UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-31719

Molina Healthcare, Inc.

Delaware		13-4204626
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
200 Oceangate, Suite 100
Long Beach, California		90802
(Address of principal executive offices)		(Zip Code)

(562) 435-3666
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the issuer’s Common Stock, par value $0.001 per share, outstanding as of April 30, 2010, was approximately 25,730,000.

 

 

MOLINA HEALTHCARE, INC.

Index

Part I — Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009			3
Consolidated Statements of Income for the three months ended March 31, 2010 and 2009 (unaudited)			4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and 2009 (unaudited)			5
Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
Part II — Other Information
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 6. Exhibits			40
Signatures			41
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1: Financial Statements.

MOLINA HEALTHCARE, INC.

		March 31,				December 31,
		2010				2009
		(Amounts in thousands,
		except per-share data)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	438,281			$	469,501
Investments			175,911				174,844
Receivables			128,600				136,654
Income and related taxes refundable			3,132				6,067
Deferred income taxes			4,279				8,757
Prepaid expenses and other current assets			15,051				15,583
Total current assets			765,254				811,406
Property and equipment, net			77,879				78,171
Goodwill and intangible assets, net			210,605				214,254
Investments			55,580				59,687
Restricted investments			36,930				36,274
Receivable for ceded life and annuity contracts			25,378				25,455
Other assets			19,322				19,988
		$	1,190,948			$	1,245,235
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable		$	326,973			$	316,516
Accounts payable and accrued liabilities			86,033				71,732
Deferred revenue			11,321				101,985
Total current liabilities			424,327				490,233
Long-term debt			160,143				158,900
Deferred income taxes			11,201				12,506
Liability for ceded life and annuity contracts			25,378				25,455
Other long-term liabilities			16,073				15,403
Total liabilities			637,122				702,497
Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 25,728 shares at March 31, 2010 and 25,607 shares at December 31, 2009			26				26
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding			—				—
Additional paid-in capital			130,272				129,902
Accumulated other comprehensive loss			(1,684	)			(1,812	)
Retained earnings			425,212				414,622
Total stockholders’ equity			553,826				542,738
		$	1,190,948			$	1,245,235

MOLINA HEALTHCARE, INC.

		Three Months Ended March 31,
		2010				2009
		(Amounts in thousands, except per share data)
		(Unaudited)
Revenue:
Premium revenue		$	965,220			$	857,484
Investment income			1,521				3,547
Total revenue			966,741				861,031
Expenses:
Medical care costs			822,816				737,888
General and administrative expenses			113,426				92,462
Depreciation and amortization			10,061				9,052
Total expenses			946,303				839,402
Gain on retirement of convertible senior notes			—				1,532
Operating income			20,438				23,161
Interest expense			(3,357	)			(3,415	)
Income before income taxes			17,081				19,746
Income tax expense			6,491				7,535
Net income		$	10,590			$	12,211
Net income per share:
Basic		$	0.41			$	0.46
Diluted (1)		$	0.41			$	0.46
Weighted average shares outstanding:
Basic			25,646				26,530
Diluted (1)			25,837				26,561

MOLINA HEALTHCARE, INC.

		Three Months Ended
		March 31,
		2010				2009
		(Amounts in thousands)
		(Unaudited)
Net income		$	10,590			$	12,211
Other comprehensive gain (loss), net of tax:
Unrealized gain (loss) on investments			128				(32	)
Other comprehensive gain (loss)			128				(32	)
Comprehensive income		$	10,718			$	12,179

MOLINA HEALTHCARE, INC.

		Three Months Ended
		March 31,
		2010				2009
		(Dollars in thousands)
		(Unaudited)
Operating activities:
Net income		$	10,590			$	12,211
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			10,061				9,052
Unrealized gain on trading securities			(540	)			(3,639	)
Loss on rights agreement			493				3,323
Deferred income taxes			3,094				4,988
Stock-based compensation			2,136				1,434
Non-cash interest on convertible senior notes			1,243				1,194
Gain on repurchase and retirement of convertible senior notes			—				(1,532	)
Amortization of deferred financing costs			344				352
Tax deficiency from employee stock compensation recorded as additional paid-in capital			(353	)			(533	)
Changes in operating assets and liabilities:
Receivables			8,054				(29,613	)
Prepaid expenses and other current assets			532				(2,912	)
Medical claims and benefits payable			10,457				19,185
Accounts payable and accrued liabilities			15,134				(2,922	)
Deferred revenue			(90,664	)			52,968
Income taxes			2,935				3,359
Net cash (used in) provided by operating activities			(26,484	)			66,915
Investing activities:
Purchases of equipment			(5,976	)			(10,367	)
Purchases of investments			(49,439	)			(48,127	)
Sales and maturities of investments			53,226				35,627
Cash paid in business purchase transactions			(2,430	)			—
(Increase) decrease in restricted investments			(656	)			445
Increase in other assets			(244	)			(1,708	)
Increase (decrease) in other long-term liabilities			670				(131	)
Net cash used in investing activities			(4,849	)			(24,261	)
Financing activities:
Treasury stock purchases			—				(14,976	)
Purchase of convertible senior notes			—				(9,653	)
Excess tax benefits from employee stock compensation			113				—
Net cash provided by (used in) financing activities			113				(24,629	)
Net (decrease) increase in cash and cash equivalents			(31,220	)			18,025
Cash and cash equivalents at beginning of period			469,501				387,162
Cash and cash equivalents at end of period		$	438,281			$	405,187
Supplemental cash flow information:
Cash paid during the period for:
Income taxes		$	91			$	63
Interest		$	142			$	339
Schedule of non-cash investing and financing activities:
Unrealized gain (loss) on investments		$	207			$	(156	)
Deferred taxes			(79	)			124
Net unrealized gain (loss) on investments		$	128			$	(32	)
Accrued purchases of equipment		$	71			$	139
Retirement of common stock used for stock-based compensation		$	1,526			$	695
Details of business purchase transactions:
Other assets		$	—			$	9,000
Accounts payable and accrued liabilities			—				2,847
Deferred taxes			—				—
Goodwill and intangible assets, net		$	—			$	11,847

MOLINA HEALTHCARE, INC.

1. Basis of Presentation

Organization and Operations

Molina Healthcare, Inc. is a multi-state managed care organization that arranges for the delivery of healthcare services to persons eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. We conduct our business primarily through licensed health plans in the states of California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington. The health plans are locally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Effective January 1, 2010, we terminated operations at our small Medicare health plan in Nevada.

