Marketplace risk corridor claims,
which we received in October 2020. Since we accounted for the judgment as a gain
contingency at September 30, 2020, it will be recognized in our fourth quarter
2020 financial results. The judgment does not create additional Minimum MLR
rebates.
Illinois. In March 2020, we terminated our agreement to acquire all of the
capital stock of NextLevel Health Partners, Inc. due to the seller's stated
unwillingness to close pursuant to the terms of the acquisition agreement.
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Puerto Rico. We will exit Puerto Rico's Medicaid program when our current
contract expires on October 31, 2020. We are working closely with the regulatory
authorities and the provider community to ensure that our members in Puerto Rico
have reliable continuity of care. As discussed in the Notes to Consolidated
Financial Statements, Note 2, "Significant Accounting Policies," we recognized a
$10 million premium deficiency reserve at September 30, 2020, in connection with
the exit from this business.
Update on Status of Significant Medicaid Contracts
California. Our managed care contracts with the California Department of Health
Care Services ("DHCS") cover six regions in central and southern California
(including the Los Angeles region covered under a separate subcontract with
Health Net, LLC). These contracts are effective through December 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 in January 2024.
Ohio. Our managed care contract with the Ohio Department of Medicaid ("ODM") is
effective through July 1, 2021. In September 2020, the ODM released the RFP for
the Ohio Medicaid program with a due date of November 20, 2020. The program will
be regionally based on the current three regions (Central/Southeast, Northeast
and West); plans may bid on one or all regions, and be awarded one or all
regions. The contracts will be awarded on
January 25, 2021, with a go-live date of January 5, 2022.
Texas. On March 25, 2020, the Texas Health and Human Services Commission
("HHSC"), notified our Texas health plan that HHSC had upheld our protest and
had canceled all previously awarded contracts associated with the re-procurement
awards announced in October 2019 for the ABD program (known in Texas as
"STAR+PLUS"). In addition, HHSC canceled the pending re-procurement associated
with the TANF and CHIP programs (known in Texas as "STAR/CHIP"). HHSC further
indicated that it was deliberating next steps with respect to both
re-procurements. We do not expect the HHSC to re-issue the RFPs in the near
future.
Update on Status of MMP Contracts
Our MMP contracts in California, Illinois and Ohio are effective through
December 31, 2022. Updates to our current Michigan, South Carolina and Texas MMP
contracts are described below. The Michigan, South Carolina and Texas MMP
contracts represented aggregate revenues of approximately $586 million in nine
months ended September 30, 2020.
Michigan. A one-year contract extension has been executed, through December 31,
2021. The state has submitted a formal letter of intent to extend the contract
for five years through 2026; the five-year contract extension is under
development.
South Carolina. A three-year contract extension has been executed, effective
through December 31, 2023.
Texas. A three-year contract extension amendment, through December 31, 2023, is
under review and pending full execution.
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."
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MEMBERSHIP
The following tables set forth our Health Plans segment membership as of the
dates indicated:
                                                         September 30,              December 31,              September 30,
                                                              2020                      2019                       2019
Ending Membership by Government Program:
Medicaid                                                  3,595,000                  2,956,000                 2,955,000
Medicare                                                    113,000                    101,000                   102,000
Marketplace                                                 325,000                    274,000                   289,000
Total                                                     4,033,000                  3,331,000                 3,346,000

Ending Membership by Health Plan:
California                                                  584,000                    565,000                   580,000
Florida                                                     136,000                    132,000                   136,000
Illinois                                                    282,000                    224,000                   224,000
Kentucky (1)                                                325,000                          -                         -
Michigan                                                    391,000                    362,000                   361,000
Ohio                                                        348,000                    288,000                   292,000
South Carolina                                              153,000                    131,000                   134,000
Texas                                                       357,000                    341,000                   350,000
Washington                                                  947,000                    832,000                   818,000
Other (2)                                                   510,000                    456,000                   451,000
Total                                                     4,033,000                  3,331,000                 3,346,000


_________________________
(1)On September 1, 2020, we closed on the acquisition of certain assets of
Passport Health Plan, Inc., a Medicaid health plan. Effective on that same date,
the Kentucky Medicaid agency approved the novation of Passport's Medicaid
contract to Molina Healthcare of Kentucky, Inc.
(2)"Other" includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico,
Utah and Wisconsin health plans, which are not individually significant to our
consolidated operating results.

