MOH-06.30.2015-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
¨
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.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
13-4204626
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer 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  ý    No  ¨
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  ý    No  ¨
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.
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
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  ¨ No  ý
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of July 24, 2015, was approximately 56,056,000.


Table of Contents

MOLINA HEALTHCARE, INC.
Form 10-Q

For the Quarterly Period Ended June 30, 2015
TABLE OF CONTENTS
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
 
June 30,
2015
 
December 31,
2014
 
(Amounts in thousands,
except per-share data)
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,013,882

 
$
1,539,063

Investments
1,466,622

 
1,019,462

Receivables
631,124

 
596,456

Deferred income taxes
37,480

 
39,532

Prepaid expenses and other current assets
148,615

 
50,884

Derivative asset
508,504

 

Total current assets
4,806,227

 
3,245,397

Property, equipment, and capitalized software, net
363,244

 
340,778

Deferred contract costs
65,410

 
53,675

Intangible assets, net
80,462

 
89,273

Goodwill
272,046

 
271,964

Restricted investments
110,956

 
102,479

Derivative asset

 
329,323

Other assets
37,814

 
44,326

 
$
5,736,159

 
$
4,477,215

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Medical claims and benefits payable
$
1,492,252

 
$
1,200,522

Amounts due government agencies
824,934

 
527,193

Accounts payable and accrued liabilities
399,186

 
241,654

Deferred revenue
57,723

 
196,076

Income taxes payable
10,396

 
8,987

Current portion of long-term debt
445,668

 
341

Derivative liability
508,355

 

Total current liabilities
3,738,514

 
2,174,773

Convertible senior notes
272,930

 
704,097

Lease financing obligations
161,323

 
160,710

Lease financing obligations – related party
40,016

 
40,241

Deferred income taxes
29,174

 
24,271

Derivative liability

 
329,194

Other long-term liabilities
31,095

 
33,487

Total liabilities
4,273,052

 
3,466,773

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 150,000 shares authorized; outstanding: 56,050 shares at June 30, 2015 and 49,727 shares at December 31, 2014
56

 
50

Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding

 

Additional paid-in capital
782,433

 
396,059

Accumulated other comprehensive loss
(1,830
)
 
(1,019
)
Retained earnings
682,448

 
615,352

Total stockholders’ equity
1,463,107

 
1,010,442

 
$
5,736,159

 
$
4,477,215

See accompanying notes.

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Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands, except net income per share)
(Unaudited)
Revenue:
 
 
 
 
 
 
 
Premium revenue
$
3,304,372

 
$
2,167,142

 
$
6,275,024

 
$
4,107,479

Service revenue
47,243

 
50,232

 
99,101

 
103,862

Premium tax revenue
94,609

 
70,120

 
189,956

 
121,813

Health insurer fee revenue
73,890

 
19,662

 
121,838

 
38,358

Investment income
3,828

 
1,945

 
6,843

 
3,574

Other revenue
948

 
2,938

 
3,251

 
6,196

Total revenue
3,524,890

 
2,312,039

 
6,696,013

 
4,381,282

Operating expenses:
 
 
 
 
 
 
 
Medical care costs
2,929,534

 
1,934,299

 
5,565,318

 
3,655,957

Cost of service revenue
32,819

 
37,107

 
68,721

 
77,764

General and administrative expenses
286,496

 
193,239

 
542,586

 
381,326

Premium tax expenses
94,609

 
70,120

 
189,956

 
121,813

Health insurer fee expenses
40,652

 
21,945

 
81,430

 
44,135

Depreciation and amortization
25,152

 
22,902

 
50,144

 
43,593

Total operating expenses
3,409,262

 
2,279,612

 
6,498,155

 
4,324,588

Operating income
115,628

 
32,427

 
197,858

 
56,694

Other expenses, net:
 
 
 
 
 
 
 
Interest expense
14,946

 
13,993

 
29,822

 
27,815

Other income, net
(32
)
 
(9
)
 
(42
)
 
(53
)
Total other expenses, net
14,914

 
13,984

 
29,780

 
27,762

Income from continuing operations before income tax expense
100,714

 
18,443

 
168,078

 
28,932

Income tax expense
61,783

 
10,702

 
101,006

 
16,357

Income from continuing operations
38,931

 
7,741

 
67,072

 
12,575

Income (loss) from discontinued operations, net of tax
12

 
70

 
24

 
(266
)
Net income
$
38,943

 
$
7,811

 
$
67,096

 
$
12,309

 
 
 
 
 
 
 
 
Basic net income per share:
 
 
 
 
 
 
 
Continuing operations
$
0.78

 
$
0.17

 
$
1.36

 
$
0.27

Basic net income per share
$
0.78

 
$
0.17

 
$
1.36

 
$
0.27

 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
Continuing operations
$
0.72

 
$
0.16

 
$
1.29

 
$
0.26

Diluted net income per share
$
0.72

 
$
0.16

 
$
1.29

 
$
0.26

See accompanying notes.