Effective May 1, 2010, we closed on our acquisition of the Healthcare Information Management, or HIM, business of Unisys Corporation. See Note 13, “Subsequent Events.”

Consolidation and Interim Financial Information

The condensed consolidated financial statements include the accounts of Molina Healthcare, Inc. and all majority owned subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented have been included. Except as described below, such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2010. Financial information related to subsidiaries acquired during any year is included only for the period subsequent to their acquisition.

The unaudited condensed consolidated interim financial statements have been prepared under the assumption that users of the interim financial data have either read or have access to our audited consolidated financial statements for the fiscal year ended December 31, 2009. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2009 audited consolidated financial statements have been omitted. These unaudited condensed consolidated interim financial statements should be read in conjunction with our December 31, 2009 audited financial statements.

Reclassifications

We have reclassified certain prior year income statement amounts to conform to the 2010 presentation. Effective January 1, 2010, we have recorded the Michigan modified gross receipts tax as a premium tax and not as an income tax. For the three months ended March 31, 2009, amounts for premium tax expense (included in general and administrative expenses) and income tax expense have been reclassified to conform to this presentation. See Note 2, “Significant Accounting Policies.”

2. Significant Accounting Policies

Investments

Our investments are principally held in debt securities, which are grouped into three separate categories for accounting and reporting purposes: available-for-sale securities, held-to-maturity securities, and trading securities. Available-for-sale securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income, net of applicable income taxes. Held-to-maturity securities are recorded at amortized cost, which approximates fair value, and unrealized holding gains or losses are not generally recognized. Realized gains and losses and unrealized losses judged to be other than temporary with respect to available-for-sale and held-to-maturity securities are included in the determination of net income. Trading securities are recorded at fair value, and holding gains and losses are recognized in net income.

Except for restricted investments and certain student loan portfolios (the “auction rate securities”), our debt securities are designated as available-for-sale and are carried at fair value. The cost of securities sold is determined using the specific-identification method, on an amortized cost basis. Fair values of securities are generally based on quoted prices in active markets.

Our investment policy requires that all of our investments have final maturities of ten years or less (excluding auction rate and variable rate securities where interest rates may be periodically reset), and that the average maturity be four years or less. Investments and restricted investments are subject to interest rate risk and will decrease in value if market rates increase. Declines in interest rates over time will reduce our investment income.

In general, our available-for-sale securities are classified as current assets without regard to the securities’ contractual maturity dates because they may be readily liquidated. During 2008, our auction rate securities were classified as non-current assets. During the fourth quarter of 2008, certain auction rate securities were designated as trading securities. For comprehensive discussions of the fair value and classification of our current and non-current investments, including auction rate securities, see Note 5, “Fair Value Measurements,” and Note 6, “Investments.”

Income Taxes

We record accruals for uncertain tax positions by applying a two-step process. First, we determine whether it is more likely than not that a tax position will be sustained upon examination. In the second step, a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.

Our accrual for unrecognized tax benefits was $4.1 million as of both March 31, 2010 and December 31, 2009. This accrual is included in “Other long-term liabilities” in the accompanying condensed consolidated balance sheets. Approximately $3.4 million of the $4.1 million in unrecognized tax benefits at March 31, 2010 would affect our effective tax rate, if recognized. We anticipate a decrease of $0.4 million to our liability for unrecognized tax benefits within the next twelve-month period.

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. Our accrual for the payment of interest relating to unrecognized tax benefits was $75,000 as of March 31, 2010 and December 31, 2009.

Effective January 1, 2008 through December 31, 2009, income tax expense included both the Michigan business income tax, or BIT, and Michigan modified gross receipts tax, or MGRT. Effective January 1, 2010, we have recorded the MGRT as a premium tax (included in general and administrative expenses) and not as an income tax. We will continue to record the BIT as an income tax. The MGRT amounted to $1.5 million, and $1.0 million for the three months ended March 31, 2010, and 2009, respectively.

Generally, the MGRT is a 0.976% tax (statutory rate of 0.8% plus 21.99% surtax) on modified gross receipts, which for most taxpayers is defined as receipts less purchases from other firms. Managed care organizations, however, are not currently allowed to deduct payments to providers in determining modified gross receipts. As a result, the MGRT is 0.976% of our Michigan plan’s receipts and does not vary with levels of pretax income or margins. We believe that presentation of the MGRT as a premium tax produces financial statements that are more useful to the reader.

Recent Accounting Pronouncements

Fair Value Measurements. In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance which expanded the required disclosures about fair value measurements. In particular, this guidance requires (a) separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers, (b) information about purchases, sales, issuances and settlements to be presented separately in the reconciliation for Level 3 fair value measurements, (c) fair value measurement disclosures for each class of assets and liabilities and (d) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or Level 3. Effective for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010, we have adopted this guidance in full with respect to the interim period ended March 31, 2010. The adoption of this guidance did not impact our financial condition or results of operations.

3. Earnings per Share

The denominators for the computation of basic and diluted earnings per share were calculated as follows:

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
Shares outstanding at the beginning of the period			25,607				26,725
Weighted-average number of shares repurchased			—				(218	)
Weighted-average number of shares issued			39				23
Denominator for basic earnings per share			25,646				26,530
Dilutive effect of employee stock options and stock grants (1)			191				31
Denominator for diluted earnings per share (2)			25,837				26,561

4. Share-Based Compensation

At March 31, 2010, we had employee equity incentives outstanding under two plans: (1) the 2002 Equity Incentive Plan; and (2) the 2000 Omnibus Stock and Incentive Plan (from which equity incentives are no longer awarded). Charged to general and administrative expenses, total stock-based compensation expense for the three months ended March 31, 2010 and 2009 was as follows:

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
Restricted stock awards		$	1,638			$	1,052
Stock options (including shares issued under our employee stock purchase plan)			498				382
Total stock-based compensation expense		$	2,136			$	1,434

As of March 31, 2010, there was $19.5 million of total unrecognized compensation expense related to unvested restricted stock awards, which we expect to be recognized over a remaining weighted-average period of 3.1 years. Also as of March 31, 2010, there was $751,000 of unrecognized compensation expense related to unvested stock options, which we expect to recognize over a remaining weighted-average period of 1.1 years.

