MOLINA HEALTHCARE, INC. 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 titled "Risk Factors" in our 2020 Annual Report on Form 10-K, including without limitation the following: •the impact of the COVID-19 pandemic and its associated or indirect effects on our business, operations, and financial results; •the numerous political, judicial, and market-based uncertainties associated with the Affordable Care Act (the "ACA"), including the ultimate outcome of theCalifornia et al. v Texas et al. matter currently pending for decision before theUnited States Supreme Court ; •significant budget pressures on state governments from diminished tax revenues incidental to the COVID-19 pandemic and their efforts to reduce rates or limit rate increases, to impose profit caps or risk corridors, or to recoup previously paid premium amounts on a retroactive basis; •the market dynamics surrounding the ACA Marketplaces, including issues impacting enrollment, risk adjustment estimates and results, the potential for disproportionate enrollment of higher acuity members, and the discontinuation of premium tax credits; •the outcome of the legal proceedings inKentucky with regard to the Medicaid contract award to ourKentucky health plan and our acquisition of certain assets of Passport; •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 inCalifornia andTexas ; •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; •our ability to consummate, integrate, and realize benefits from acquisitions, including the completed acquisitions of Magellan Complete Care and Passport, and announced acquisitions of Affinity and of the Medicaid assets of Cigna inTexas ; •effective management of our medical costs; •our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with COVID-19; •cyber-attacks, ransomware attacks, or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected information; •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; •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; Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 20 -------------------------------------------------------------------------------- Table of Contents •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; •the success and renewal of our Medicare-Medicaid Plan ("MMP") 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; •changes in our annual effective tax rate, due to federal and/or state legislation, or changes in our mix of earnings and other factors; •complications, member confusion, eligibility redeterminations, or enrollment backlogs related to the renewal of Medicaid coverage; •fraud, waste and abuse matters, government audits or reviews, comment letters, or potential investigations, and any fine, sanction, enrollment freeze, corrective action plan, monitoring program, or premium recovery that may result therefrom; •our exit fromPuerto Rico , including the payment in full of our outstanding accounts receivable, 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; •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 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; •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 our 2020 Annual Report on Form 10-K, 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 2020 Annual Report on Form 10-K. Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 21 -------------------------------------------------------------------------------- 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, we served approximately 4.6 million members as ofMarch 31, 2021 . FIRST QUARTER 2021 HIGHLIGHTS We reported net income per diluted share of$3.89 for the first quarter of 2021, with net income of$228 million , which included the following: •Membership increase of 1.2 million, or 35%, compared withMarch 31, 2020 . •Premium revenue of$6.3 billion , which increased 47% compared with the first quarter of 2020, reflecting increased membership consistent with our expectations in Medicaid and Medicare, and exceeding our expectations in Marketplace; •Consolidated medical care ratio ("MCR") of 86.8%, which increased compared with 86.3% for the first quarter of 2020, but demonstrated strong fundamentals of cost management, particularly in light of the various pressure points caused by the COVID-19 pandemic, and was consistent with our expectations; •General and administrative expense ("G&A") ratio of 7.3%, which increased compared with 7.0% in the first quarter of 2020, but was consistent with our expectations; and •After-tax margin of 3.5%. We note the following factors impacting first quarter of 2021 financial results: •The net effect of COVID had a negligible impact on the first quarter of 2021, as the COVID-related utilization curtailment was offset by the states' COVID-related risk corridors and direct COVID medical costs; •While the net effect of COVID was in-line with our expectations and net negligible to the quarter in total, the impacts were varied by segment; and •We experienced higher than expected membership increases in Marketplace, due to strong open enrollment. This improvement resulted from several factors, including strong product design and competitive pricing, better than expected natural attrition rates, and the extended open enrollment period, as described in further detail below in "Trends and Uncertainties." Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 22 -------------------------------------------------------------------------------- Table of Contents CONSOLIDATED FINANCIAL SUMMARY Three Months Ended March 31, 2021 2020 (In millions, except per-share amounts) Premium revenue $ 6,306$ 4,304 Less: medical care costs 5,474 3,716 Medical margin 832 588 MCR (1) 86.8 % 86.3 % Other revenues: Premium tax revenue 187 150 Health insurer fees reimbursed - 66 Investment income 9 25 Other revenue 20 4 General and administrative expenses 473 317 G&A ratio (2) 7.3 % 7.0 % Premium tax expenses 187 150 Health insurer fees - 68 Depreciation and amortization 33 20 Other 20 4 Operating income 335 274 Interest expense 30 21 Income before income tax expense 305 253 Income tax expense 77 75 Net income $ 228$ 178 Net income per share - Diluted $ 3.89$ 2.92 Diluted weighted average shares outstanding 58.6 61.0 Other Key Statistics Ending membership 4.6 3.4 Effective income tax rate 25.2 % 29.8 % After-tax margin (3) 3.5 % 3.9 % ________________________ (1) MCR represents medical care costs as a percentage of premium revenue. (2) G&A ratio represents general and administrative expenses as a percentage of total revenue. (3) After-tax margin represents net income as a percentage of total revenue. CONSOLIDATED RESULTS NET INCOME AND OPERATING INCOME Net income in the first quarter of 2021 amounted to$228 million , or$3.89 per diluted share, compared with$178 million , or$2.92 per diluted share, in the first quarter of 2020. Operating income of$335 million in the first quarter of 2021, was higher compared with$274 million in the first quarter of 2020. The improvement in operating income was mainly due to membership growth and higher premium revenues in Medicaid and Marketplace, partially offset by increases in the Medicare and Marketplace MCRs. Net income per share in the first quarter of 2021 was favorably impacted by the reduction in common shares outstanding as a result of our share repurchases in late 2020 and early 2021. See further discussion in "Liquidity and Financial Condition," below. Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 23 -------------------------------------------------------------------------------- Table of Contents PREMIUM REVENUE Premium revenue increased$2 billion in the first quarter of 2021, when compared with the first quarter of 2020. In the first quarter of 2021, membership increased by 1.2 million compared with the first quarter of 2020, which mainly reflected increases in the Medicaid and Marketplace segments and included the impact from the Magellan Complete Care and other acquisitions that closed in the second half of 2020. The increase in premium revenue was net of COVID-related risk corridors that have been enacted in several states beginning in the second quarter of 2020. MEDICAL CARE RATIO The consolidated MCR in the first quarter of 2021 was 86.8%, compared with 86.3% in the first quarter of 2020. Our overall medical margin performance and MCR were consistent with expectations. The net effect of COVID had a negligible impact on the first quarter of 2021; however, the impacts were varied by segment. The Medicaid MCR benefited from lower utilization due to modest COVID-related curtailment, severe winter weather in several states, and the absence of a typical flu season, which was mostly offset by COVID-related risk corridors enacted in several states. The Medicare and Marketplace MCRs both increased compared with the first quarter of 2020, as both segments experienced a disproportionately negative impact from the net effect of COVID. The prior year reserve development in the first quarter of 2021 was modestly favorable, but its impact on earnings was absorbed by the COVID-related risk corridors. PREMIUM TAX REVENUE AND EXPENSES The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue) was 2.9% and 3.4% for the first quarter of 2021 and 2020, respectively. The current year ratio decrease was mainly due to changes in business mix resulting from the Magellan Complete Care and other acquisitions closed in the second half of 2020. INVESTMENT INCOME Investment income decreased to$9 million in the first quarter of 2021, compared with$25 million in the first quarter of 2020, due to the continued low interest rate environment and a temporarily higher allocation in shorter-term invested assets during the COVID-19 pandemic, which has been rescinded effective for the second quarter of 2021. OTHER REVENUE Other revenue increased to$20 million in the first quarter of 2021, compared with$4 million in the first quarter of 2020. Beginning in the first quarter of 2021, other revenue includes service revenue associated with the long-term services and supports consultative services we now provide inWisconsin , as a result of our Magellan Complete Care acquisition. Such service revenue amounted to$17 million in the first quarter of 2021. G&A EXPENSES The G&A expense ratio increased to 7.3% in the first quarter of 2021, compared with 7.0% in the first quarter of 2020, mainly reflecting integration and other costs associated with the Magellan Complete Care and other acquisitions closed in the second half of 2020. HEALTH INSURER FEES ("HIF") There were no HIF fees incurred or reimbursed in 2021, because the HIF was repealed effective for years after 2020. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased to$33 million in the first quarter of 2021, compared with$20 million in the first quarter of 2020, due primarily to amortization associated with acquisitions completed in the second half of 2020. Refer to Notes to Consolidated Financial Statements, Note 10, "Segments," for further information. Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 24 -------------------------------------------------------------------------------- Table of Contents OTHER OPERATING EXPENSES Other operating expenses increased to$20 million in the first quarter of 2021, compared with$4 million in the first quarter of 2020. Beginning in the first quarter of 2021, other operating expenses included service costs associated with the long-term services and supports consultative services we now provide inWisconsin , as noted above. Such service costs amounted to$13 million in the first quarter of 2021. INTEREST EXPENSE Interest expense increased to$30 million in the first quarter of 2021, compared with$21 million in the first quarter of 2020, mainly due to the issuance of$650 million principal amount of 3.875% Notes issued in the fourth quarter of 2020. See further details of our financing transactions in Notes to Consolidated Financial Statements, Note 8, "Debt," and below in "Liquidity and Financial Condition." INCOME TAXES Income tax expense amounted to$77 million in the first quarter of 2021, or 25.2% of pretax income, compared with income tax expense of$75 million , or 29.8% of pretax income in the first quarter of 2020. The effective tax rate was lower in 2021 mainly because the nondeductible HIF was repealed for years after 2020. TRENDS AND UNCERTAINTIES COVID-19 PANDEMIC As the COVID-19 pandemic continues to evolve, its ongoing 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 Medicaid, Medicare, and Marketplace segments follow. Federal Economic Stabilization and Other Programs In addition to various programs enacted in 2020 and described in our 2020 Annual Report on Form 10-K, the$1.9 trillion American Rescue Plan Act of 2021 was enacted onMarch 11, 2021 . This legislation includes several components to assist in COVID-19 vaccine testing and deployment, as well as provisions relating to the opening of schools; direct immediate relief to working families; and additional support for communities struggling the most in the wake of the pandemic. Among its specific provisions: •$350 billion in state and local funding; •Funding for Medicaid and CHIP COVID-19 vaccines and treatment to be matched at 100% of the federal medical assistance percentage ("FMAP"); •Incentives for states that have not expanded Medicaid to do so; •State flexibility to extend Medicaid eligibility to women for 12 months postpartum; •A temporary 10% FMAP increase for states to improve Medicaid home- and community-based services for one year; and •An increase to theACA Marketplace premium subsidies for 2021 and 2022. In addition, theBiden Administration has extended the COVID-19 related Public Health Emergency Declaration ("PHE").The Biden Administration has indicated the PHE will likely remain in place throughout 2021, and that states will receive 60 days' notice before the end of the PHE to prepare for the end of emergency authorities and the resumption of pre-PHE rules. This extension of the PHE will continue the suspension in state Medicaid eligibility redeterminations. Also,President Biden's January 2021 executive order providing for a three-month Marketplace special enrollment period fromFebruary 15, 2021 , toMay 15, 2021 , was extended throughAugust 15, 2021 . Due to the uncertainty as to the duration and breadth of the pandemic, we are unable to reasonably estimate the ultimate impact of the economic stabilization and other programs to our business, financial condition, and operating results. Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 25 -------------------------------------------------------------------------------- Table of Contents Operations Enrollment and Premium Revenue Excluding acquisitions and our exit fromPuerto Rico , we have added nearly 500,000 new Medicaid members sinceMarch 31, 2020 , when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations for Medicaid eligibility. We expect Medicaid enrollment to continue to benefit from the extension of the PHE period, and the associated pause on membership redeterminations, through the end of the third quarter of 2021. We estimate that for each month the PHE is extended, it could increase our full-year revenue estimate by$150 million . Marketplace revenue growth is now expected to be over 50% in 2021, and we expect to end 2021 with slightly more than 500,000 members. The current rate environment is stable and rational. We continue to believe that the risk-sharing corridors previously introduced are related to the declared PHE and will likely be eliminated as the COVID pandemic subsides. However, the risk corridors continue to contribute an added level of variability to our results of operations. In the first quarter of 2021, we recognized approximately$110 million for the impact of risk corridors enacted in several states beginning in the second quarter of 2020, in response to the lower utilization of medical services resulting from COVID-19. It is possible that certain states could increase the level of existing risk corridors, and other states could implement some form of retroactive risk corridors in the future. 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. Medical Care Costs We expect continued uncertainty regarding utilization trends as the pandemic continues. The speed and extent to which utilization rebounds will be greatly impacted by the economy and consumer behavior, provider capacity, and the potential resurgence of COVID-19 infection rates. We believe that some portion of the utilization curtailment experienced in the first quarter of 2021 is likely the result of service deferrals, and so these services will likely be provided to members over the remainder of the year. 