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Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands)
(Unaudited)
Net income
$
38,943

 
$
7,811

 
$
67,096

 
$
12,309

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized investment (loss) gain
(3,377
)
 
391

 
(1,261
)
 
1,817

Effect of income taxes
(1,250
)
 
(31
)
 
(450
)
 
691

Other comprehensive (loss) income, net of tax
(2,127
)
 
422

 
(811
)
 
1,126

Comprehensive income
$
36,816

 
$
8,233

 
$
66,285

 
$
13,435


See accompanying notes.


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MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
June 30,
 
2015
 
2014
 
(Amounts in thousands)
(Unaudited)
Operating activities:
 
 
 
Net income
$
67,096

 
$
12,309

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
62,076

 
65,654

Deferred income taxes
7,405

 
1,692

Share-based compensation
9,241

 
10,456

Amortization of convertible senior notes and lease financing obligations
14,685

 
13,455

Other, net
8,641

 
1,723

Changes in operating assets and liabilities:
 
 
 
Receivables
(34,668
)
 
(174,579
)
Prepaid expenses and other assets
(97,027
)
 
(66,887
)
Medical claims and benefits payable
291,730

 
254,395

Amounts due government agencies
297,741

 
119,872

Accounts payable and accrued liabilities
157,734

 
57,625

Deferred revenue
(138,353
)
 
(76,271
)
Income taxes
1,409

 
16,016

Net cash provided by operating activities
647,710

 
235,460

Investing activities:
 
 
 
Purchases of investments
(992,978
)
 
(368,304
)
Proceeds from sales and maturities of investments
541,050

 
326,648

Purchases of property, equipment and capitalized software
(65,860
)
 
(37,670
)
Increase in restricted investments
(14,202
)
 
(15,622
)
Net cash paid in business combinations
(8,006
)
 

Other, net
(16,853
)
 
(7,388
)
Net cash used in investing activities
(556,849
)
 
(102,336
)
Financing activities:
 
 
 
Proceeds from common stock offering, net of issuance costs
373,151

 

Contingent consideration liabilities settled

 
(50,349
)
Proceeds from employee stock plans
8,387

 
7,617

Other, net
2,420

 
1,064

Net cash provided by (used in) financing activities
383,958

 
(41,668
)
Net increase in cash and cash equivalents
474,819

 
91,456

Cash and cash equivalents at beginning of period
1,539,063

 
935,895

Cash and cash equivalents at end of period
$
2,013,882

 
$
1,027,351


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Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
Six Months Ended
 
June 30,
 
2015
 
2014
 
(Amounts in thousands)
(Unaudited)
Supplemental cash flow information:
 
 
 
 
 
 
 
Schedule of non-cash investing and financing activities:
 
 
 
Increase in non-cash lease financing obligation – related party
$

 
$
12,447

Common stock used for share-based compensation
$
(8,921
)
 
$
(8,453
)
 
 
 
 
Details of change in fair value of derivatives, net:
 
 
 
Gain on 1.125% Call Option
$
(179,161
)
 
$
63,809

Loss on 1.125% Conversion Option
179,181

 
(63,799
)
Change in fair value of derivatives, net
$
20

 
$
10

 
 
 
 
Details of business combinations:
 
 
 
Fair value of assets acquired
$
(82
)
 
$

Payable to seller
(7,924
)
 

Net cash paid in business combinations
$
(8,006
)
 
$


See accompanying notes.


