Molina Withdraws 2012 Guidance

Molina Healthcare Inc. (MOH - Analyst Report) recently announced the withdrawal of its 2012 earnings per share guidance of $1.75 due to higher-than-expected medical claims in Texas. The Zacks Consensus Estimate for the company’s 2012 earnings currently stands at $1.76 per share, up 5.5% year-over-year. However, the estimate is expected to be revised downward soon to factor in the high medical costs.

Earlier, the company’s Texas plan – Molina healthcare of Texas – expanded its presence in Texas to several new regions, such as Hidalgo and El Paso. The premium rates for the new markets were fixed on Molina’s estimation of the utilization rates.

However, the actual claims exceeded the estimates, leading to Medical Care Ratio (MCR) (Ratio of health plan services expense to health plan services premium) of 120% for the STAR+PLUS plan in the two new markets. This means that the premium revenues from these markets are not enough to cover the medical costs, thus leading to losses.

Consequently, Molina expects its 2012 earnings to fall short of the previous estimates. High MCR in the Hidalgo and El Paso markets have also increased the MCR for the state of Texas to about 100%, while Molina expects the MCR, after excluding the new markets, to be around 93%. Utilization rate in the rest of the state is lower than that in Hidalgo and El Paso, thus leading to the underestimation of utilization in those markets by the company.

Nevertheless, Molina is considering some remedial steps to enhance profitability in Texas. The company will also fix new premium rates on September 1, 2012. However, the news resulted in a 31% decline in Molina’s share price to $17.77 on Thursday.

On a brighter note, the Ohio Department of Job and Family Services (ODJFS) upheld Molina’s subsidiary, Molina Healthcare of Ohio Inc.’s protest filing against the awarding of a Medicaid managed care contract to 5 rival bidders. In April this year, the subsidiary filed a protest complaining that the state made a mistake in scoring its submission and a rectification would lead to an alteration in the bidding results.

ODJFS upheld the protest and has endorsed the award of a new Medicaid managed care provider agreement to Molina. Consequently, the company will undergo a comprehensive pre-contracting assessment with ODJFS for a new Medicare contract, which will commence on January 1, 2013.

Molina competes with WellPointInc.(WLP - Analyst Report) and UnitedHealth Group Inc. (UNH - Analyst Report). The company currently carries a Zacks #3 Rank, implying a short-term ‘Hold’ rating. Considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the shares.