Molina Healthcare Targets The Uninsured

By Gregory S. Davis | April 18, 2006 AAA

Molina Healthcare (MOH), established in 1980 by emergency room physician C. David Molina, started with one clinic in Long Beach, California and today spans a network of primary care physicians, specialists and hospitals across several states.

Molina Healthcare currently serves 893,000 members in California, Indiana, Michigan, New Mexico, Ohio, Utah, and Washington. Molina Healthcare has been operating 21 of its own primary care clinics in California for over 25 years and is considering expanding these facilities out to states in its existing network.

As an HMO that primarily serves Medicaid recipients, Molina Healthcare is paid by the states it serves. Molina Healthcare's revenue structure places a tremendous emphasis on its ability to curtail medical care costs, since revenues are essentially fixed for contracts setup with the states.

Although Molina Healthcare revenues increased 40% to $1.7 billion in 2005, medical care costs also increased 47% to $1.6 billion, sending net income down 50% from the previous year to $28 million. The medical care cost increases were related to catastrophic medical needs of members where payments exceeded $50,000, along with a higher utilization of services in geographic areas where Molina Healthcare contracts were not favorable.

Investors should also note that Molina Healthcare restated earnings in July last year, causing the stock to fall $20 dollars in one day to $26 per share. A class action lawsuit has been issued against the head officials of Molina Healthcare and the case is still pending.

Despite Molina Healthcare's troubles it has still been able to renew contracts with Washington State and Utah for their HMO services. Since the beginning of the year Molina Healthcare stock is up 17.8% closing at $31.80 on April 17th, driven by its ability to renew contracts along with the execution of its growth plan.

Medicare legislation passed in 2003 set aside $1 billion dollars to help states cover the cost of the uninsured through 2007. The money was dolled out to states with the highest numbers of undocumented workers. For fiscal year 2005 California received the biggest allotment of $70 million, while Texas received $46 million.

As part of Molina Healthcare's 2005 expansion program it acquired two health plans in San Diego and it also won a contract to serve Medicaid and Children's Health insurance program recipients in Houston and Galveston, TX. Molina Healthcare membership numbers increased a total of 13% in 2005.

Molina Healthcare is not alone in providing managed care to Medicaid recipients. Amerigroup Corp. (AGP) based in Virginia Beach, VA, is comparable in size to Molina Healthcare, but it caters to the mid-west and east coast region of the U.S. with operations primarily in Illinois, Florida, Maryland, New Jersey and New York. The growing market space has also attracted the nations biggest players in the healthcare plan industry, including WellPoint Inc. (WLP) and United Health Group (UNH), who are also taking strides to reach out to the uninsured.

Molina Healthcare operates in a politically charged segment of the healthcare market. The recent protests around the nation by Latino immigrants and social justice advocates highlights the importance of immigration issues as well as popular opposition against immigration reforms proposed by U.S. government officials.

An estimated 11-12 million undocumented immigrants with approximately 300,000 new Spanish speaking immigrants entering the country each year adds fuel to the debate. Molina Healthcare's competitive advantage of understanding the culture of its market along with its ability to provide quality managed care will continue to benefit the recipients of its much-needed services while rewarding its investors beyond the dollars and cents of capital appreciation.

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