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 September 30,
                                                                   2020                                                                2019
                                                                       Medical                                                          Medical
                                          Premium Revenue               Margin               MCR              Premium Revenue            Margin               MCR
California                            $            554               $      87                84.3  %       $            567          $     111                80.3  %
Florida                                            166                      27                83.5                       171                 19                89.0
Illinois                                           339                      32                90.5                       257                 25                90.6
Kentucky                                           169                      16                90.7                         -                  -                   -
Michigan                                           398                      76                80.8                       408                 72                82.3
Ohio                                               808                     124                84.6                       640                 58                91.0
South Carolina                                     158                      18                88.8                       151                 13                91.6
Texas                                              801                     104                87.1                       734                 89                87.8
Washington                                         807                     116                85.7                       688                 85                87.7
Other (1)                                          568                      70                87.6                       468                 89                80.9
Total                                 $          4,768               $     670                85.9  %       $          4,084          $     561                86.3  %



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                                                                                   Nine Months Ended September 30,
                                                                2020                                                            2019
                                                                  Medical                                                         Medical
                                        Premium Revenue           Margin               MCR              Premium Revenue           Margin               MCR
California                            $          1,660          $    280                83.1  %       $          1,682          $    295                82.4  %
Florida                                            482                82                83.0                       570               115                79.9
Illinois                                           953               116                87.8                       726                94                87.1
Kentucky                                           169                16                90.7                         -                 -                   -
Michigan                                         1,224               256                79.1                     1,226               221                81.9
Ohio                                             2,279               326                85.7                     1,914               208                89.2
South Carolina                                     472                60                87.3                       427                49                88.7
Texas                                            2,273               276                87.9                     2,246               292                87.0
Washington                                       2,351               364                84.5                     2,011               223                88.9
Other (1)                                        1,581               256                83.7                     1,283               228                82.2
Total                                 $         13,444          $  2,032                84.9  %       $         12,085          $  1,725                85.7  %


__________________
(1)"Other" includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico,
Utah and Wisconsin health plans, which are not individually significant to our
consolidated operating results.

As discussed in "Trends and Uncertainties" above, the combination of all the
COVID-19 pandemic-related impacts netted to a negligible to slightly positive
impact on our overall financial results for the third quarter of 2020. Some of
these items increased earnings, such as lower than expected medical costs from
the curtailment of utilization that benefited all our state health plans, and a
meaningful increase in Medicaid membership, while others served to decrease
earnings, such as the temporary, retroactive Medicaid premium refunds and
related actions enacted by certain states.
Comments relating to the performance of our health plans in California, Ohio,
Texas and Washington, which represent our largest health plans from a premium
revenue standpoint, follow:
California. For the third quarter and nine months ended September 30, 2020,
Medical Margin declined as the lower medical costs from the curtailment of
utilization were more than offset by Medicaid premium actions and
underperformance in the Marketplace.
Ohio. For the third quarter and nine months ended September 30, 2020, Medical
Margin was higher when compared with the same periods in 2019 due to higher
premiums and improved operating performance in Medicaid. Premium revenues were
higher year-over-year, mainly due to increased membership, program changes and
rate increases in Medicaid established before COVID-19. In the third quarter of
2020, the combined impacts from COVID-19 were negligible; however, the health
plan experienced a modest benefit for the nine months ended September 30, 2020,
as lower medical costs from the curtailment of utilization slightly exceeded the
impact of retroactive Medicaid premium refunds and related actions.
Texas. For the third quarter of 2020, Medical Margin improved compared with the
third quarter of 2019, due to a decrease in the MCR in Medicaid, partially
offset by underperformance in Marketplace. For the nine months ended September
30, 2020, performance declined year-over-year, with a lower Medical Margin
compared with the same period in 2019. The decline resulted mainly from
underperformance in Marketplace, due primarily to lower premiums and higher
acuity mix for the new members we now serve, partially offset by lower MCRs in
Medicaid and Medicare.
Washington. For the third quarter and nine months ended September 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 third quarter and nine months ended September 30, 2020, due to
membership growth in Medicaid. In addition, results in the nine months ended
September 30, 2020, benefited modestly from lower medical costs due to the
curtailment of utilization driven by COVID-19, which was partially offset by
COVID-related provider payments mandated by the state in the second quarter of
2020.
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PROGRAMS
                                                                                 Three Months Ended September 30,
                                                                  2020                                                            2019
                                                                     Medical                                 Premium            Medical
                                        Premium Revenue               Margin               MCR               Revenue             Margin               MCR
Medicaid                            $          3,754               $     509                 86.4  %       $   3,168$     378                88.1  %
Medicare                                         632                      91                 85.6                559                 80                85.6
Marketplace                                      382                      70                 81.6                357                103                71.2
Total                               $          4,768               $     670                 85.9  %       $   4,084$     561                86.3  %