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MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2015
1. Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality health care to those receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program. We report our financial performance based on two reportable segments: the Health Plans segment and the Molina Medicaid Solutions segment.
Our Health Plans segment consists of health plans in 11 states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of June 30, 2015, these health plans served 3.4 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. Additionally, we serve Health Insurance Marketplace (Marketplace) members, many of whom are eligible for government premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO). Our direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate, as well as the management of a hospital in southern California under a management services agreement.
Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida.
Market Updates - Health Plans Segment
Florida. On July 14, 2015, we announced that our Florida health plan entered into an agreement with Preferred Medical Plan, Inc. Under this agreement, we will assume Preferred's Medicaid contract in Miami-Dade and Monroe counties, as well as acquire certain assets related to the operation of its Medicaid business. Preferred currently serves approximately 25,000 Medicaid members. Subject to regulatory approvals and the satisfaction of other closing conditions, we expect the transaction to close during the third quarter of 2015.
As of June 30, 2015, our Florida health plan served 176,000 Marketplace members, more than double its total membership as of December 31, 2014.
Illinois. On July 15, 2015, we announced that our Illinois health plan entered into an agreement with Accountable Care Chicago, LLC, also known as MyCare Chicago. Under this agreement, we will receive the right to assume MyCare Chicago's Medicaid members in Cook County, as well as acquire certain assets related to the operation of the Medicaid business. MyCare Chicago currently serves approximately 61,000 Medicaid members. Subject to regulatory approvals and the satisfaction of other closing conditions, we expect the transaction to close during the fourth quarter of 2015.
Michigan. On May 15, 2015, we announced that our Michigan health plan entered into an agreement with HealthPlus of Michigan and its subsidiary, HealthPlus Partners, Inc. (collectively, HealthPlus). Under this agreement, we will assume HealthPlus Partners' Medicaid contract and HealthPlus of Michigan's MIChild contract, as well as certain provider agreements. HealthPlus currently serves approximately 90,000 Medicaid and 6,000 MIChild members. Subject to regulatory approvals and the satisfaction of other closing conditions, we expect the transaction to close during the third quarter of 2015.
Puerto Rico. Effective April 1, 2015, our Puerto Rico health plan served its first members. As of June 30, 2015, our Puerto Rico plan enrollment amounted to approximately 361,000 members.
Market Updates - Molina Medicaid Solutions Segment
New Jersey. On April 9, 2015, the state of New Jersey announced its selection of Molina Medicaid Solutions to design and operate its new Medicaid management information system (MMIS). The new contract is effective May 1, 2015, and has a term of 10 years with three one-year renewal options. Molina Medicaid Solutions was the state's previous MMIS provider, and was awarded the new contract as a result of Molina Medicaid Solutions' submission in response to the state of New Jersey's request for proposals.
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., its subsidiaries, and variable interest entities in which Molina Healthcare, Inc. is considered to be the primary beneficiary. Such variable interest entities are

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insignificant to our consolidated financial position and results of operations. 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; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated. The consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2015.
The unaudited 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, 2014. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2014 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2014 audited consolidated financial statements.
Reclassifications
We have reclassified certain amounts in the 2014 statement of cash flows to conform to the 2015 presentation.
2. Significant Accounting Policies
Revenue Recognition
Premium Revenue – Health Plans Segment
Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally subject to significant accounting estimates. Premium revenues are recognized in the month that members are entitled to receive health care services, and premiums collected in advance are deferred.
Certain components of premium revenue are subject to accounting estimates as follows:
Contractual Provisions That May Adjust or Limit Revenue or Profit
Health Plan Medical Cost Floors (Minimums), Medical Cost Corridors, and Administrative Cost Ceilings (Maximums): A portion of certain Medicaid, Medicare, and Marketplace premiums received by our health plans may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded a liability under the terms of such contract provisions of $516.8 million and $392.4 million at June 30, 2015 and December 31, 2014, respectively, to amounts due government agencies. Approximately $458.1 million of the liability accrued at June 30, 2015 relates to our participation in Medicaid expansion programs.
In general, such amounts are subject to future changes in estimate based upon our actual cost performance and interpretations of allowable medical costs and revenue. At our Washington health plan (where we had recorded a liability of approximately $271.1 million related to the Medicaid expansion medical cost floor at June 30, 2015), premium revenue may be retroactively adjusted across the entire state Medicaid expansion program based upon the medical cost performance of the program as a whole. As such, our liability under Washington’s contractual provisions is determined not just by our own medical cost performance, but by that of all health plans participating in the program; and we have limited visibility into the costs of those health plans. 
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold; we had no receivables recorded at June 30, 2015 or December 31, 2014 that were related to such provisions.
Health Plan Profit Sharing and Profit Ceiling: Our contracts with certain states contain profit-sharing or profit ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage, in some cases in accordance with a tiered rebate schedule. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. As a result of profits in excess of the amount we are allowed to retain, we recorded a liability of $5.4 million and $0.5 million at June 30, 2015 and December 31, 2014, respectively.
Medicare Revenue Risk Adjustment: Based on member encounter data that we submit to the Centers for Medicare and Medicaid Services (CMS), our Medicare premiums are 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 will recover premium from us. In the event that a member requires more acute medical care than was anticipated by the original premium amount, CMS will pay us additional retroactive premium. A similar retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy utilization. We estimate the amount of Medicare revenue that will ultimately be realized for the

