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Monday, May 23, 2022

Molina Moves to S&P 500 Index, Capping Huge Share Price Runup

The last year has been a good ride for investors in Molina Healthcare Inc., punctuated last month with Molina joining the Standard & Poor’s 500 Index.
The Long Beach company provides managed health care services for government-sponsored Medicare, Medicaid and Obamacare programs. It has benefited from increased federal support for these programs, especially managed Medicaid contracts that make up roughly three-fourths of its revenue. As the company has expanded its member base and revenue, shares have gone up 47% over the past year, reaching an all-time high early last week of $343 a share.

Zubretsky

Then, on March 2, Molina moved over to the S&P 500 Index from its longtime position as a member of the S&P mid-cap 400 Index. The S&P 500 is one of the three marquee stock market indices and the one with the broadest reach.
“It’s a stamp of approval,” said A.J. Rice, health care services analyst at Credit-Suisse A.G. Rice said being on the S&P 500 helps Molina in competing for Medicaid contracts.

On the investor front, several exchange-traded funds and index funds mirror the S&P 500, Rice said. That means investors who buy into those funds are also buying into Molina.
Also, Rice noted that the S&P 500 is primarily a large cap index, signifying that Molina – with its market cap of about nearly $20 billion – is now regarded as a large cap company.

Investors certainly showed more interest on the days surrounding its move to the S&P 500. On March 1, share volume peaked at nearly 14 million, about 30 times a typical trading day.

On the business side, Rice said Molina’s move onto the S&P 500 puts it in the same league as three of its major competitors for managed Medicaid contracts: St. Louis, Mo.-based Centene Corp.; Minnetonka, Minn.-based UnitedHealth Group; and Indianapolis, Ind.-based Anthem Inc.

“The state agencies making these contract redeterminations do view the S&P 500 as a stamp of approval,” Rice said. “Molina previously being on the S&P mid-cap 400 did carry some significance, but now being on the S&P 500 caries more and broader cachet.”

Medicaid boost

Yet Rice said he didn’t want to oversell the significance Molina’s move onto the S&P 500. Of more overall importance to Molina’s fortunes, he said, has been the tremendous boost that the company has received from increased federal funding for Medicaid patients.

The American Rescue Act signed into law in March 2021 increased financial incentives for 14 holdout states to expand Medicaid coverage and added up to $11 billion in one-time matching funds for the Medicaid Home and Community-Based Services program. Also in the legislation was an increase in federal subsidies for state-run insurance marketplace programs created through the 2010 Affordable Care Act, also known as Obamacare exchanges.

As this Medicaid pie was growing bigger, Molina improved its competitive strategies, scoring Medicaid contract wins in Nevada and Ohio last year.
The company also made a pair of strategic acquisitions last year that boosted its premium revenue by about $1.7 billion. The company bought Bloomfield Conn.-based Cigna Corp.’s Texas Medicaid business for $60 million and AgeWell New York of New Hyde Park, N.Y. for about $110 million.

Molina’s Chief Executive Joe Zubretsky summed up the cumulative impact of all this activity during a recent teleconference call with analysts.
“We generated premium revenue of $26.9 billion, an increase of 47% over our full year 2020 premium revenue and $3.9 billion above our initial 2021 guidance,” he said.

Ballooning costs

Even as premium revenue was soaring last year, Molina found itself with a major problem: unexpected increases in medical treatment costs, especially for its patients who sought coverage through the state insurance (Obamacare) exchanges.

“Our marketplace medical care ratio for the full year was 86.9%, well above our long-term target,” Zubretsky said in the analyst call, referring to the standard measurement of treatment costs. “This reflects the significant cost related to the net effect of Covid in our largest geographies, and the high-cost impact of the adverse selection related to the special enrollment period.”

According to Zubretsky, a major culprit was the extended enrollment period last year for the state insurance exchanges due to the Covid-19 pandemic; that extension brought in a cumulative total of about 300,000 patients.
But, Credit-Suisse analyst Rice explained, many of those patients used the extended enrollment period to wait until they got sick – either with Covid or other illnesses – to sign up. So, Molina was treating a more expensive pool of patients, which in turn drove up those treatment costs.

“Much of this was a one-time occurrence tied to the extended enrollment period,” Rice said.
Zubretsky said the company was taking steps this year to try to keep those costs in check or produce additional offsetting revenue.
Looking ahead, Molina issued guidance for this year showing a premium revenue growth of about 6%, far below last year’s 47%.

Rice called this a “settling back into more modest growth rates” after the disruptions of the past couple years. A major factor behind this forecast is the expectation that government funding and reimbursement levels will begin to taper back to historical norms.

Also, the company projects that up to two-thirds of the marketplace insurance exchange members will choose not to renew with Molina as the Bronze-level plans are dropped in favor of the higher margin Silver plans.
But Zubretsky said in his remarks to analysts that this effort will pay off over the longer term with a higher margin book of business.

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