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 continue to 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. Refer to "Liquidity and Financial Condition" below for further discussion of our capital and financial resources. AFFORDABLE CARE ACT InDecember 2018 , in a case brought by the state ofTexas and nineteen other states, a federal judge inTexas held that the individual mandate of the ACA 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 further consideration of the severability issue. The intervenor defendant states led byCalifornia subsequently appealed the case to theU.S. Supreme Court , which heard oral arguments in the case onNovember 10, 2020 . TheSupreme Court's decision is expected byJune 2021 . If theSupreme Court were to rule that the individual mandate is unconstitutional, and that the individual mandate is not severable from the balance of the ACA, or that the entirety of the ACA is unconstitutional, that ruling could have a material adverse effect on our business, financial condition, cash flows, or results of operations. As ofMarch 31, 2021 , we served a significant number of members enrolled in programs created by the ACA, including approximately 990,000 Medicaid Expansion members and 620,000 Marketplace members. In the first quarter of 2021, premium revenue associated with these members amounted to$2.1 billion , and contributed medical margin of$374 million . Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 26 -------------------------------------------------------------------------------- Table of Contents OTHER RECENT DEVELOPMENTS Texas Acquisition-Medicaid and Medicare. OnApril 22, 2021 , we announced a definitive agreement to acquire Cigna Corporation's Texas Medicaid and Medicare-Medicaid Plan ("MMP") contracts, along with certain operating assets. As ofDecember 31, 2020 , Cigna served approximately 48,000 members in theTexas ABD program, also known as "STAR+PLUS," in theHidalgo ,Tarrant and Northeast service areas, and approximately 2,000 MMP members in theHidalgo service area, with full year 2020 premium revenue of approximately$1.0 billion . The purchase price for the transaction is approximately$60 million , which we intend to fund with cash on hand. The transaction is subject to receipt of applicable federal and state regulatory approvals and satisfaction of other customary closing conditions. We currently expect the transaction to close in the second half of 2021. Ohio Procurement-Medicaid. OnApril 13, 2021 , we announced that ourOhio health plan subsidiary was selected as an awardee in all three regions across the state pursuant to the Medicaid managed care request for award issued onSeptember 30, 2020 , by theOhio Department of Medicaid . This new contract is expected to begin in early 2022, and will offer health care coverage to Medicaid beneficiaries through the state ofOhio's Covered Family and Children, Expansion, and ABD programs. For a discussion of additional segment trends, uncertainties and other developments, refer to our 2020 Annual Report on Form 10-K, "Item 1. Business-Our Business," and "-Legislative and Political Environment." REPORTABLE SEGMENTS As ofMarch 31, 2021 , we served approximately 4.6 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. In the first quarter of 2021, we realigned our reportable operating segments to reflect recent changes in our internal operating and reporting structure, which is now organized by government program. These reportable segments consist of: 1) Medicaid; 2) Medicare; 3) Marketplace; and 4) Other. The Medicaid, Medicare, and Marketplace segments represent the government-funded or sponsored programs under which we offer managed healthcare services. The Other segment, which is insignificant to our consolidated results of operations, includes certain corporate amounts not associated with or allocated to the Medicaid, Medicare, or Marketplace segments. Additionally, the Other segment includes service revenues and service costs associated with the long-term services and supports consultative services we now provide inWisconsin , as a result of the Magellan Complete Care acquisition onDecember 31, 2020 . 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 Medicaid, Medicare, and Marketplace segments are premium revenue, medical margin and MCR. MCR represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying medical margin, or the amount earned by the Medicaid, Medicare, and Marketplace segments after medical costs are deducted from premium revenue, represents the most important measure of earnings reviewed by management, and is used by our chief executive officer to review results, assess performance, and allocate resources. The key metric used to assess the performance of our Other segment is service margin. The service margin is equal to service revenue minus cost of service revenue. Management's discussion and analysis of the change in medical margin is discussed below under "Segment Financial Performance." For more information, see Notes to Consolidated Financial Statements, Note 10, "Segments." Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 27 -------------------------------------------------------------------------------- Table of Contents SEGMENT MEMBERSHIP The following table sets forth our membership by segment as of the dates indicated: March 31, December 31, March 31, 2021 (1) 2020 2020 Medicaid 3,859,000 3,599,000 2,970,000 Medicare 126,000 115,000 105,000 Marketplace 620,000 318,000 329,000 Total 4,605,000 4,032,000 3,404,000 ____________________ (1)Approximately 200,000 members, from the Magellan Complete Care acquisition that closed onDecember 31, 2020 , are included in the totals as ofMarch 31, 2021 , but not in prior periods.