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periods presented based on our knowledge of our members’ health care utilization patterns and CMS practices. Based on our knowledge of member health care utilization patterns and expenses, we have recorded a net receivable of $30.8 million and $7.6 million for anticipated Medicare risk adjustment premiums at June 30, 2015 and December 31, 2014, respectively.
Quality Incentives
At our California, Illinois, New Mexico, Ohio, South Carolina, Texas, Washington and Wisconsin health plans, revenue ranging from approximately 1% to 4% of certain health plan premiums is not earned unless specified performance measures are met.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the period presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of June 30, 2015 are not known, we have no reason to believe that the adjustments to prior years noted below are not indicative of the potential future changes in our estimates as of June 30, 2015.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Maximum available quality incentive premium - current period
$
27,830

 
$
24,300

 
$
58,145

 
$
44,464

 
 
 
 
 
 
 
 
Amount of quality incentive premium revenue recognized in current period:
 
 
 
 
 
 
 
Earned current period
$
11,225

 
$
12,717

 
$
20,776

 
$
18,014

Earned prior periods
11,088

 
3,582

 
11,471

 
3,204

Total
$
22,313

 
$
16,299

 
$
32,247

 
21,218

 
 
 
 
 
 
 
 
Total premium revenue recognized for state health plans with quality incentive premiums
$
2,525,571

 
$
1,708,808

 
$
4,878,806

 
$
3,187,069

California Health Plan Rate Settlement Agreement
In 2013, our California health plan entered into a settlement agreement with the California Department of Health Care Services (DHCS). The agreement settled rate disputes initiated by our California health plan dating back to 2003 with respect to its participation in Medi-Cal (California’s Medicaid program). Under the terms of the agreement, DHCS may be required to make a payment to us if the California health plan's pre-tax margin falls below certain levels. The maximum amount that DHCS would pay to us under the terms of the settlement agreement is $40.0 million; no amounts receivable were recorded related to this agreement at June 30, 2015 or December 31, 2014. The agreement expires effective December 31, 2017.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally greater than the U.S. federal statutory rate primarily because of state taxes, nondeductible expenses under the Affordable Care Act Health Insurer Fee (HIF), nondeductible compensation and other general and administrative expenses. The effective tax rate may be subject to fluctuations during the year, particularly as a result of the level of pretax earnings, and also as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers.
New Accounting Standards
Revenue Recognition. On July 9, 2015, the Financial Accounting Standards Board (FASB) affirmed its proposal to defer the effective date of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, for all entities by one year. As a result, public business entities will apply the new revenue standard to annual reporting periods beginning after December 15, 2017, and for interim reporting periods within annual reporting periods beginning after December 15, 2017. We continue to evaluate whether to elect the full or modified retrospective adoption method, and the potential effects to our financial statements.

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Short-Duration Contracts. In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, which will require additional disclosure on the liability for unpaid claims and claim adjustment expenses. Effective for us in the first quarter of 2016, ASU 2015-09 is applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted; we are evaluating the potential effects of the adoption to our financial statements.
Debt Issuance Costs. In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of such debt liability, consistent with debt discounts. Effective for us in the first quarter of 2016, ASU 2015-03 is applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted; we are evaluating the potential effects of the adoption to our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (SEC) did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.
3. Net Income per Share
The following table sets forth the calculation of the denominators used to compute basic and diluted net income per share:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Shares outstanding at the beginning of the period
48,852

 
46,263

 
48,578

 
45,871

Weighted-average number of shares issued:
 
 
 
 
 
 
 
Common stock offering
1,365

 

 
687

 

Share-based compensation
25

 
16

 
203

 
279

Denominator for basic net income per share
50,242

 
46,279

 
49,468

 
46,150

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based compensation
319

 
361

 
426

 
527

Convertible senior notes (1)
682

 
1,363

 
341

 
1,147

1.125% Warrants (1)
2,628

 

 
1,773

 

Denominator for diluted net income per share
53,871

 
48,003

 
52,008

 
47,824

 
 
 
 
 
 
 
 
Potentially dilutive common shares excluded from calculations (2):
 
 
 
 
 
 
 
Stock options

 

 

 
45

1.125% Warrants

 
13,490

 