                                                                                 Nine Months Ended September 30,
                                                              2020                                                            2019
                                                                Medical                                                         Medical
                                      Premium Revenue           Margin               MCR              Premium Revenue           Margin               MCR
Medicaid                            $         10,415          $  1,427                86.3  %       $          9,239          $  1,088                88.2  %
Medicare                                       1,896               333                82.4                     1,682               249                85.2
Marketplace                                    1,133               272                76.0                     1,164               388                66.7
Total                               $         13,444          $  2,032                84.9  %       $         12,085          $  1,725                85.7  %


Medicaid
Medicaid premium revenue increased $586 million in the third quarter of 2020
when compared with the third quarter of 2019, and increased $1,176 million in
the nine months ended September 30, 2020, when compared with the nine months
ended September 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 stemming from COVID-19. The increase in
membership includes the impact of the Passport members in Kentucky that we
assumed on September 1, and the YourCare membership in New York that we assumed
on July 1, as well as the impact from suspension of redeterminations due to
COVID-19.
As described above in "Health Plans-Trends and Uncertainties," we recognized
approximately $88 million and $163 million, respectively, in the third quarter
and nine months ended September 2020, for the impact of premium refunds and
related actions enacted in several states in response to the lower utilization
of medical services resulting from COVID-19.
The Medical Margin in our Medicaid program increased $131 million, or 35%, in
the third quarter of 2020 when compared with the third quarter of 2019, and
increased $339 million, or 31% in the nine months ended September 30, 2020, when
compared with the nine months ended September 30, 2019. The increase in both
periods was driven by increased premium revenues and margin associated with the
membership growth discussed above, and from a reduction in the MCR.
The Medicaid MCR decreased to 86.4% in the third quarter of 2020, from 88.1% in
the third quarter of 2019, or 170 basis points, and decreased to 86.3% in the
nine months ended September 30, 2020, from 88.2% in the nine months ended
September 30, 2019, or 190 basis points. The improvements were generally present
across all our programs. The year-over-year decrease in the third quarter of
2020 was due to increases in the premium revenue per member per month ("PMPM")
and improved operating performance, including enhanced medical cost initiatives.
The combined impacts from COVID-19 were negligible to slightly positive in the
third quarter of 2020. At the beginning of the third quarter of 2020,
utilization was still moderately curtailed but reverted more to normal levels by
the end of the quarter. For the nine months ended September 30, 2020, the MCR
benefited from lower medical costs due to the curtailment of utilization from
COVID-19, which modestly exceeded the impact of the retroactive Medicaid premium
refunds and related actions enacted in several states.
In the third quarter of 2020, we recognized a $10 million premium deficiency
reserve ("PDR") associated with the Puerto Rico Medicaid business. As previously
announced, we will exit this business when our current contract expires on
October 31, 2020. The PDR represents the estimated remaining claims and
administrative costs that exceed the estimated remaining premiums associated
with the contract.
The MCR for TANF and CHIP was relatively flat in the third quarter of 2020, when
compared with the third quarter of 2019, while the MCR for the ABD program
decreased 180 basis points, and the MCR for Medicaid Expansion decreased by 440
basis points. The MCR for TANF and CHIP reflected the impact of the Puerto Rico
PDR
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discussed above. Excluding the PDR, the MCR in all our Medicaid programs
improved year-over-year, mainly from increases in the premium revenue PMPM rates
and improved operating performance.
For the nine months ended September 30, 2020, the MCR decreased 40 basis points
for TANF and CHIP, decreased 190 basis points for ABD, and decreased 440 basis
points for Medicaid Expansion, when compared with the same period in 2020. The