Unvested restricted stock and restricted stock activity for the three months ended March 31, 2010 is summarized below:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested balance as of December 31, 2009			687,630			$	24.64
Granted			432,625				21.77
Vested			(191,426	)			25.22
Forfeited			(3,950	)			24.74
Unvested balance as of March 31, 2010			924,879				23.18

The total fair value of restricted shares granted during the three months ended March 31, 2010 and 2009 was $9.4 million and $6.8 million, respectively. The total fair value of restricted shares vested during the three months ended March 31, 2010 and 2009 was $4.2 million and $2.1 million, respectively. Stock option activity during the three months ended March 31, 2010 is summarized below:

														Weighted
														Average
						Weighted				Aggregate				Remaining
						Average				Intrinsic				Contractual
						Exercise				Value (in				Term
		Shares				Price				Thousands)				(Years)
Stock options outstanding as of December 31, 2009			650,739			$	30.25
Stock options outstanding as of March 31, 2010			650,739			$	30.25			$	379				5.6
Stock options exercisable and expected to vest as of March 31, 2010			644,579			$	30.23			$	379				5.6
Exercisable as of March 31, 2010			588,272			$	30.04			$	378				5.4

5. Fair Value Measurements

Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, trade accounts payable, medical claims and benefits payable, long-term debt and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For a comprehensive discussion of fair value measurements with regard to our current and non-current investments, see below.

Based on quoted market prices, the fair value of our convertible senior notes issued in October 2007 was $172.8 million as of March 31, 2010, and $160.8 million as of December 31, 2009. The carrying amount of the convertible senior notes was $160.1 million, and $158.9 million as of March 31, 2010, and December 31, 2009, respectively.

To prioritize the inputs we use in measuring fair value, we apply a three-tier fair value hierarchy. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of March 31, 2010, we held certain assets that are required to be measured at fair value on a recurring basis. These included investments as follows:

Balance Sheet Classification		Description
Current assets:
Investments (see Note 6)		Investment grade debt securities; designated as available-for-sale; reported at fair value based on market prices that are readily available (Level 1).
Non-current assets: Investments (see Note 6)		Auction rate securities; designated as available-for-sale; reported at fair value based on discounted cash flow analysis or other type of valuation model (Level 3). Auction rate securities; designated as trading; reported at fair value based on discounted cash flow analysis or other type of valuation model (Level 3).
Other assets		Other assets include auction rate securities rights (the “Rights”); reported at fair value based on discounted cash flow analysis or other type of valuation model (Level 3).

As of March 31, 2010, $62.9 million par value (fair value of $55.6 million) of our investments consisted of auction rate securities, all of which were collateralized by student loan portfolios guaranteed by the U.S. government. We continued to earn interest on substantially all of these auction rate securities as of March 31, 2010. Due to events in the credit markets, the auction rate securities held by us experienced failed auctions beginning in the first quarter of 2008. As such, quoted prices in active markets were not readily available during the majority of 2008, all of 2009, and continued to be unavailable as of March 31, 2010. To estimate the fair value of these securities, we used pricing models that included factors such as the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security would have a successful auction. The estimated values of these securities were also compared, when possible, to valuation data with respect to similar securities held by other parties. We concluded that these estimates, given the lack of market available pricing, provided a reasonable basis for determining fair value of the auction rate securities as of March 31, 2010.

As of March 31, 2010, we held $36.4 million par value (fair value of $32.8 million) auction rate securities (designated as trading securities) with a certain investment securities firm. In the fourth quarter of 2008, we entered into a rights agreement with this firm that (1) allows us to exercise rights (the “Rights”) to sell the eligible auction rate securities at par value to this firm between June 30, 2010 and July 2, 2012, and (2) gives the investment securities firm the right to purchase the auction rate securities from us any time after the agreement date as long as we receive the par value.

We account for the Rights as a freestanding financial instrument and have elected to record the value of the Rights under the fair value option. We recorded pretax losses on the Rights, attributable to the decline in the fair value of the Rights, totaling $493,000 and $3.3 million for the three months ended March 31, 2010, and 2009, respectively. To determine the fair value estimate of the Rights, we use a discounted cash-flow model based on the expectation that the auction rate securities will be put back to the investment securities firm at par on June 30, 2010, as permitted by the rights agreement.

For the three months ended March 31, 2010 and 2009, we recorded pretax gains of $540,000 and $3.6 million, respectively, on the auction rate securities underlying the Rights. We expect that the future changes in the fair value of the Rights will continue to be substantially offset by the fair value movements in the underlying auction rate securities.

As of March 31, 2010, the remainder of our auction rate securities (designated as available-for-sale securities) amounted to $26.5 million par value (fair value of $22.8 million). As a result of the increase in fair value of auction rate securities designated as available-for-sale, we recorded pretax unrealized gains of $203,000 and $320,000 to accumulated other comprehensive loss for the three months ended March 31, 2010, and 2009, respectively. We have deemed these unrealized losses to be temporary and attribute the decline in value to liquidity issues, as a result of the failed auction market, rather than to credit issues. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive loss. If we determine that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as appropriate.

Our assets measured at fair value on a recurring basis at March 31, 2010, were as follows:

		Fair Value Measurements at Reporting Date Using
		Total				Level 1				Level 2				Level 3
		(In thousands)
Investments		$	175,911			$	175,911			$	—			$	—
Auction rate securities (available-for-sale)			22,810				—				—				22,810
Auction rate securities (trading)			32,770				—				—				32,770
Auction rate securities rights			3,314				—				—				3,314
Total assets measured at fair value		$	234,805			$	175,911			$	—			$	58,894

The following table presents a rollforward of the balance of our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

		(Level 3)
		(In thousands)
Balance at December 31, 2009		$	63,494
Total gains (unrealized):
Included in earnings			47
Included in other comprehensive income			203
Settlements			(4,850	)
Balance at March 31, 2010		$	58,894
The amount of total gains for the period included in other comprehensive loss attributable to the change in unrealized gains relating to assets still held at March 31, 2010		$	203

6. Investments

The following tables summarize our investments as of the dates indicated:

		March 31, 2010
						Gross								Estimated
						Unrealized								Fair
		Cost				Gains				Losses				Value
		(In thousands)
Government-sponsored enterprise securities		$	84,712			$	471			$	230			$	84,953
Municipal securities (including non-current auction rate securities)			78,086				2,534				3,904				76,716
Corporate debt securities			39,145				176				231				39,090
U.S. treasury notes			27,405				90				27				27,468
Certificates of deposit			3,264				—				—				3,264
		$	232,612			$	3,271			$	4,392			$	231,491

		December 31, 2009
						Gross								Estimated
						Unrealized								Fair
		Cost				Gains				Losses				Value
		(In thousands)
Government-sponsored enterprise securities		$	89,451			$	504			$	281			$	89,674
Municipal securities (including non-current auction rate securities)			82,009				3,120				4,154				80,975
Corporate debt securities			32,543				206				185				32,564
U.S. treasury notes			28,052				92				84				28,060
Certificates of deposit			3,258				—				—				3,258
		$	235,313			$	3,922			$	4,704			$	234,531

The contractual maturities of our investments as of March 31, 2010 are summarized below.