 
13,490

______________________________
(1)
For more information regarding the convertible senior notes, refer to Note 11, "Debt." For more information regarding the 1.125% Warrants, refer to Note 12, "Derivatives."
(2)
The dilutive effect of all potentially dilutive common shares is calculated using the treasury-stock method. Certain potentially dilutive common shares issuable are not included in the computation of diluted net income per share because to do so would be anti-dilutive. For the three and six months ended June 30, 2014, the 1.125% Warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price of our common stock.
4. Business Combinations
Health Plans Segment
Florida. In December 2014, our Florida health plan acquired certain assets relating to the Medicaid business of First Coast Advantage, LLC (FCA). As part of the transaction, we assumed FCA's Medicaid contract and certain provider agreements for Region 4 of the Statewide Medicaid Managed Care Managed Medical Assistance Program in the state of Florida. The Florida health plan's membership increased by approximately 62,000 members as a result of this transaction. The final purchase price for this acquisition amounted to $44.6 million, of which $36.6 million was paid in December 2014, and $8.0 million was paid in the first quarter of 2015.

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5. Share-Based Compensation
As of June 30, 2015, there are approximately 475,000 unvested restricted shares awarded to our named executive officers, with market and performance conditions, outstanding. In the event the vesting conditions are not achieved, the awards will lapse. Based on our assessment as of June 30, 2015, we expect the performance conditions relating to approximately 297,000 of such restricted share awards to be met in full. For the remaining 178,000 unvested restricted share awards, we reversed share-based compensation expense recognized from inception through March 31, 2015, or approximately $2.6 million, in the second quarter of 2015.
Charged to general and administrative expenses, total share-based compensation expense was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Restricted stock and performance awards
$
2,654

 
$
4,214

 
$
7,255

 
$
8,822

Employee stock purchase plan and stock options
912

 
646

 
1,986

 
1,634

 
$
3,566

 
$
4,860

 
$
9,241

 
$
10,456

As of June 30, 2015, there was $34.3 million of total unrecognized compensation expense related to unvested restricted stock awards, including those with performance conditions, which we expect to recognize over a remaining weighted-average period of 1.8 years.
Restricted and performance stock activity for the six months ended June 30, 2015 is summarized below:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested balance as of December 31, 2014
1,282,072

 
$
33.55

Granted
412,994

 
64.01

Vested
(386,634
)
 
32.77

Forfeited
(46,634
)
 
37.61

Unvested balance as of June 30, 2015
1,261,798

 
43.61

The total fair value of restricted and performance awards granted during the six months ended June 30, 2015 and 2014 was $26.8 million and $23.5 million, respectively. The total fair value of restricted awards, including those with performance and market conditions, which vested during the six months ended June 30, 2015 and 2014 was $24.4 million and $21.5 million, respectively.
6. Fair Value Measurements
We consider the carrying amounts of cash and cash equivalents and other current assets and current liabilities (not including derivatives) to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:
Level 1 — Observable Inputs
Level 1 financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.
Level 2 — Directly or Indirectly Observable Inputs
Level 2 financial instruments are traded frequently though not necessarily daily. Fair value for these investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
Level 3 — Unobservable Inputs
Level 3 financial instruments are valued using unobservable inputs that represent management's best estimate of what market participants would use in pricing the financial instrument at the measurement date. Our Level 3 financial instruments include the following:

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Derivative financial instruments. Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of June 30, 2015 included the price of our common stock, time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note 12, “Derivatives,” the 1.125% Call Option asset and the 1.125% Conversion Option liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.
Contingent consideration liability. The contingent consideration liability represents the remaining liability associated with the Medicare-Medicaid Plan (MMP) component of our South Carolina health plan acquisition in 2013, and is recorded in accounts payable and accrued liabilities. We applied a cash flow analysis to determine the fair value of this liability. The significant unobservable input is the purchase price estimate for the projected membership.
Auction rate securities. Auction rate securities are designated as available-for-sale and are reported at fair value in other assets. To estimate the fair value of these securities, we use valuation data from our primary pricing source, a third party who provides a marketplace for illiquid assets with over 10,000 participants. This valuation data is based on a range of prices that represent indicative bids from potential buyers. To validate the reasonableness of the data, we compare these valuations to data from other third-party pricing sources, which also provide a range of prices representing indicative bids from potential buyers. We have concluded that these estimates, given the lack of market available pricing, provide a reasonable basis for determining the fair value of the auction rate securities as of June 30, 2015.
Our financial instruments measured at fair value on a recurring basis at June 30, 2015, were as follows:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Corporate debt securities
$
961,796

 
$

 
$
961,796

 
$

Municipal securities
177,416

 

 
177,416

 

GSEs
162,413

 
162,413

 

 

U.S. treasury notes
65,741

 
65,741

 

 

Certificates of deposit
72,164

 

 
72,164

 

Asset-backed securities
26,276

 

 
26,276

 

Mortgage-backed securities
816

 
816

 

 

