Molina Healthcare rebounded from a rocky 2017 with a strong second quarter earnings report released Tuesday, heralding earnings of $3.02 per diluted share. This includes a $79 million positive impact from settling the 2017 marketplace risk-adjustment payment, according to CEO Joe Zubretsky. Accounting for net expenses stemming from Molina’s extensive restructuring and debt extinguishment efforts, the company saw second quarter fully diluted earnings per share of $2.19.
The Long Beach, California-based insurer reported premium revenue increases of $191 million (4.4% higher than Q1 2017) — increases that prompted Molina to boost its end-of-year financial guidance. Its GAAP earnings per diluted share ratcheted $3 higher to between $7.15 and $7.35.
Net income increased to $202 million in Q2, up from $107 million in the first quarter of this year. Net profit margin was 4.1% in the second quarter alone, a touch higher than the 3.2% year-to-date figure.
The company appears to be slowly overcoming the turbulent executive changes and losses of 2017, including a $555 million operating income loss compared to the prior year. Molina eliminated 1,500 jobs — 7% of its total workforce — to cut costs in Q2 of 2017 alone.
In May 2017, the insurer, which sells plans in Medicare, Medicaid and the ACA exchanges, abruptly ousted CEO Mario Molina and CFO John Molina (the sons of the company’s founder), citing their “disappointing” financial performance.
Zubretsky touted the company’s reduced administrative costs on a Wednesday earnings call. Molina’s administrative expense ratio decreased to 6.9% this quarter (7.2% year-to-date), an improvement that Zubretsky attributed to “a combination of continued administrative cost containment and better than expected revenue” in the call.
The company also repaid $300 million in outstanding debt this past quarter, bringing its half-year total to $493 million.
Molina has also simplified its capital structure and contracted to sell a non-core operating asset, Molina Medicare Solutions, to DXC Technology. The deal, announced in June, will give the parent company between $150 and $180 million in additional cash post-transaction costs and taxes once it closes, expected sometime in the third quarter.
Zubretsky said Molina’s marketplace businesses, Medicare, Medicaid were all either outperforming or fulfilling expectations.
The primary driver of improvement for Medicaid business was contained medical cost, particularly inpatient cost. The nearly 70,000 additional members Molina was awarded in an April 1 statewide Illinois contract couldn't have hurt either, along with renewed and expanded contracts in Florida, Puerto Rico and Washington.
Medicare reaped the benefits as well, continuing to perform well into the quarter with a medical care ratio remaining flat at 85%.
Yet it was in the ACA marketplace that investors were surprised, given concerns over the area. Zubretsky said that it’s now becoming clear that the price increases Molina placed in the market, along with “improved retention of risk-adjusted revenue,” are producing results projected to outperform the company’s pre-tax target margin of 4.6%.
Zubretsky highlighted three factors that contributed to the positive performance: a slowly-attriting membership with premium volumes better than expected, outperformance in the risk-adjusted revenue procast and the risk profile of the reduced membership base and related medical cost experience being consistent with Molina’s pricing assumption.
Although Molina may have waffled on ACA participation in the past, these strong numbers seem to bolster the decision to double down on the individual market now that concerns about the fragility of the marketplace have calmed somewhat.
The payer is considering a move into ACA markets in North Carolina, Wisconsin and Utah despite continued industry concern over the future of the program amidst the back-and-forth in Washington.
Though Molina is “pleased” with the trajectory of its financial results, Zubretsky and CFO John Tran reiterated that they remain cautious. “We are still in the early stages of our margin recovery and sustainability plan,” he said. “If we continue to deliver on the elements of our turnaround plan for 2018, we will have built a strong baseline from which to achieve the 2019 and 2020 margin targets."