year-over-year improvement in the nine months ended September 30, 2020, was due
to the increase in premium revenue PMPM, operating improvements, and the
COVID-19 related net impacts. These improvements were partially offset by
unfavorable year-over-year changes in prior year reserve development.
Medicare
Medicare premium revenue increased $73 million in the third quarter of 2020 and
$214 million in the nine months ended September 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.
The Medical Margin for Medicare increased $11 million, or 14%, in the third
quarter of 2020, and increased $84 million, or 34%, in the nine months ended
September 30, 2020, when compared with the same periods, respectively, in 2019.
The year-over-year improvement in both periods was mainly attributed to the
increased revenues described above, and to a lesser extent, lower utilization of
medical services stemming from COVID-19.
The Medicare MCR was unchanged at 85.6% in the third quarter of 2020. The 280
basis point year-over-year decrease in the MCR in the nine months ended
September 30, 2020, was due to the same factors impacting the year-over-year
changes in Medical Margin as discussed above.
Marketplace
Marketplace premium revenue increased $25 million in the third quarter of 2020,
but decreased $31 million in the nine months ended September 30, 2020, mainly
due to lower pricing in an effort to be more competitive, and lower risk scores
that were not commensurate with the risk of the population. The decrease in the
nine months period also resulted from the impact of more health plans being
subject to minimum medical loss ratio rebates when compared with the prior year,
and the benefit from favorable retrospective adjustments to risk adjustment
premiums was higher in the prior year.
The Marketplace Medical Margin decreased $33 million in the third quarter of
2020, and $116 million in the nine months ended September 30, 2020, when
compared with the same periods, respectively, in 2019. In both periods, the
Medical Margin decrease was primarily due to the decline in premium revenues
discussed above, and a higher than expected member acuity mix. Our risk scores
continue to lag the acuity of our membership, and the rebound in utilization for
Marketplace has been much more pronounced than our Medicaid and Medicare
programs. The COVID-19 related utilization impact was unfavorable to the
Marketplace business and contributed to the year-over-year decline.
The Marketplace MCR increased in the third quarter and the nine months ended
September 30, 2020, attributable to same factors impacting the year-over-year
changes in Medical Margin discussed above.

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
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our liquidity. In the nine months ended September 30, 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 third
quarter and nine months ended September 30, 2020, the parent received $120
million and $355 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."
The parent company may also contribute capital to the regulated health plan
subsidiaries to satisfy minimum statutory net worth requirements, including
funding for newer health plans with growing enrollment. In the third quarter and
nine months ended September 30, 2020, the parent contributed capital of $10
million and $62 million, respectively, to the regulated health plan
subsidiaries.
Cash, cash equivalents and investments at the parent company amounted to $1,286
million, and $997 million as of September 30, 2020, and December 31, 2019,
respectively. The increase as of September 30, 2020, was mainly due to net
proceeds of $789 million for the 4.375% Notes issued in June 2020, $380 million
drawn on the term loan facility in the first quarter of 2020, and $355 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, $62 million
contributed to our health plan subsidiaries (including $42 million for the
YourCare acquisition), $63 million for purchases of property, equipment and
capitalized software, $42 million net cash paid for the aggregate convertible
notes-related transactions, and $20 million for the initial cash payment for the
Passport acquisition. As described in Note 2," Significant Accounting Policies,"
we received $128.1 million for the Marketplace risk corridor settlement in
October 2020.
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,
and U.S.Treasury securities; we have the ability to hold such restricted
investments until maturity. All of our unrestricted investments are classified
as current assets.
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Cash Flow Activities
Our cash flows are summarized as follows:
                                                                Nine Months Ended September 30,
                                                          2020                2019              Change

