Long Beach-based health care insurance giant Molina Healthcare Inc. has been slammed with higher medical care costs in recent months, hampering its ability to deliver desired returns to shareholders.

In its most recent quarterly earnings report, Molina said its medical loss ratio surged past the key threshold of 90% during the fourth quarter, meaning that for every premium dollar taken in, the company spent more than 90 cents of that dollar on care costs. That was above company expectations of just over 88% for its medical loss ratio.

For all of last year, the ratio was just over 89%, with the ratio for its principal Medicaid line of business topping 90%, again above the target of 88%.

While these percentage differences might seem small, they translate into big dollars. Molina pulled in $38.6 billion in premium revenue last year, so a full percentage point increase in the full-year medical loss ratio means nearly $400 million in higher costs. In the fourth quarter, on premium revenue of about $10 billion, a percentage point increase in the loss ratio translates into nearly $100 million in higher costs.

This news did not sit well with Molina Healthcare investors, who sent shares down 10% on Feb. 6, the day after Molina’s earnings release.

The selloff may also have been triggered by increasing uncertainty over the level of Medicaid funding from the Republican-led Congress and the administration of President Donald Trump. About 80% of Molina’s business comes from the Medicaid program, the government health care program for low-income and indigent people.

Rising medical care costs

In the company’s Feb. 5 earnings call with analysts, Joseph Zubretsky, Molina’s chief executive, cited increased use of the health care system by Medicaid enrollees as a major factor for the higher-than-expected medical costs. He said this trend accelerated as the year progressed. Three of the areas specifically singled out for cost increases: long-term supportive care services, the use of prescription drugs and behavioral health services.

“In the second half of the year, we experienced higher than expected utilization among the continuing population,” he said. Increasing the premium rates in contract bids and other steps the company took “were not sufficient to completely offset the higher medical cost pressure that continued into the fourth quarter,” he added.

On the Medicare side, Zubretsky said there were significant national headwinds that contributed to the higher costs. Mark Keim, Molina’s chief financial officer elaborated, citing the same factors as on the Medicaid side, with the addition that there were more patients than expected enrolled in both Medicare and Medicaid (known as “dual eligible” patients) who were using outpatient services.

Zubretsky said he expects higher medical loss costs for Molina’s Medicare business to persist well into this year.

“We would characterize 2025 as a year of transition and some early growing pains as the business transforms to serve the increasingly integrated and high growth dual eligible population,” he said.

Both Zubretsky and Keim said that for 2025, Molina has increased the premium rates that are used in its contract bids, which they hope this time will completely offset the rising cost trends.

Scott Fidel, an analyst with New York-based Stephens Inc., said this is a necessary adjustment, saying in a research note on Molina that the company must acclimate to these new trends, especially the increasing proportion of patients enrolled in both Medicaid and Medicare.

Contract wins for the company

Negative developments on the cost front obscured what has been a fairly remarkable run of Medicaid contract wins for Molina that started about three years ago and continued through last year.

Zubretsky cited contract wins last year in Georgia, Idaho, Massachusetts, Michigan and Ohio.

“The incremental revenue from these new contracts is over $3 billion, an increase from the prior estimate of $1.8 billion we had shared at our November Investor Day,” Zubretsky said.

Molina also retained contracts in Florida, Michigan and Wisconsin, fending off challengers as those states rebid Medicaid contracts.

“These contracts represent over $2 billion of renewed premium revenue,” he said.

The only major contract setback last year was the loss of a Medicaid contract in Virginia, where Molina had grown its membership base to 140,000 over eight years. However, in the conference call, Zubretsky said the company has protested Virginia’s bid process and that the existing contract runs through a good portion of this year.

Nonetheless, he said the company is on track to reach $42 billion in premium revenue next year, a 9% increase over last year’s $38.6 billion.

He also noted that Molina will be picking up about 140,000 additional members through its $350 million acquisition of ConnectiCare Holding Co. that closed on Feb. 1. ConnectiCare has been one of Connecticut’s largest health plans.

Zubretsky said the acquisition should add about $1.2 billion in premium revenue; that’s a slight downward adjustment from the original estimate of $1.4 billion in added premium revenue this year.

That followed Molina’s $425 million acquisition of the California book of business from Minneapolis-based Bright Health Group Inc. that closed in early January of last year, adding roughly 125,000 members to its rolls.

Uncertain Medicaid funding future

Republicans in Congress are proposing Medicaid funding cuts to help offset revenue losses from extensive proposed tax cuts. The House budget bill approved last week calls for nearly $900 billion in Medicaid program cuts.

With 80% of its business coming from Medicaid patients, if the proposed Medicaid funding cuts were to be enacted, Molina stands to lose substantial revenue. The revenue losses could come on two fronts: reimbursement rates for services provided to current Medicaid patients and drastically smaller Medicaid contracts doled out by states in coming quarters and years.

Yet during the earnings conference call with analysts, Zubretsky said he did not believe there would be drastic cuts to the Medicaid program, despite pronouncements from the Trump administration and Republican Congressional leaders.

“We continue to believe that any changes to the Medicaid program as we know it today will be marginal,” Zubretsky said in the call. “Neither side of the aisle wants to see an increase in the number of uninsured, a reduction in benefits for those relying on government assistance or the related impact to providers.”

He elaborated on this politically unpalatable prospect.

When cutting Medicaid funding, he said, “It’s either got to be membership, benefits to existing membership, reductions of payments to providers, or higher taxes for the citizens in a state.

“(None) of those approaches is politically tenable,” he continued. “That’s why we conclude that any changes to manage Medicaid as we know it today would be marginal.”

Zubretsky’s comments did not appear to reassure investors. On Feb. 26, the day after the House budget bill passed with the Medicaid cuts, shares of publicly-traded Medicaid insurers generally fell; Molina shares saw a 7% drop, wiping out a brief rally earlier in the week.