It’s been a very rough six months for shareholders of Long Beach-based health insurance giant Molina Healthcare Inc.

In mid-May, shares of Molina were trading at about $325 each. They have since plunged nearly 60% to close on Nov. 19 at $138.

The culprit: shareholder reaction to two consecutive earnings reports that showed Molina being slammed by sharply rising health care treatment costs. The increases have hit all three lines of Molina’s business of providing health insurance for government-sponsored programs: Medicaid, Medicare and the Obamacare health exchanges. And they have outstripped Molina’s ability to raise premium rates or institute additional cost-saving measures.

“The magnitude and persistence of these medical cost increases are unprecedented,” Joseph Zubretsky, Molina’s chief executive, told analysts in the company’s second quarter earnings conference call.

Share prices on downward roller-coaster

Three weeks before that call, Molina issued an unusual off-cycle earnings preview, warning that second quarter earnings would come in somewhat below expectations and at the low end of its guidance. The news hit with a thud, sending shares down 22% to $239.

When the full earnings report came out, not only were the earnings less than initial guidance, but Molina also lowered its full-year earnings guidance by more than $5 a share to $19. That prompted another 17% drop in the share price to about $158.

Over the next three months, Molina’s share price recovered a bit, coming close to $200. But then the bottom fell out again late last month as Molina reported in its third quarter earnings that medical treatment costs were still rising faster than its ability to counteract them, ratcheting up the pressure on margins. Molina shares gave back all their gains since midsummer, sliding 18% to close at $161.

But more bad news followed, starting with an analyst downgrade. Andrew Mok, equity analyst with the New York investment research unit of London-based Barclays Bank, downgraded Molina to “underweight” from “equal weight.” Mok said in his downgrade report that he expects costs under Medicaid to increase more than Molina is projecting, in part due to increasingly inadequate reimbursements from the federal government.

Then early this month, it became clear that federal government subsidies for the state-run Obamacare health insurance exchanges would not be extended under terms of the deal to end the record-long government shutdown. Roughly 10% of Molina’s enrolled membership comes from these exchanges; last year, revenue from the exchanges comprised about 7% of the overall revenue pie.

With the future of the subsidies in limbo, it is not clear whether and how many exchange enrollees across the nation would have to drop out of the exchanges. This news sent shares of many publicly traded health insurers down, including Molina, St. Louis-based Centene Corp. and Eden Prairie, Minnesota-based UnitedHealthcare Group Inc.

Why costs are rising

On the cost front, Molina has been grappling with a perfect storm of rising costs. Zubretsky, in that second quarter conference call with analysts, attempted to sum up the factors on the Medicaid side of the business, which accounts for roughly 80% of all revenue.

He said behavioral health costs have increased due to drivers on both the supply and demand side, as well as certain states enacting limitations on Medicaid managed care insurers’ ability to restrict patient usage of these services. Of course, high-cost drugs have contributed to the runup in costs, both because more prescriptions are being written and because of intense demand for high-costs drugs to treat cancer, HIV and other conditions and diseases.

In addition, Zubretsky said, more patients are being admitted to hospitals for treatment of “complex health episodes,” while more enrollees are visiting their primary care doctors and opting for preventative screenings.

“This is the fourth consecutive quarter we have observed some combination of these trends,” he said in that conference call following second quarter earnings. He noted 90 days later that these trends continued into the third quarter, though they were more focused on the exchange side of the business.

Medical cost ratios climbing

At many businesses facing rising costs, management decides to pass the costs along to consumers. Molina faces restrictions in its managed care contracts on how much and how often costs for enrollees can be increased.

On the other side, many states limit the ability of insurers to use their biggest tool in their cost-control toolbox: keeping utilization in check by imposing rigorous criteria that must be met before approving treatment requests.

In his second quarter comments to analysts, Zubretsky said that when this current rising cost trend started, Molina was able to absorb the higher costs through regularly scheduled premium increases and so-called “risk corridors,” essentially cost buffer provisions in contracts.

“By the fourth quarter of 2024, the increasing medical cost trend moved beyond the 2024 midyear rate updates and corridors have largely become depleted,” Zubretsky said.

Since then, this cycle has repeated.

All these costs are distilled into one commonly used measuring stick in the industry known as the medical cost ratio: the medical expenses paid by the insurer divided by the premium revenue. In general, the lower the medical cost ratio, the higher the insurer’s profitability. Conversely, an MCR of more than 100% means the insurer is spending more money on health care than it is taking in through premiums – operating at a significant loss.

Since many states have laws requiring insurers to spend at least 80% or 85% of their premium dollars on direct medical care, the optimum medical cost ratio is just above these thresholds.

But Molina’s medical cost ratios have been climbing. In the third quarter, the consolidated ratio across all of Molina’s lines of business stood at 92.6%. That’s up from 90.4% in the second quarter and 89.2% in the third quarter of last year.

“Our 92.6% consolidated MCR reflects the continuation of a very challenging medical cost environment in the third quarter,” Zubretsky said in the earnings call. “We produced an adjusted pretax margin of 1%.”

The picture on the health care exchange side of the business was even worse, with the medical cost ratio rising to 95.6% in the third quarter, Zubretsky noted.

Both Zubretsky and Chief Financial Officer Mark Keim said they expect this rising cost trend to continue through the fourth quarter.

Looking ahead, both Zubretsky and Keim said they are looking for premium rate increases for the new year starting in January to be “above trend.” They also said that as Molina is preparing bids for 2026, the company is factoring in the higher cost trends that have emerged in recent quarters. But they did not indicate whether that would be enough to put the medical cost ratios back on a downward trend.

Dose of good news

Amid all this gloom, Molina did have some good news to report. Earlier this month, the company announced it had won a major Medicaid contract in Florida, covering some 120,000 enrollees – mostly children enrolled in the Children’s Health Insurance Program, or CHIP. The announcement said that the total premium for this year under the exiting insurer was about $5 billion, which amounts to more than $40,000 per enrollee.

Zubretsky noted in the announcement many of the children have special medical care needs and that the high premium per enrollee amount was “to provide care for medically complex, high acuity populations.”

Of course, the very fact that these enrollees will likely need high levels of care could exacerbate the cost pressures that Molina is facing, especially in this current environment. The question is whether the premium paid out to Molina from this contract will offset these costs.