SEGMENT FINANCIAL PERFORMANCE The following table summarizes premium revenue, medical margin, and MCR by segment for the periods indicated (dollars in millions):
Three Months Ended March 31,
2021 2020
Premium Medical Premium Medical
Revenue Margin MCR Revenue Margin MCR
Medicaid $ 4,840 $ 604 87.5 % $ 3,286 $ 365 88.9 %
Medicare 799 77 90.3 634 117 81.7
Marketplace 667 151 77.3 384 106 72.3
Total $ 6,306 $ 832 86.8 % $ 4,304 $ 588 86.3 %
Medicaid
Medicaid premium revenue increased$1,554 million in the first quarter of 2021, when compared with the first quarter of 2020. The increase was mainly due to membership growth and the impact from the Magellan Complete Care and other acquisitions closed in the second half of 2020. Excluding the acquisitions, the membership growth was across several states and was mainly driven by the extension of the PHE period and the associated suspension of membership redeterminations due to COVID-19. The overall increase was partially offset by state risk corridors stemming from COVID-19. As described above in "Trends and Uncertainties," we recognized approximately$110 million in the first quarter of 2021, for the impact of risk corridors enacted in several states beginning in the second quarter of 2020, in response to the lower utilization of medical services resulting from COVID-19. The medical margin in our Medicaid program increased$239 million , or 65%, in the first quarter of 2021 when compared with the first quarter of 2020. The increase was driven by increased premium revenues and margin associated with the membership growth discussed above, and from a reduction in the MCR. The total Medicaid MCR decreased to 87.5% in the first quarter of 2021, from 88.9% in the first quarter of 2020, or 140 basis points. The improvement was mainly attributable to lower than expected utilization, resulting from the combined effects of a modest level of COVID-related utilization curtailment, severe winter weather in several states, and the absence of a typical flu season. Performance in utilization management and payment integrity also favorably impacted the MCR. The improvement was partially offset by the impact of the various COVID-related risk corridors enacted by several states, as discussed above. Medicare Medicare premium revenue increased$165 million in the first quarter of 2021, primarily due to the impact from the Magellan Complete Care acquisition, including higher membership and higher premium revenue PMPM. The increase was partially offset by risk corridors, mainly in MMP, enacted in response to the lower utilization of medical services stemming from COVID-19. Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 28 -------------------------------------------------------------------------------- Table of Contents The medical margin for Medicare decreased$40 million , in the first quarter of 2021, when compared with the first quarter of 2020, mainly due to an increase in the MCR, partially offset by the increase in revenues. The Medicare MCR increased to 90.3% in the first quarter of 2021, from 81.7% in the first quarter of 2020, or 860 basis points. The increase was primarily driven by higher direct COVID medical costs, and risk scores that do not fully reflect the acuity of our membership. Marketplace Marketplace premium revenue increased$283 million in the first quarter of 2021, mainly due to increased membership, partially offset by a decrease in premium revenue PMPM. Our Marketplace membership as ofMarch 31, 2021 , amounted to 620,000 members, representing growth of 302,000 members sequentially, and substantially exceeding our previous beginning of the year expectation of approximately 500,000 members. This improvement resulted from several factors, including strong product design and competitive pricing, better than expected natural attrition rates, and the extended open enrollment period. The decrease in premium revenue PMPM was mainly driven by changes in business mix, with an increase of members in the bronze metal tier. The Marketplace medical margin increased$45 million in the first quarter of 2021, when compared with the first quarter of 2020, primarily due to the increase in membership and premiums, partially offset by an increase in the MCR compared to 2020. The Marketplace MCR increased to 77.3% in the first quarter of 2021, from 72.3% in the first quarter of 2020, or 500 basis points. The increase resulted from higher direct COVID medical costs, as the COVID infection rate resurged in many of our Marketplace geographies. Other The Other segment includes service revenues and costs associated with the long-term services and supports consultative services we now provide inWisconsin , and also includes certain corporate amounts not allocated to the Medicaid, Medicare, or Marketplace segments. Such amounts were immaterial to our consolidated results of operations in the first quarters of 2021 and 2020, respectively. 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 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 quarter of 2021, 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 in "Future Sources and Uses of Liquidity-Future Uses-Potential Impact of COVID-19 Pandemic." 