		Amortized				Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	72,561			$	72,448
Due one year through five years			102,559				102,943
Due after five years through ten years			1,430				1,403
Due after ten years			56,062				54,697
		$	232,612			$	231,491

Gross realized gains and gross realized losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Total proceeds from sales of available-for-sale securities were $36.0 million and $35.5 million for the three months ended March 31, 2010, and 2009, respectively. Net realized investment gains for the three months ended March 31, 2010, and 2009 were $14,000 and $158,000 respectively.

We monitor our investments for other-than-temporary impairment. For investments other than our municipal securities, we have determined that unrealized gains and losses at March 31, 2010, and December 31, 2009, are temporary in nature, because the change in market value for these securities has resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. So long as we hold these securities to maturity, we are unlikely to experience gains or losses. In the event that we dispose of these securities before maturity, we expect that realized gains or losses, if any, will be immaterial.

Our investment in municipal securities consists primarily of auction rate securities. As described in Note 5, “Fair Value Measurements,” the unrealized losses on these investments were caused primarily by the illiquidity in the auction markets. Because the decline in market value is not due to the credit quality of the issuers, and because we do not intend to sell, nor is it more likely than not that we will be required to sell, these investments before recovery of their cost, we do not consider the auction rate securities that are designated as available-for-sale to be other-than-temporarily impaired at March 31, 2010.

The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a loss position for 12 months or more as of March 31, 2010.

		In a Continuous Loss								In a Continuous Loss
		Position								Position
		for Less than 12 Months								for 12 Months or More								Total
		Estimated								Estimated								Estimated
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Government-sponsored enterprise securities		$	23,646			$	50			$	10,331			$	180			$	33,977			$	230
Municipal securities			10,700				47				24,101				3,698				34,801				3,745
Corporate debt securities			11,193				109				9,409				122				20,602				231
U.S. treasury notes			15,603				27				—				—				15,603				27
		$	61,142			$	233			$	43,841			$	4,000			$	104,983			$	4,233

The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a loss position for 12 months or more as of December 31, 2009. At December 31, 2009, we previously reported only those available-for-sale investments in an unrealized loss position for at least two consecutive months. To conform to the current year presentation, we have included all available-for-sale investments in an unrealized loss position at December 31, 2009. This presentation change increased the total amount of unrealized losses reported in the following table by $113,000 at December 31, 2009. The accompanying increase to the estimated fair value of the underlying investments amounted to $42.9 million at December 31, 2009.

		In a Continuous Loss								In a Continuous Loss
		Position								Position
		for Less than 12 Months								for 12 Months or More								Total
		Estimated								Estimated								Estimated
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Government-sponsored enterprise securities		$	30,460			$	187			$	7,297			$	94			$	37,757			$	281
Municipal securities			12,460				78				24,031				3,902				36,491				3,980
Corporate debt securities			13,513				149				1,203				36				14,716				185
U.S. treasury notes			21,824				84				—				—				21,824				84
		$	78,257			$	498			$	32,531			$	4,032			$	110,788			$	4,530

7. Receivables

Receivables consist primarily of amounts due from the various states in which we operate. All receivables are subject to potential retroactive adjustment. As the amounts of all receivables are readily determinable and our creditors are in almost all instances state governments, our allowance for doubtful accounts is immaterial. Any amounts determined to be uncollectible are charged to expense when such determination is made. Accounts receivable by health plan operating subsidiary were as follows:

		March 31,				December 31,
		2010				2009
		(In thousands)
California		$	28,250			$	34,289
Michigan			17,122				14,977
Missouri			21,082				19,670
New Mexico			12,389				11,919
Ohio			31,286				37,004
Utah			3,630				6,107
Washington			11,953				9,910
Others			2,888				2,778
Total receivables		$	128,600			$	136,654

8. Restricted Investments

Pursuant to the regulations governing our subsidiaries, we maintain statutory deposits and deposits required by state Medicaid authorities in certificates of deposit and U.S. treasury securities. Additionally, we maintain restricted investments as protection against the insolvency of capitated providers. The following table presents the balances of restricted investments by health plan, and by our insurance company:

		March 31,				December 31,
		2010				2009
		(In thousands)
California		$	369			$	368
Florida			2,053				2,052
Insurance company			4,729				4,686
Michigan			1,000				1,000
Missouri			502				503
New Mexico			16,108				15,497
Ohio			9,044				9,036
Texas			1,506				1,515
Utah			576				578
Washington			151				151
Other			892				888
Total		$	36,930			$	36,274

The contractual maturities of our held-to-maturity restricted investments as of March 31, 2010 are summarized below.

		Amortized				Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	31,151			$	31,153
Due one year through five years			5,637				5,611
Due after five years through ten years			142				155
		$	36,930			$	36,919

9. Other Assets

Other assets include deferred financing costs associated with long-term debt, certain investments held in connection with our employee deferred compensation program, and an investment in a vision services provider (see Note 12, “Related Party Transactions”). The deferred financing costs are being amortized on a straight-line basis over the seven-year term of the convertible senior notes maturing in 2014.

10. Convertible Senior Notes

In October 2007, we sold $200.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2014 (the “Notes”). The sale of the Notes resulted in net proceeds totaling $193.4 million. During 2009, we purchased and retired $13.0 million face amount of the Notes, so the remaining aggregate principal amount totaled $187.0 million as of December 31, 2009. The Notes rank equally in right of payment with our existing and future senior indebtedness.

