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Molina Healthcare's Rising Medical Care Costs Raise Caution

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On Aug 22, 2014, we issued an updated research report on Molina Healthcare Inc. (MOH - Free Report) . We believe that rising medical care costs, health plan implementation delays and the adverse impact of certain provisions of the healthcare reform might partially offset the benefits from higher memberships, effect of geographic expansion and increased revenues.

Earlier, Molina Healthcare reported second-quarter 2014 earnings that surpassed the Zacks Consensus Estimate but declined year over year mainly due to the Affordable Care Act (ACA) and Health Insurer Fee (HIF) reimbursement delay.

Molina Healthcare has been faring well in participating in the various healthcare program expansions, be it Medicaid, dual eligibles or Managed Medicaid. Effective Jan 2014, various health plans of Molina Healthcare have participated in the Medicaid expansion and dual-eligible demonstration.

While some health plans are awaiting participation, the Managed Medicaid contract from the Grays Harbor Community Hospital and Harbor Medical Group is expected to boost the payment received from the state for providing Medicaid services.

This Zacks Rank #3 (Hold) stock has been witnessing a steady increase in premiums and service revenues over the past several years and the first half of 2014 was no exception. In fact, Medicaid expansion in California, Illinois, Michigan, New Mexico, Ohio and Washington, along with the start-up of the South Carolina health plan, contributed significantly to overall revenues in the first half of 2014.

Moreover, creation of new health plans and enhancement of existing ones have increased Molina Healthcare’s membership, thereby boosting revenues. The company is also moving toward having all its health plans accredited by NCQA for Medicaid in order to gain further memberships. Moreover, the geographic expansions are helping Molina Healthcare strengthen its operations.

On the flip side, an increase in Molina Healthcare’s medical care costs raise caution. Higher medical care costs are also leading to a sharp rise in medical care ratio. Moreover, high operating expenses continue to pose a risk to the company’s operating leverage. Certain provisions of the ACA like ban on annual and lifetime coverage caps, annual fees on health insurance companies and excise tax on high premium insurance policies are likely to increase expenses further.

Additionally, a prime component of Molina Healthcare’s revenues, investment income has been declining over the years. Although it rose in the first half of 2014, investment income remains vulnerable to the low interest rate environment. The company is also exposed to losses related to delays in enrollment and delays in implementation of programs.

Such delays have been increasing administrative costs. Any further delays are likely to weigh on the cash flow, which will make it difficult for the company to meet the debt and liquidity needs going forward.

Other Stocks to Consider

Better-ranked stocks in the healthcare services space include Gentiva Health Services Inc. , Chemed Corp. (CHE - Free Report) and Centene Corp. (CNC - Free Report) . While Gentiva and Chemed sport a Zacks Rank #1 (Strong Buy), Centene carries a Zacks Rank #2 (Buy).

In-Depth Zacks Research for the Tickers Above

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Molina Healthcare, Inc (MOH) - free report >>

Chemed Corporation (CHE) - free report >>

Centene Corporation (CNC) - free report >>

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