Molina Healthcare, Inc. has a market cap of $1.05 billion; its shares were traded at around $25.55 with a P/E ratio of 44.2 and P/S ratio of 0.2. Molina Healthcare, Inc. had an annual average earning growth of 9.9% over the past 10 years.
Highlight of Business Operations:The Texas health plans financial performance improved dramatically in the third quarter from the second quarter of 2012. The medical care ratio of the Texas health plan was 90.3% in the third quarter of 2012 compared with 109.4% in the second quarter of 2012, and 93.7% in the third quarter of 2011. The medical care ratio for the Texas health plans ABD membership declined to 94% in the third quarter of 2012 from 119% in the second quarter. We received a blended rate increase in Texas of approximately 4%, or $4.5 million per month, effective September 1, 2012. The loss before taxes at the Texas health plan was approximately $5 million for the third quarter of 2012, compared with approximately $68 million for the second quarter of 2012 (which included a premium deficiency reserve charge of $10 million). In our Quarterly Report on Form 10-Q for the period ended June 30, 2012, we discussed the steps we are taking to return the Texas health plan to profitability. We confirm the previously disclosed expectation that the Texas health plan will be operating at financial break even on a go forward basis by December 2012.
The medical care ratio at the California health plan increased to 96.1% in the third quarter of 2012 from 88.8% in the third quarter of 2011. The higher medical care ratio was primarily the result of a shift in member mix to include more ABD members. The medical care ratio for the California health plans ABD membership was 110% in the third quarter of 2012, 100% for the nine months ended September 30, 2012, and 84% for the third quarter of 2011. The California Department of Health Care Services has recently solicited health plan input as to whether to conduct a review of the adequacy of ABD premium rates in California. The California health plan, which believes the ABD premium rates to be inadequate, has provided input supporting such a review. During the fourth quarter of 2012, we intend to exit an unprofitable service area in California, reducing enrollment by approximately 6,000 members.
The Wisconsin health plan reported a medical care ratio of 93.5% for the third quarter of 2012 compared with 79.1% for the third quarter of 2011. We believe that the states premium rates in effect through December 31, 2012 are not adequate to cover the costs of servicing that contract. Accordingly, we recorded a premium deficiency reserve for the Wisconsin health plan at June 30, 2012 of $3.0 million. One-half of that reserve was reversed during the third quarter corresponding with the reduction in the number of months remaining in the rating period. Absent the $1.5 million partial reversal of the premium deficiency reserve, the medical care ratio of the Wisconsin health plan would have been approximately 102.6% for the third quarter of 2012. Inpatient costs in the TANF program are the primary driver of the increased costs in the third quarter of 2012, when compared with the third quarter 2011. The Wisconsin health plan will receive new premium rates effective January 1, 2013. Company management believes that premiums remain too low to cover medical costs and is working with the state and CMS to achieve actuarially sound rates. Additionally, our Wisconsin plan has implemented provider contracting initiatives and new utilization management techniques as a part of its efforts to improve profitability. If we are unable to achieve rates that are actuarially sound, it may no longer be feasible for us to continue as a health plan in the state.
Cash provided by operating activities for the nine months ended September 30, 2012 was $264.0 million compared with $155.2 million for the nine months ended September 30, 2011, an increase of $108.8 million. Higher medical claims and benefits payable at our Texas health plan was the primary reason for the increase in cash flow provided by operating activities, followed by an increase in deferred revenue. Medical claims and benefits payable were a source of operating cash of $134.0 million in the nine months ended September 30, 2012 compared with $6.7 million in the nine months ended September 30, 2011. Deferred revenue was a source of operating cash amounting to $92.4 million in the nine months ended September 30, 2012, compared with $25.4 million in the nine months ended September 30, 2011.
In May 2012, we entered into a $42.5 million notional amount interest rate swap agreement, or Swap Agreement, with an effective date of March 1, 2013. While not designated as a hedge instrument, the Swap Agreement is intended to reduce our exposure to fluctuations in the contractual variable interest rates under our Term Loan Agreement, and expires on the maturity date of the Term Loan Agreement, which is November 30, 2018. Under the Swap Agreement beginning on March 1, 2013, we will receive a variable rate of the one-month LIBOR plus 3.25%, and pay a fixed rate of 5.34%. The Swap Agreement is measured and reported at fair value on a recurring basis, within Level 2 of the fair value hierarchy. Gains and losses relating to changes in its fair value are reported in earnings in the current period. For the three months and nine months ended September 30, 2012, we have recorded losses of $0.2 million and $1.3 million, respectively, to general and administrative expense. As of September 30, 2012, the fair value of the Swap Agreement is a liability of $1.3 million, recorded to other noncurrent liabilities. We do not use derivatives for trading or speculative purposes. We believe that we are not exposed to more than a nominal amount of credit risk relating to the Swap Agreement because the counterparty is an established and well-capitalized financial institution.
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