The Notes are convertible into cash and, under certain circumstances, shares of our common stock. The initial conversion rate is 21.3067 shares of our common stock per one thousand dollar principal amount of the Notes. This represents an initial conversion price of approximately $46.93 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances. Prior to July 2014, holders may convert their Notes only under the following circumstances:

•

During any fiscal quarter after our fiscal quarter ended December 31, 2007, if the closing sale price per share of our common stock, for each of at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than or equal to 120% of the conversion price per share of our common stock;

•

During the five business day period immediately following any five consecutive trading day period in which the trading price per one thousand dollar principal amount of the Notes for each trading day of such period was less than 98% of the product of the closing price per share of our common stock on such day and the conversion rate in effect on such day; or

•

Upon the occurrence of specified corporate transactions or other specified events.

On or after July 1, 2014, holders may convert their Notes at any time prior to the close of business on the scheduled trading day immediately preceding the stated maturity date regardless of whether any of the foregoing conditions is satisfied.

We will deliver cash and shares of our common stock, if any, upon conversion of each $1,000 principal amount of Notes, as follows:

•

An amount in cash (the “principal return”) equal to the sum of, for each of the 20 Volume-Weighted Average Price (VWAP) trading days during the conversion period, the lesser of the daily conversion value for such VWAP trading day and fifty dollars (representing 1/20th of one thousand dollars); and

•

A number of shares based upon, for each of the 20 VWAP trading days during the conversion period, any excess of the daily conversion value above fifty dollars.

The proceeds from the issuance of such convertible debt instruments have been allocated between a liability component and an equity component. We have determined that the effective interest rate of the Notes is 7.5%, principally based on the seven-year U.S. treasury note rate as of the October 2007 issuance date, plus an appropriate credit spread. The resulting debt discount is being amortized over the period the Notes are expected to be outstanding, as additional non-cash interest expense. As of March 31, 2010, we expect the Notes to be outstanding until their October 1, 2014 maturity date, for a remaining amortization period of 54 months. The Notes’ if-converted value did not exceed their principal amount as of March 31, 2010. At March 31, 2010, the equity component of the Notes, net of the impact of deferred taxes, was $24.0 million. The following table provides the details of the liability amounts recorded:

		As of				As of
		March 31,				December 31,
		2010				2009
		(in thousands)
Details of the liability component:
Principal amount		$	187,000			$	187,000
Unamortized discount			(26,857	)			(28,100	)
Net carrying amount		$	160,143			$	158,900

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
Interest cost recognized for the period relating to the:
Contractual interest coupon rate of 3.75%		$	1,753			$	1,817
Amortization of the discount on the liability component			1,243				1,194
Total interest cost recognized		$	2,996			$	3,011

11. Commitments and Contingencies

Legal

The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and regulations include significant fines, exclusion from participating in publicly-funded programs, and the repayment of previously billed and collected revenues.

We are involved in various legal actions in the normal course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. These actions, when finally concluded and determined, are not likely, in our opinion, to have a material adverse effect on our business, consolidated financial position, cash flows, or results of operations.

Provider Claims

Many of our medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such differing interpretations have led certain medical providers to pursue us for additional compensation. The claims made by providers in such circumstances often involve issues of contract compliance, interpretation, payment methodology, and intent. These claims often extend to services provided by the providers over a number of years.

Various providers have contacted us seeking additional compensation for claims that we believe to have been settled. These matters, when finally concluded and determined, will not, in our opinion, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.

Regulatory Capital and Dividend Restrictions

Our principal operations are conducted through our health plan subsidiaries operating in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington. Our health plans are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances or cash dividends was $356.3 million at March 31, 2010, and $368.7 million at December 31, 2009. The National Association of Insurance Commissioners, or NAIC, adopted rules effective December 31, 1998, which, if implemented by the states, set new minimum capitalization requirements for insurance companies, HMOs and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital (RBC) rules. Michigan, Missouri, New Mexico, Ohio, Texas, Washington, and Utah have adopted these rules, which may vary from state to state. California and Florida have not yet adopted NAIC risk-based capital requirements for HMOs and have not formally given notice of their intention to do so. Such requirements, if adopted by California and Florida, may increase the minimum capital required for those states.

As of March 31, 2010, our health plans had aggregate statutory capital and surplus of approximately $367.0 million compared with the required minimum aggregate statutory capital and surplus of approximately $253.4 million. All of our health plans were in compliance with the minimum capital requirements at March 31, 2010. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.

12. Related Party Transactions

We have an equity investment in a medical service provider that provides certain vision services to our members. We account for this investment under the equity method of accounting because we have an ownership interest in the investee that confers significant influence over operating and financial policies of the investee. As of both March 31, 2010 and December 31, 2009, our carrying amount for this investment totaled $4.1 million. For the three months ended March 31, 2010 and 2009, we paid $4.4 million, and $4.8 million, respectively, for medical service fees to this provider.

We are a party to a fee-for-service agreement with Pacific Hospital of Long Beach (“Pacific Hospital”). Pacific Hospital is owned by Abrazos Healthcare, Inc., the shares of which are held as community property by the husband of Dr. Martha Bernadett, the sister of Dr. J. Mario Molina, our Chief Executive Officer, and John Molina, our Chief Financial Officer. Amounts paid to Pacific Hospital under the terms of this fee-for-service agreement were $297,000, and $172,000 for the three months ended March 31, 2010 and 2009, respectively. We also had a capitation arrangement with Pacific Hospital, where we paid Pacific Hospital a fixed monthly fee per member. This contract was terminated by the parties effective August 31, 2009. Amounts paid to Pacific Hospital for capitated services totaled approximately $460,000 for the three months ended March 31, 2009. We believe that both arrangements with Pacific Hospital are based on prevailing market rates for similar services.

13. Subsequent Events

Effective May 1, 2010, we closed our acquisition of the HIM business of Unisys Corporation. HIM will operate as a subsidiary of Molina Healthcare under the name, Molina Medicaid Solutions^SM. Molina Medicaid Solutions provides design, development, implementation, and business process outsourcing solutions to state governments for their Medicaid Management Information Systems (MMIS). MMIS is a core tool used to support the administration of state Medicaid and other health care entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provide drug rebate administration services for the Florida Medicaid program.

The consideration for the acquisition was $135 million, subject to working capital adjustments. The acquisition was funded with available cash of $30 million and $105 million drawn under our credit facility. In connection with the HIM closing, both the fourth amendment and fifth amendment to our credit facility became effective.