                                                                         (In millions)
Net cash provided by operating activities             $      591$     398$      193
Net cash provided by (used in) investing activities           98                (80)                178
Net cash provided by (used in) financing activities           69               (510)                579

Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents

              $      758          $ 

(192) $ 950



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 nine months ended September 30, 2020 was
$591 million, compared with $398 million in the nine months ended September 30,
2019. The $193 million increase in cash flow was due to stronger operating
results in the nine months ended September 30, 2020, and the net impact of
timing differences in government receivables and payables.
Investing Activities
Net cash provided by investing activities was $98 million in the nine months
ended September 30, 2020, compared with $80 million used in investing activities
in the nine months ended September 30, 2019, an increase in cash flow of $178
million. The year over year increase was primarily due to decreased purchases of
investments in the nine months ended September 30, 2020.
Financing Activities
Net cash provided by financing activities was $69 million in the nine months
ended September 30, 2020, compared with $510 million used in financing
activities in the nine months ended September 30, 2019, an increase in cash flow
of $579 million. In the nine months ended September 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 late December 2019, and
net cash paid for the aggregate convertible senior notes­related transactions
amounting to $42 million. In the nine months ended September 30, 2019, net cash
paid for the aggregate convertible senior notes-related transactions amounted to
$754 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, at September 30, 2020, our working capital was $3,397
million, compared with $2,698 million at December 31, 2019. At September 30,
2020, our cash and investments amounted to $5,058 million, compared with $4,477
million at December 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 at September 30, 2020, compared with
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$1,110 million at December 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
of September 30, 2020, is approximately $187 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 of September 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-" by Standard & Poor's, and
"Ba3" by Moody'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 of September 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 source 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. We added 625,000 Medicaid members as of
September 30, 2020, compared with our Medicaid membership as of March 31, 2020,
when we first began to report on the impacts of the pandemic. Included in this
total are 325,000 members added from our acquisition of the Kentucky Passport
business on September 1, 2020. The 47,000 member increase from our acquisition
of the New York YourCare business on July 1, 2020, was offset by the decline in
membership, in the third quarter of 2020, associated with our announced exit of
operations in Puerto Rico. The remaining 300,000 increase in membership was
mainly due to the suspension of redeterminations, as we believe that
unemployment-related enrollment has not yet materially accessed managed
Medicaid. It remains unclear how high the COVID-related membership peak will be,
how quickly it will fall as the economy recovers, and where it will ultimately
settle. However it does now appear that since unemployment nationally is now
just under 8%, the initial industry estimates of unemployment-related Medicaid
membership increases were somewhat overstated. On a related note, the
declaration of the extension of the public health emergency period into next
year will also likely have an impact. 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 of September 30, 2020, we had available
borrowing capacity of $1 billion under the revolving credit facility of our
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
                       Molina Healthcare, Inc.September 30, 2020 Form 10-Q | 40
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we maintain a minimum consolidated net leverage ratio. See further discussion in
the Notes to Consolidated Financial Statements, Note 8, "Debt."
Future Uses
Common Stock Purchases. In September 2020, our board of directors authorized the
purchase of up to $500 million, in the aggregate, of our common stock. This
program will be funded with cash on hand and extends through December 31, 2021.
The exact timing and amount of any repurchase will be determined by management
based on market conditions and share price, in addition to other factors, and
subject to the restrictions relating to volume, price, and timing under
applicable law. No shares were purchased under this program through October 29,
2020.
Acquisitions. We have 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. For
further information on our acquisitions, refer to the Notes to Consolidated
Financial Statements, Note 4, "Business Combinations."
