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Risk-Reward Balanced at Molina

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On April 16, 2014, we issued an updated research report on Molina Healthcare Inc. . The company has been seeing higher service revenues, increased membership and inorganic expansions that bode well for long-term growth. However, rising medical care costs, delays in enrollment and program execution, and declining cash flows raise concern.  

Molina has been gaining new contracts that should boost its membership base. In Nov 2013, the company was selected by the Michigan Department of Community Health (MDCH) to participate in the Michigan Demonstration Program to Integrate Care for Persons Eligible for Medicare and Medicaid. On commencement of the program in Oct 2014, memberships are slated to increase further.

Other health plans of Molina like those in California, Ohio and South Carolina were also selected for the dual-eligible demonstration projects beginning 2014. Also, Molina gained members under New Mexico’s State Coverage Insurance (SCI) program with Lovelace, effective Jan 2014.

Continuing the positives, the acquired assets of Community Health Solutions of America Inc. has contributed around 137,000 members to the company’s in Jan 2014. Molina has been witnessing a steady increase in premiums and service revenues over the past several years.

However, on the tepid side, rising medical care costs are constricting margins. Also, expenses rose in 2013 on the establishment of a health plan in South Carolina, long-term care programs in Florida and New Mexico and acquisitions in New Mexico. Medical care costs are expected to increase in 2014 as well, leading to deterioration in the Medical Care ratio. Moreover, Molina’s investment income remains vulnerable to a decline in interest rates which might further reduce investment income.

Molina is exposed to losses related to delays in enrollment and delays in implementation of programs. For instance, the deferred Illinois health plan, from February to March 2014, is expected to increase administrative costs significantly. Any further postponement is likely to weigh on the cash flow of the company, which has declined considerably in 2013.

Moreover, the establishment of minimum medical loss ratios is increasing the expenses of healthcare companies. Further provision of the U.S. Health Care Reform Act, that is pending implementation, will likely raise expenses. Particularly, the restriction on charging higher premiums from patients with pre-existing medical conditions should increase benefit expenses from 2014.

This Zacks Rank #3 (Hold) healthcare services company delivered negative earnings surprises in two of the last four quarters, with a negative average surprise of 11.82%.

Other Stocks to Consider

Aetna Inc. , WellPoint Inc. and MEDNAX Inc. are some better-ranked stocks in the healthcare services space. All three stocks carry a Zacks Rank #2 (Buy).

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