Based on our preliminary valuation, we acquired current assets of approximately $19 million, current liabilities of approximately $9 million, and goodwill and intangible assets of approximately $125 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Securities Exchange Act. All statements, other than statements of historical facts, included in this quarterly report may be deemed to be forward-looking statements for purposes of the Securities Act and the Securities Exchange Act. We use the words “anticipate(s),” “believe(s),” “estimate(s),” “expect(s),” “intend(s),” “may,” “plan(s),” “project(s),” “will,” “would” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and, accordingly, you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from the forward-looking statements that we make. You should read these factors and the other cautionary statements as being applicable to all related forward-looking statements wherever they appear in this quarterly report. We caution you that we do not undertake any obligation to update forward-looking statements made by us. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected, estimated, expected, or contemplated as a result of, but not limited to, risk factors related to the following:

•

budgetary pressures on the federal and state governments and their resulting inability to fully fund Medicaid, Medicare, or CHIP, or to maintain current payment rates, benefit packages, or membership eligibility thresholds and criteria;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investors should refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009, for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurances that any results or events projected or contemplated by our forward-looking statements will in fact occur and we caution investors not to place undue reliance on these statements.

This document and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report and the audited financial statements and Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, 2009.

Reclassification

Effective January 1, 2010, we have recorded the Michigan modified gross receipts tax, or MGRT as a premium tax and not as an income tax. For the three months ended March 31, 2009, amounts for premium tax expense (included in general and administrative expenses) and income tax expense have been reclassified to conform to this presentation.

Overview

Our financial performance for the three months ended March 31, 2010 compared with our financial performance for the three months ended March 31, 2009 is briefly summarized as follows:

		Three Months Ended March 31,
		2010				2009
		(Dollar amounts in
		thousands, except per
		share data)
Earnings per diluted share		$	0.41			$	0.46
Premium revenue		$	965,220			$	857,484
Operating income		$	20,438			$	23,161
Net income		$	10,590			$	12,211
Medical care ratio			85.3	%			86.1	%
G&A expenses as a percentage of total revenue			11.7	%			10.7	%
Total ending membership			1,482,000				1,303,000

Revenue

Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally subject to significant accounting estimates. For the three months ended March 31, 2010, we received approximately 94% of our premium revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contracts with state agencies, our Medicare contracts with CMS, and our contracts with other managed care organizations for which we operate as a subcontractor. These premium revenues are recognized in the month that members are entitled to receive health care services. The state Medicaid programs and the federal Medicare program periodically adjust premium rates.

The amount of the premiums paid to us may vary substantially between states and among various government programs. PMPM premiums for Children’s Health Insurance Program, or CHIP members are generally among our lowest, with rates as low as approximately $75 PMPM in California. Premium revenues for Medicaid members are generally higher. Among the Temporary Assistance for Needy Families, or TANF Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums range between approximately $100 in California to $235 in New Mexico. Among our Medicaid Aged, Blind or Disabled, or ABD membership, PMPM premiums range from approximately $320 in Utah to over $1,000 in Ohio. Contributing to the variability in Medicaid rates among the states is the practice of some states to exclude certain benefits from the managed care contract (most often pharmacy and catastrophic case benefits) and retain responsibility for those benefits at the state level. Medicare premiums are nearly $1,100 PMPM on average. Medicare revenue totaled $50.3 million and $27.1 million for the three months ended March 31, 2010 and 2009, respectively.

For the three months ended March 31, 2010, we received approximately 5% of our premium revenue in the form of “birth income” — a one-time payment for the delivery of a child — from the Medicaid programs in California (effective October 1, 2009), Michigan, Missouri, Ohio, Texas, Utah (effective September 1, 2009), and Washington. Such payments are recognized as revenue in the month the birth occurs.

Certain components of premium revenue are subject to accounting estimates. Chief among these are:

•

Florida Health Plan Medical Cost Floor (Minimum) for Behavioral Health. A portion of premium revenue paid to our Florida health plan by the state of Florida may be refunded to the state if certain minimum amounts are not spent on defined behavioral health care costs. At March 31, 2010, we had not recorded any liability under the terms of this contract provision. If the state of Florida disagrees with our interpretation of the existing contract terms, an adjustment to the amounts owed may be required. Any changes to the terms of this provision, including revisions to the definitions of premium revenue or behavioral health care costs, the period of time over which performance is measured or the manner of its measurement, or the percentages used in the calculations, may affect the profitability of our Florida health plan.

•

New Mexico Health Plan Medical Cost Floors (Minimums) and Administrative Cost and Profit Ceilings (Maximums): A portion of premium revenue paid to our New Mexico health plan by the state of New Mexico may be refunded to the state if certain minimum amounts are not spent on defined medical care costs, or if administrative costs or profit (as defined) exceed certain amounts. Our contract with the state of New Mexico requires that we spend a minimum percentage of premium revenue on certain explicitly defined medical care costs (the medical cost floor). Our contract is for a three-year period, and the medical cost floor is based on premiums and medical care costs over the entire contract period. Effective July 1, 2008, our New Mexico health plan entered into a new three year contract that, in addition to retaining the medical cost floor, added certain limits on the amount our New Mexico health plan can: (a) expend on administrative costs; and (b) retain as profit. At March 31, 2010, we had not recorded any liability under the terms of these contract provisions. If the state of New Mexico disagrees with our interpretation of the existing contract terms, an adjustment to the amounts owed may be required. Any changes to the terms of these provisions, including revisions to the definitions of premium revenue, medical care costs, administrative costs or profit, the period of time over which performance is measured or the manner of its measurement, or the percentages used in the calculations, may affect the profitability of our New Mexico health plan.

•

New Mexico Health Plan At-Risk Premium Revenue: Under our contract with the state of New Mexico, up to 1% of our New Mexico health plan’s revenue may be refundable to the state if certain performance measures are not met. These performance measures are generally linked to various quality of care and administrative measures dictated by the state. For the three months ended March 31, 2010, our New Mexico health plan had received $2.8 million in at-risk revenue for state fiscal year 2010. We have recognized $1.2 million of that amount as revenue, and recorded a liability of approximately $1.6 million for the remainder.

•

Ohio Health Plan At-Risk Premium Revenue: Under our contract with the state of Ohio, up to 1% of our Ohio health plan’s revenue may be refundable to the state if certain performance measures are not met. These performance measures are generally linked to various quality-of-care measures dictated by the state. For the three months ended March 31, 2010, our Ohio health plan had received $6.5 million in at-risk revenue for state fiscal year 2010. We have recognized $4.0 million of that amount as revenue and recorded a liability of approximately $2.6 million for the remainder at March 31, 2010.