In September 2020, we entered into a definitive agreement to acquire
substantially all of the assets of Affinity Health Plan, Inc. The net purchase
price for the transaction is approximately $380 million, subject to various
adjustments at closing, which we intend to fund with cash on hand. We currently
expect the transaction to close as early as the second quarter of 2021.
In September 2020, we completed the acquisition of certain assets of Passport
Health Plan, Inc. The estimated total purchase price of $60 million includes our
initial cash payment of $20 million in September 2020, plus estimated contingent
consideration which consists primarily of an amount due to the seller for
members we enroll in the open enrollment period for the 2021 plan year, over a
minimum threshold, which resulted in an estimated contingent consideration
liability of $40 million. We expect to settle this liability in the first
quarter of 2021.
In April 2020, we entered into a definitive agreement to acquire the MCC line of
business of Magellan Health, Inc. The purchase price for the transaction is
approximately $820 million, net of certain tax benefits, 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
around the end of 2020. In connection with this transaction, Magellan Health,
Inc. has agreed to provide certain transition services following the closing.
Outcome of ACA Litigation. As described above in "Health Plans Segment-Trends
and Uncertainties," the U.S. Supreme Court has accepted the appeal of the Fifth
Circuit Court's decision regarding the constitutionality and severability of the
individual mandate. The ACA remains in effect pending the issuance of the
Supreme Court's opinion. A decision by the Supreme Court that the entirety of
the ACA is unconstitutional could have a material adverse effect on our
business, financial condition, cash flows, or results of operations.
Potential Impact of COVID-19 Pandemic. Beginning in early 2020 the pandemic,
along with the related quarantine and social distancing measures, initially
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. At the beginning of the third quarter of 2020,
utilization was still moderately curtailed, but rebounded to more normal levels
during the quarter. 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," we
have been subject to Medicaid premium actions as a result of the pandemic.
Various states have implemented temporary premium refunds 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 actions are retroactive to earlier periods in 2020, or as early as the
beginning of the states' fiscal years in 2019. In the second quarter of 2020, we
recognized approximately $75 million for certain of these retroactive premium
actions that we believe to be probable, and where the ultimate premium amount is
reasonably estimable. In most of those states, the refund period extended into
the third quarter of 2020, and one additional state, Michigan, enacted a premium
refund mechanism in the third quarter of 2020. Consequently, we recognized an
additional $88 million related to these retroactive premium actions in the third
quarter of 2020, resulting in $163 million recognized in the nine months ended
September 30, 2020.
It is possible that certain states could increase the level of existing premium
refunds, and it is also possible that other states could implement some form of
retroactive premium refund during the fourth quarter of 2020. Due to these
uncertainties, the ultimate outcomes could differ materially from our estimates
as a result of changes in facts
                       Molina Healthcare, Inc.September 30, 2020 Form 10-Q | 41
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or further developments, which could have an adverse effect on our consolidated
financial position, results of operations, or cash flows.
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.
The Molina Healthcare Charitable Foundation. In August 2020, we announced our
commitment of $150 million to fund The Molina Healthcare Charitable Foundation
(the "Foundation"), an independent not-for-profit charitable foundation. We
intend to make a sizable contribution to the Foundation in the fourth quarter of
2020.

CONTRACTUAL OBLIGATIONS
A summary of future obligations under our various contractual obligations and
commitments as of December 31, 2019, was disclosed in our Annual Report on Form
10-K for the year ended December 31, 2019.
Other than the financing transactions described in Notes to Consolidated
Financial Statements, Note 8, "Debt," there were no significant changes to our
contractual obligations and commitments outside the ordinary course of business
during the nine months ended September 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 7, "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 nine months ended September 30, 2020, to our
disclosure reported in "Critical Accounting Estimates" in our Annual Report on
Form 10-K for the year ended December 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 nine months ended September 30, 2020, to our disclosure reported in
"Critical Accounting Estimates" in our Annual Report on Form 10-K for the year
ended December 31, 2019.

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