Subtotal - current investments
1,466,622

 
228,970

 
1,237,652

 

Auction rate securities
2,365

 

 

 
2,365

1.125% Call Option derivative asset
508,504

 

 

 
508,504

Total assets measured at fair value on a recurring basis
$
1,977,491

 
$
228,970

 
$
1,237,652

 
$
510,869

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
508,355

 
$

 
$

 
$
508,355

Contingent consideration liability
500

 

 

 
500

Total liabilities measured at fair value on a recurring basis
$
508,855

 
$

 
$

 
$
508,855


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Our financial instruments measured at fair value on a recurring basis at December 31, 2014, were as follows:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Corporate debt securities
$
641,729

 
$

 
$
641,729

 
$

Municipal securities
127,045

 

 
127,045

 

GSEs
122,269

 
122,269

 

 

U.S. treasury notes
59,543

 
59,543

 

 

Certificates of deposit
68,876

 

 
68,876

 

Subtotal - current investments
1,019,462

 
181,812

 
837,650

 

Auction rate securities
4,847

 

 

 
4,847

1.125% Call Option derivative asset
329,323

 

 

 
329,323

Total assets measured at fair value on a recurring basis
$
1,353,632

 
$
181,812

 
$
837,650

 
$
334,170

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
329,194

 
$

 
$

 
$
329,194

Contingent consideration liability
500

 

 

 
500

Total liabilities measured at fair value on a recurring basis
$
329,694

 
$

 
$

 
$
329,694

The following table presents activity relating to our assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Changes in Level 3 Instruments
 
Auction Rate Securities
 
Derivatives, Net
 
Contingent Consideration Liability
 
(In thousands)
Balance at December 31, 2014
$
4,847

 
$
129

 
$
(500
)
Total gains for the period recognized in:
 
 
 
 
 
Other expenses, net

 
20

 

Other comprehensive income
118

 

 

 
 
 
 
 
 
Settlements
(2,600
)
 

 

Balance at June 30, 2015
$
2,365

 
$
149

 
$
(500
)
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our convertible senior notes, which are classified as Level 2 financial instruments, are indicated in the following table. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
 
June 30, 2015
 
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
1.125% Notes
$
445,239

 
$
973,770

 
$

 
$
973,770

 
$

1.625% Notes
272,930

 
394,199

 

 
394,199

 

 
$
718,169

 
$
1,367,969

 
$

 
$
1,367,969

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
1.125% Notes
$
435,330

 
$
767,377

 
$

 
$
767,377

 
$

1.625% Notes
268,767

 
337,292

 

 
337,292

 

 
$
704,097

 
$
1,104,669

 
$

 
$
1,104,669

 
$


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7. Investments
The following tables summarize our investments as of the dates indicated:
 
June 30, 2015
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Corporate debt securities
$
964,150

 
$
226

 
$
2,580

 
$
961,796

Municipal securities
177,898

 
142

 
624

 
177,416

GSEs
162,496

 
79

 
162

 
162,413

U.S. treasury notes
65,571

 
185

 
15

 
65,741

Certificates of deposit
72,165

 

 
1

 
72,164

Asset-backed securities
26,294

 
3

 
21

 
26,276

Mortgage-backed securities
818

 

 
2

 
816

Subtotal - current investments
1,469,392

 
635

 
3,405

 
1,466,622

Auction rate securities
2,500

 

 
135

 
2,365

 
$
1,471,892

 
$
635

 
$
3,540

 
$
1,468,987

 
December 31, 2014
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Corporate debt securities
$
642,910

 
$
201

 
$
1,382

 
$
641,729

Municipal securities
127,185

 
129

 
269

 
127,045

GSEs
122,317

 
34

 
82

 
122,269

U.S. treasury notes
59,546

 
30

 
33

 
59,543

Certificates of deposit
68,893

 
1

 
18

 
68,876

Subtotal - current investments
1,020,851

 
395

 
1,784

 
1,019,462

Auction rate securities
5,100

 

 
253

 
4,847

 
$
1,025,951

 
$
395

 
$
2,037

 
$
1,024,309

The contractual maturities of our investments as of June 30, 2015 are summarized below:
 
Amortized Cost
 
Estimated
Fair Value
 
(In thousands)
Due in one year or less
$
695,555

 
$
695,104

Due one year through five years
740,989

 
738,942

Due after five years through ten years
32,848

 
32,576

Due after ten years
2,500

 
2,365

 
$
1,471,892

 
$
1,468,987

Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Gross realized investment gains and losses for the three and six months ended June 30, 2015 and 2014 were insignificant.
We have determined that unrealized gains and losses on our investments at June 30, 2015 and December 31, 2014, 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.