•

Utah Health Plan Premium Revenue: Our Utah health plan may be entitled to receive additional premium revenue from the state of Utah as an incentive payment for saving the state of Utah money in relation to fee-for-service Medicaid. In prior years, we estimated amounts we believed were recoverable under our savings sharing agreement with the state of Utah based on available information and our interpretation of our contract with the state. The state may not agree with our interpretation or our application of the contract language, and it may also not agree with the manner in which we have processed and analyzed our member claims and encounter records. Thus, the ultimate amount of savings sharing revenue that we realize from prior years may be subject to negotiation with the state. During 2007, as a result of an ongoing disagreement with the state of Utah, we wrote off the entire receivable, totaling $4.7 million. Our Utah health plan continues to assert its claim to the amounts believed to be due under the savings share agreement. When additional information is known, or resolution is reached with the state regarding the appropriate savings sharing payment amount for prior years, we will adjust the amount of savings sharing revenue recorded in our financial statements as appropriate in light of such new information or agreement. No receivables for saving sharing revenue have been established at March 31, 2010 or December 31, 2009.

•

Texas Health Plan Premium Revenue: The contract entered into between our Texas health plan and the state of Texas includes a profit-sharing agreement, where we pay a rebate to the state of Texas if our Texas health plan generates pretax income, as defined in the contract, above a certain specified percentage, as determined in accordance with a tiered rebate schedule. We are limited in the amount of administrative costs that we may deduct in calculating the rebate, if any. As of March 31, 2010, we had an aggregate liability of approximately $3.7 million accrued pursuant to our profit-sharing agreement with the state of Texas for the 2009 and 2010 contract years (ending August 31 of each year). We made no payments to the state under the terms of this profit sharing agreement during the first quarter of 2010. Because the final settlement calculations include a claims run-out period of nearly one year, the amounts recorded, based on our estimates, may be adjusted. We believe that the ultimate settlement will not differ materially from our estimates.

•

Texas Health Plan At-Risk Premium Revenue: Under our contract with the state of Texas, up to 1% of our Texas health plan’s revenue may be refundable to the state if certain performance measures are not met. These performance measures are generally linked to various quality-of-care measures dictated by the state. For the three months ended March 31, 2010, our Texas health plan had received $0.9 million in at-risk revenue for state fiscal year 2010, which has all been recognized revenue.

•

Medicare Premium Revenue: Based on member encounter data that we submit to CMS, our Medicare revenue is subject to retroactive adjustment for both member risk scores and member pharmacy cost experience for up to two years after the original year of service. This adjustment takes into account the acuity of each member’s medical needs relative to what was anticipated when premiums were originally set for that member. In the event that a member requires less acute medical care than was anticipated by the original premium amount, CMS may recover premium from us. In the event that a member requires more acute medical care than was anticipated by the original premium amount, CMS may pay us additional retroactive premium. A similar retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy utilization. That analysis is similar to the process for the adjustment of member risk scores, but is further complicated by member pharmacy cost sharing provisions attached to the Medicare pharmacy benefit that do not apply to the services measured by the member risk adjustment process. We estimate the amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ heath care utilization patterns and CMS practices. To the extent that the premium revenue ultimately received from CMS differs from recorded amounts, we will adjust reported Medicare revenue. Based upon our knowledge of member health care utilization patterns we have recorded a liability of approximately $0.6 million related to the potential recoupment of Medicare premium revenue at March 31, 2010.

Historically, membership growth has been the primary reason for our increasing revenues, although more recently our revenues have also grown due to the more care intensive benefits and related higher premiums associated with our ABD and Medicare members. We have increased our membership through both internal growth and acquisitions. The following table sets forth the approximate total number of members by state health plan as of the dates indicated:

		March 31,				December 31,				March 31,
		2010				2009				2009
Total Ending Membership by Health Plan:
California			353,000				351,000				327,000
Florida			52,000				50,000				17,000
Michigan			226,000				223,000				207,000
Missouri			78,000				78,000				77,000
New Mexico			92,000				94,000				83,000
Ohio			228,000				216,000				190,000
Texas			40,000				40,000				33,000
Utah			75,000				69,000				60,000
Washington			338,000				334,000				309,000
Total			1,482,000				1,455,000				1,303,000
Total Ending Membership by State for our Medicare Advantage Special Needs Plans:
California			2,700				2,100				1,500
Florida			300				—				—
Michigan			4,200				3,300				2,000
New Mexico			600				400				400
Texas			500				500				400
Utah			7,100				4,000				2,800
Washington			1,600				1,300				1,000
Total			17,000				11,600				8,100
Total Ending Membership by State for our Aged, Blind or Disabled Population:
California			13,400				13,900				12,600
Florida			8,900				8,800				4,200
Michigan			32,700				32,200				30,100
New Mexico			5,800				5,700				6,200
Ohio			26,700				22,600				19,700
Texas			18,100				17,600				16,700
Utah			7,900				7,500				7,500
Washington			3,500				3,200				3,000
Total			117,000				111,500				100,000

The following table provides details of member months (defined as the aggregation of each month’s ending membership for the period) by health plan for the periods indicated:

		Three Months Ended
		March 31,
Total Member Months by Health Plan:		2010				2009				% of Increase
California			1,062,000				980,000				8.4	%
Florida			154,000				61,000				152.5
Michigan			675,000				620,000				8.9
Missouri			234,000				231,000				1.3
New Mexico			280,000				248,000				12.9
Ohio			673,000				560,000				20.2
Texas			121,000				98,000				23.5
Utah			221,000				184,000				20.1
Washington			1,007,000				919,000				9.6
Total			4,427,000				3,901,000				13.5	%

Expenses

Our operating expenses include expenses related to the provision of medical care services and general and administrative, or G&A, expenses. Our results of operations are impacted by our ability to effectively manage expenses related to medical care services and to accurately estimate costs incurred. Expenses related to medical care services are captured in the following four categories:

•

Fee-for-service: Physician providers paid on a fee-for-service basis are paid according to a fee schedule set by the state or by our contracts with these providers. We pay hospitals on a fee-for-service basis in a variety of ways, including per diem amounts, diagnostic-related groups, or DRGs, percentage of billed charges, and case rates. We also pay a small portion of hospitals on a capitated basis. We also have stop-loss agreements with the hospitals with which we contract; under certain circumstances, we pay escalated charges in connection with these stop-loss agreements. Under all fee-for-service arrangements, we retain the financial responsibility for medical care provided. Expenses related to fee-for-service contracts are recorded in the period in which the related services are dispensed. The costs of drugs administered in a physician or hospital setting that are not billed through our pharmacy benefit managers are included in fee-for-service costs.

