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Molina Healthcare's Implementation of Health Plans Show Potential

Zacks Equity Research

On Jul 10, 2014, we issued an updated research report on Molina Healthcare Inc. (MOH). We believe that the implementation of the health plans in various states, growth of new contracts and increased membership across its health plans position the company to generate higher revenues going forward.

Notably, Molina Healthcare has increased its membership base through creation of new health plans and development of the existing ones, thereby increasing premium revenues. The acquisition of the Lovelace Community Health Plan contract and the State Coverage Insurance (SCI) program of New Mexico have also contributed to membership increase. Additionally, going forward, Molina Healthcare’s ability to offer certified Qualified Health Plans (QHPs) on the California Health Benefit Exchange and selection by Covered California should boost its membership in California.

The health plans of Molina Healthcare like those in California, Ohio, New Mexico, Washington and South Carolina resulted in increased membership effective Jan 2014, as these were selected to take part in the dual-eligible demonstration projects. While the Illinois health plan commenced serving dual-eligibles in Mar 2014, the rest are expected to begin serving these members by 2014 and early 2015.

Moreover, this Zacks Rank #1 (Strong Buy) stock has been witnessing a steady increase in premiums and service revenues over the past several years. Furthermore, with the approval of the Medicaid expansion in Ohio (fourth largest health plan in terms of enrollment), memberships and consequently, revenues are expected to improve further.

Molina Healthcare has been expanding its geographic reach through acquisitions and has thereby been helping to consolidate the industry. Acquisition of entities like Health Information Management, Abri Health Plan and Community Health Solutions of America Inc. has aided membership growth. In addition, despite the cash outlays for inorganic growth, Molina Healthcare has a healthy balance sheet with a steadily improving cash flow.

On the flip side, management remains cautious about rising medical care costs, which are compressing margins. Total medical care costs are expected to increase in 2014, due to which medical care ratio could deteriorate. Further, certain provisions of the U.S. Health Care Reform Act like the establishment of minimum medical loss ratios, restriction on charging higher premiums from patients with pre-existing medical conditions and the burden of an annual fee or excise tax by the ACA on health insurers (health insurance fee) are likely to increase expenses for the company.

Additionally, investment income, a prime component of Molina Healthcare’s revenues, has been declining since 2007 primarily due to lower interest rates. Although it increased in the last reported quarter, investment income remains vulnerable to the low interest rate environment.

Other Stocks to Consider

Other players that look attractive at current levels include WellCare Health Plans, Inc. (WCG), Aetna Inc. (AET) and Humana Inc. (HUM). While WellCare has the same Zacks Rank as Molina Healthcare, Aetna and Humana have a Zacks Rank #2 (Buy).

Read the Full Research Report on AET
Read the Full Research Report on HUM
Read the Full Research Report on MOH
Read the Full Research Report on WCG

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