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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 June 30, 2015:
 
In a Continuous Loss Position
for Less than 12 Months
 
In a Continuous Loss Position
for 12 Months or More
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
(Dollars in thousands)
Corporate debt securities
$
584,246

 
$
2,253

 
422

 
$
81,997

 
$
327

 
41

Municipal securities
116,735

 
542

 
162

 
5,725

 
82

 
12

GSEs
73,182

 
162

 
28

 

 

 

U.S. treasury notes
8,274

 
15

 
5

 

 

 

Certificates of deposit
734

 
1

 
3

 

 

 

Asset-backed securities
17,793

 
21

 
19

 

 

 

Mortgage-backed securities
816

 
2

 
2

 

 

 

Auction rate securities

 

 

 
2,365

 
135

 
3

 
$
801,780

 
$
2,996

 
641

 
$
90,087

 
$
544

 
56

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, 2014:
 
In a Continuous Loss Position
for Less than 12 Months
 
In a Continuous Loss Position
for 12 Months or More
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
(Dollars in thousands)
Corporate debt securities
$
379,034

 
$
1,151

 
265

 
$
28,668

 
$
231

 
10

Municipal securities
53,626

 
168

 
64

 
11,075

 
101

 
13

GSEs
75,025

 
69

 
22

 
2,986

 
13

 
3

U.S. treasury notes
19,199

 
33

 
13

 

 

 

Certificates of deposit
12,591

 
18

 
52

 

 

 

Auction rate securities

 

 

 
4,847

 
253

 
6

 
$
539,475

 
$
1,439

 
416

 
$
47,576

 
$
598

 
32


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8. Receivables
Receivables consist primarily of amounts due from government Medicaid agencies, which may be subject to potential retroactive adjustments. Because all of our receivable amounts are readily determinable and substantially all of our creditors are governmental authorities, our allowance for doubtful accounts is immaterial.  
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
California
$
175,864

 
$
310,938

Florida
16,529

 
2,141

Illinois
43,963

 
31,594

Michigan
25,959

 
19,880

New Mexico
71,434

 
49,609

Ohio
84,484

 
45,187

Puerto Rico
10,607

 

South Carolina
4,579

 
4,134

Texas
51,654

 
29,348

Utah
16,201

 
6,389

Washington
69,823

 
42,848

Wisconsin
27,888

 
8,102

Direct delivery and other
6,886

 
11,295

Total Health Plans segment
605,871

 
561,465

Molina Medicaid Solutions segment
25,253

 
34,991

 
$
631,124

 
$
596,456

9. Restricted Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities in certificates of deposit and U.S. treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. In connection with a Molina Medicaid Solutions segment state contract, we maintain restricted investments as collateral for a letter of credit. The following table presents the balances of restricted investments:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
California
$
373

 
$
373

Florida
27,016

 
28,649

Illinois
311

 
311

Michigan
1,014

 
1,014

New Mexico
46,643

 
35,135

Ohio
11,725

 
12,719

Puerto Rico
10,094

 
5,097

South Carolina
310

 
6,040

Texas
3,502

 
3,500

Utah
3,619

 
3,601

Washington
151

 
151

Wisconsin
954

 

Other
242

 
888

Total Health Plans segment
105,954

 
97,478

Molina Medicaid Solutions segment
5,002

 
5,001

 
$
110,956

 
$
102,479


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The contractual maturities of our held-to-maturity restricted investments as of June 30, 2015 are summarized below:
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Due in one year or less
$
100,792

 
$
100,792

Due one year through five years
10,164

 
10,167

 
$
110,956

 
$
110,959

10. Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable (including amounts payable for the provision of long-term services and supports, or LTSS) as of the dates indicated.
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Fee-for-service claims incurred but not paid (IBNP)
$
1,138,794

 
$
870,429

Pharmacy payable
80,902

 
71,412

Capitation payable
30,673

 
28,150

Other
241,883

 
230,531

 
$
1,492,252

 
$
1,200,522

"Other" medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various government agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. Non-risk provider payables amounted to $134.2 million and $119.3 million as of June 30, 2015 and December 31, 2014, respectively.
The following table presents the components of the change in our medical claims and benefits payable from continuing and discontinued operations combined for the periods indicated. The amounts presented for “Components of medical care costs related to: Prior periods” represent the amount by which our original estimate of medical claims and benefits payable at the beginning of the period were more than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.
 