•

Capitation: Many of our primary care physicians and a small portion of our specialists and hospitals are paid on a capitated basis. Under capitation contracts, we typically pay a fixed PMPM payment to the provider without regard to the frequency, extent, or nature of the medical services actually furnished. Under capitated contracts, we remain liable for the provision of certain health care services. Certain of our capitated contracts also contain incentive programs based on service delivery, quality of care, utilization management, and other criteria. Capitation payments are fixed in advance of the periods covered and are not subject to significant accounting estimates. These payments are expensed in the period the providers are obligated to provide services. The financial risk for pharmacy services for a small portion of our membership is delegated to capitated providers.

•

Pharmacy: Pharmacy costs include all drug, injectibles, and immunization costs paid through our pharmacy benefit managers. As noted above, drugs and injectibles not paid through our pharmacy benefit managers are included in fee-for-service costs, except in those limited instances where we capitate drug and injectible costs.

•

Other: Other medical care costs include medically related administrative costs, certain provider incentive costs, reinsurance cost, costs of operating our medical clinics, and other health care expense. Medically related administrative costs include, for example, expenses relating to health education, quality assurance, case management, disease management, 24-hour on-call nurses, and a portion of our information technology costs. Salary and benefit costs are a substantial portion of these expenses. For the three month periods ended March 31, 2010 and 2009, medically related administrative costs were approximately $19.6 million and $17.6 million, respectively.

The following table provides the details of our consolidated medical care costs for the periods indicated (dollars in thousands except PMPM amounts):

		Three months ended March 31,
		2010												2009
										% of												% of
		Amount				PMPM				Total				Amount				PMPM				Total
Fee for service		$	566,879			$	128.06				68.9	%		$	489,141			$	125.35				66.3	%
Capitation			137,132				30.98				16.7				118,414				30.34				16.1
Pharmacy			90,071				20.35				10.9				102,638				26.30				13.9
Other			28,734				6.48				3.5				27,695				7.10				3.7
Total		$	822,816			$	185.87				100.0	%		$	737,888			$	189.09				100.0	%

Our medical care costs include amounts that have been paid by us through the reporting date as well as estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. See “Critical Accounting Policies” below for a comprehensive discussion of how we estimate such liabilities.

The following table provides the details of our medical claims and benefits payable as of the dates indicated (in thousands):

		March 31,				Dec. 31,				March 31,
		2010				2009				2009
Fee-for-service claims incurred but not paid (IBNP)		$	260,456			$	246,508			$	247,111
Capitation payable			42,461				39,995				31,815
Pharmacy			16,196				20,609				24,047
Other			7,860				9,404				8,654
Total		$	326,973			$	316,516			$	311,627

G&A expenses largely consist of wage and benefit costs for our employees, premium taxes, and other administrative expenses. Some G&A services are provided locally, while others are delivered to our health plans from a centralized location. The primary centralized functions are claims processing, information systems, finance and accounting services, and legal and regulatory services. Locally provided functions include member services, plan administration, and provider relations. G&A expenses include premium taxes for each of our health plans in California, Florida, Michigan, New Mexico, Ohio, Texas, and Washington.

Results of Operations

The following table sets forth selected operating ratios. All ratios with the exception of the medical care ratio are shown as a percentage of total revenue. The medical care ratio is shown as a percentage of premium revenue because there is a direct relationship between the premium revenue earned and the cost of health care.

		Three Months Ended
		March 31,
		2010				2009
Premium revenue			99.8	%			99.6	%
Investment income			0.2				0.4
Total revenue			100.0	%			100.0	%
Medical care ratio			85.3	%			86.1	%
General and administrative expense ratio, excluding premium taxes			8.2	%			7.6	%
Premium taxes included in general and administrative expenses			3.5				3.1
Total general and administrative expense ratio			11.7	%			10.7	%
Operating income			2.1	%			2.7	%
Net income			1.1	%			1.4	%

The following table summarizes premium revenue, medical care costs, medical care ratio and premium taxes by health plan for the three months ended March 31, 2010 and March 31, 2009 (dollar amounts in thousands except for PMPM amounts):

		Three Months Ended March 31, 2010
		Premium Revenue								Medical Care Costs								Medical				Premium Tax
		Total				PMPM				Total				PMPM				Care Ratio				Total
California		$	123,910			$	116.67			$	107,561			$	101.28				86.8	%		$	1,628
Florida			39,088				253.45				34,687				224.91				88.7				6
Michigan			155,345				230.13				125,449				185.85				80.8				9,939
Missouri			52,143				223.01				43,516				186.11				83.5				—
New Mexico			95,598				341.02				74,015				264.03				77.4				2,004
Ohio			218,363				324.35				172,625				256.41				79.1				17,005
Texas			39,200				324.08				32,331				267.29				82.5				681
Utah			58,540				265.51				61,460				278.76				105.0				—
Washington			181,054				179.84				163,510				162.42				90.3				3,262
Other (1)			1,979				—				7,662				—				—				21
Total		$	965,220			$	218.04			$	822,816			$	185.87				85.3	%		$	34,546

		Three Months Ended March 31, 2009
		Premium Revenue								Medical Care Costs								Medical				Premium Tax
		Total				PMPM				Total				PMPM				Care Ratio				Total
California		$	110,035			$	112.29			$	103,973			$	106.10				94.5	%		$	3,316
Florida			19,691				323.89				17,768				292.25				90.2				—
Michigan			132,765				213.98				109,995				177.28				82.9				7,838
Missouri			58,707				254.00				46,974				203.24				80.0				—
New Mexico			81,818				329.68				72,021				290.20				88.0				2,093
Ohio			187,222				334.13				157,780				281.58				84.3				10,192
Texas			33,011				338.14				27,406				280.73				83.0				684
Utah			50,618				275.11				44,263				240.57				87.5				—
Washington			180,704				196.66				149,545				162.75				82.8				2,947
Other (1)			2,913				—				8,163				—				—				(15	)
Total		$	857,484			$	219.73			$	737,888			$	189.09				86.1	%		$	27,055