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 first quarter of 2021, the parent received$74 million 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 first quarter of 2021, the parent contributed capital of$52 million to the regulated health plan subsidiaries. Cash, cash equivalents and investments at the parent company amounted to$436 million and$644 million as ofMarch 31, 2021 , andDecember 31, 2020 , respectively. The decrease as ofMarch 31, 2021 , was mainly due to our share repurchase program. In the first quarter of 2021, we purchased an aggregate of approximately 577,000 shares for$122 million , at an average cost of$211.65 per share. Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 29 -------------------------------------------------------------------------------- Table of Contents 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: Three Months Ended March 31, 2021 2020 Change (In millions) Net cash provided by operating activities$ 568 $ 143 $ 425 Net cash used in investing activities (87) (103) 16 Net cash used in financing activities (207) (125) (82)
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents
$ 274 $
(85)
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 first quarter of 2021 was$568 million , compared with$143 million in the first quarter of 2020. The$425 million increase in cash flow was due to the growth in operations and the net impact of timing differences in government receivables and payables. Investing Activities Net cash used in investing activities was$87 million in the first quarter of 2021, compared with$103 million in the first quarter of 2020, an increase in cash flow of$16 million . This increase was primarily due to decreased purchases of investments in the first quarter of 2021. Financing Activities Net cash used in financing activities was$207 million in the first quarter of 2021, compared with$125 million in the first quarter of 2020, a decrease in cash flow of$82 million . In the first quarter of 2021, financing cash outflows included common stock purchases of$128 million ,$51 million for common stock withheld to settle employee tax obligations, and$20 million paid to settle contingent consideration liabilities relating to our Kentucky Passport acquisition in 2020. In the first quarter of 2020, net cash paid for the common stock purchases amounted to$453 million , partially offset by proceeds of$380 million borrowed under the term loan facility.Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 30 -------------------------------------------------------------------------------- Table of Contents 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, atMarch 31, 2021 , our working capital was$3.0 billion , compared with$2.9 billion atDecember 31, 2020 . AtMarch 31, 2021 , our cash and investments amounted to$6.5 billion , compared with$6.2 billion atDecember 31, 2020 .Regulatory Capital and Dividend Restrictions Each of our regulated, wholly owned 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 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 requirement for these subsidiaries was estimated to be approximately$1.7 billion atMarch 31, 2021 , compared with$1.5 billion atDecember 31, 2020 . The aggregate capital and surplus of our wholly owned subsidiaries was in excess of these minimum capital requirements as of both dates. Under applicable regulatory requirements, the amount of dividends that may be paid by our wholly owned subsidiaries without prior approval by regulatory authorities as ofMarch 31, 2021 , was approximately$30 million in the aggregate. The 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 ofMarch 31, 2021 , management believes that its regulated wholly owned 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 "Ba3" 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. In addition, the indentures governing each of our outstanding high-yield senior 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. As ofMarch 31, 2021 , we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt. FUTURE SOURCES AND USES OF LIQUIDITY Future Sources Our 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. Excluding acquisitions and our exit fromPuerto Rico , we have added nearly 500,000 new Medicaid members sinceMarch 31, 2020 , when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations for Medicaid eligibility. We expect Medicaid enrollment to continue to benefit from the extension of the PHE period, and the associated pause on membership redeterminations, through the end of the third quarter of 2021. We estimate that for each month the PHE is extended, it could increase our full-year revenue estimate by$150 million . 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 couldMolina Healthcare, Inc. March 31, 2021 Form 10-Q | 31 -------------------------------------------------------------------------------- Table of Contents 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 ofMarch 31, 2021 , we had available borrowing capacity of$1.0 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 our consolidated net leverage ratio is not greater than a defined maximum. See further discussion in the Notes to Consolidated Financial Statements, Note 8, "Debt." Future Uses Common Stock Purchases. InSeptember 2020 , our board of directors authorized the purchase of up to$500 million , in the aggregate, of our common stock. This program is funded with cash on hand and extends throughDecember 31, 2021 . The exact timing and amount of any repurchase is 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. As ofApril 29, 2021 , approximately$219 million remained available to purchase our common stock under this program throughDecember 31, 2021 . Acquisitions. OnApril 22, 2021 , we announced a definitive agreement to acquire Cigna Corporation's Texas Medicaid and Medicare-Medicaid Plan ("MMP") contracts, along with certain operating assets. As ofDecember 31, 2020 , Cigna served approximately 48,000 members in the Texas ABD program, also known as "STAR+PLUS," in theHidalgo ,Tarrant and Northeast service areas, and approximately 2,000 MMP members in theHidalgo service area, with full year 2020 premium revenue of approximately$1.0 billion . The purchase price for the transaction is approximately$60 million , which we intend to fund with cash on hand. The transaction is subject to receipt of applicable federal and state regulatory approvals and satisfaction of other customary closing conditions. We currently expect the transaction to close in the second half of 2021. InSeptember 2020 , we entered into a definitive agreement to acquire substantially all of the assets ofAffinity Health Plan, Inc. , a Medicaid health plan inNew York . 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 in the third quarter of 2021. In connection with the acquisition of certain assets ofPassport Health Plan, Inc. in 2020, in the first quarter of 2021, the contingent purchase consideration relating to 2021 member enrollment was finalized and half the consideration due, or$23 million , was paid to the seller. We expect to pay the remaining balance of the liabilities, reported in "Accounts payable, accrued liabilities and other" in the accompanying consolidated balance sheets, later in 2021 and in the first quarter of 2022. Outcome of ACA Constitutionality Court Case. As described above in "Trends and Uncertainties," theSupreme Court's decision is expected byJune 2021 . If theSupreme Court were to rule that the individual mandate is unconstitutional, and that the individual mandate is not severable from the balance of the ACA, or that the entirety of the ACA is unconstitutional, that ruling could have a material adverse effect on our business, financial condition, cash flows, or results of operations. Potential Impact of COVID-19 Pandemic. As described above in "Trends and Uncertainties," we have been subject to Medicaid risk corridors as a result of the pandemic. Beginning in 2020, throughMarch 31, 2021 , various states enacted temporary risk corridors in response to the reduced demand for medical services stemming from COVID-19, which have resulted in a reduction of our medical margin. In some cases, these risk corridors were retroactive to earlier periods in 2020, or as early as the beginning of the states' fiscal years in 2019. Beginning in the second quarter of 2020, we have recognized retroactive risk corridors that we believe to be probable, and where the ultimate premium amount is reasonably estimable. In the first quarter of 2021, we recognized approximately$110 million related to such risk corridors, primarily in the Medicaid segment. It is possible that certain states could increase the level of existing risk corridors, and other states could implement some form of retroactive risk corridors in the future. 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. 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.Molina Healthcare, Inc. March 31, 2021 Form 10-Q | 32 -------------------------------------------------------------------------------- Table of Contents CONTRACTUAL OBLIGATIONS A summary of future obligations under our various contractual obligations and commitments as ofDecember 31, 2020 , was disclosed in our 2020 Annual Report on Form 10-K. There were no significant changes to our contractual obligations and commitments outside the ordinary course of business during the first quarter of 2021. 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, in the first quarter of 2021 there have been no significant changes to our disclosure reported in "Critical Accounting Estimates" in our 2020 Annual Report on Form 10-K. •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. In the first quarter of 2021, there have been no significant changes to our disclosure reported in "Critical Accounting Estimates" in our 2020 Annual Report on Form 10-K. •Business combinations, goodwill, and intangible assets, net. In the first quarter of 2021, we realigned our reportable operating segments to reflect recent changes in our internal operating and reporting structure, which is now organized by government program. The revised reporting structure reflects the reporting and review process used by our chief executive officer (who is our chief operating decision maker) to assess performance and allocate resources, and is consistent with how we currently manage the business and view the markets we serve. These reportable segments consist of: 1) Medicaid; 2) Medicare; 3) Marketplace; and 4) Other. Such reportable operating segments also now constitute our reporting units in the annual assessment of goodwill impairment. Refer to Notes to Consolidated Financial Statements, Note 10, "Segments," for a presentation of goodwill, and intangibles assets, net, by reportable segment, and "Critical Accounting Estimates," in our 2020 Annual Report on Form 10-K, for further information.
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