Six Months Ended
 
Year Ended
 
June 30, 2015
 
December 31, 2014
 
(Dollars in thousands)
Medical claims and benefits payable, beginning balance
$
1,200,522

 
$
669,787

Components of medical care costs related to:
 
 
 
Current period
5,703,391

 
8,122,885

Prior periods (1)
(138,131
)
 
(45,979
)
Total medical care costs
5,565,260

 
8,076,906

 
 
 
 
Change in non-risk provider payables
14,826

 
(31,973
)
 
 
 
 
Payments for medical care costs related to:
 
 
 
Current period
4,448,820

 
7,064,427

Prior periods
839,536

 
449,771

Total paid
5,288,356

 
7,514,198

Medical claims and benefits payable, ending balance
$
1,492,252

 
$
1,200,522

 
 
 
 
Benefit from prior period as a percentage of:
 
 
 
Balance at beginning of period
11.5
%
 
6.9
%
Premium revenue, trailing twelve months
1.2
%
 
0.5
%
Medical care costs, trailing twelve months
1.4
%
 
0.6
%

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____________________
(1)
The benefit from prior period development of medical claims and benefits payable for the six months ended June 30, 2015 included approximately $22 million relating to programs that contain medical cost floor or corridor provisions. Accordingly, premium revenue for the six months ended June 30, 2015 was reduced by the same amount.
That portion of our total medical claims and benefits payable liability that is most subject to variability in the estimate is fee-for-service claims incurred but not paid (IBNP). IBNP represents our best estimate of the total amount of claims we will ultimately pay with respect to claims that we have incurred as of the balance sheet date. We estimate our IBNP monthly using actuarial methods based on a number of factors.
Assuming that our initial estimate of IBNP is accurate, we believe that amounts ultimately paid out would generally be between 8% and 10% less than the IBNP liability recorded at the end of the period as a result of the inclusion in that liability of the provision for adverse claims deviation and the accrued cost of settling those claims. Because the amount of our initial liability is merely an estimate (and therefore not perfectly accurate), we will always experience variability in that estimate as new information becomes available with the passage of time. Therefore, there can be no assurance that amounts ultimately paid out will fall within the range of 8% to 10% lower than the liability that was initially recorded. Furthermore, because our initial estimate of IBNP is derived from many factors, some of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the reasons for a change in estimate – we only know when the circumstances for any one or more factors are out of the ordinary.
The use of a consistent methodology in estimating our liability for medical claims and benefits payable minimizes the degree to which the under– or overestimation of that liability at the close of one period may affect consolidated results of operations in subsequent periods. In particular, the use of a consistent methodology should result in the replenishment of reserves during any given period in a manner that generally offsets the benefit of favorable prior period development in that period. Facts and circumstances unique to the estimation process at any single date, however, may still lead to a material impact on consolidated results of operations in subsequent periods. Any absence of adverse claims development (as well as the expensing through general and administrative expense of the costs to settle claims held at the start of the period) will lead to the recognition of a benefit from prior period claims development in the period subsequent to the date of the original estimate.
As indicated above, the amounts ultimately paid out on our medical claims and benefits payable liabilities in fiscal years 2015 and 2014 were less than what we had expected when we had established those liabilities. The differences between our original estimates and the amounts ultimately paid out (or now expected to be ultimately paid out) for the most part related to IBNP. While many related factors working in conjunction with one another determine the accuracy of our estimates, we are seldom able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
We believe that the most significant factors that will determine the accuracy of our IBNP estimates at June 30, 2015 are as follows:
At our Florida health plan, Marketplace enrollment increased by 175,000 members in the first half of 2015. Because of these new members the reserves are more subject to change than usual.
At our Illinois health plan, enrollment has increased by nearly 79,000 members during the fourth quarter of 2014 and the first half of 2015. Because of these new members the reserves are more subject to change than usual.
At our Ohio health plan, enrollment in the MMP integrated duals program has increased by approximately 9,000 members during the first half of 2015. Because of these new members the reserves are more subject to change than usual.
At our Washington health plan, certain delays related to the implementation of revised fee schedules resulted in a significant increase to our outpatient claims inventory in the first quarter of 2015, followed by a reduction in inventory during the second quarter of 2015. This significant change in inventory adds to the uncertainty of our unpaid claims estimates.
We recognized favorable prior period claims development in the amount of $138.1 million for the six months ended June 30, 2015. This amount represents our estimate as of June 30, 2015, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2014 was more than the amount that will ultimately be paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
At our Ohio health plan, approximately 17,000 members were enrolled in the new MMP program during 2014. Since we did not have enough historical claims data to use the pattern of paid and incurred claims, we initially estimated the reserves for these new members by applying an estimated medical care ratio (MCR). This resulted in an overstatement in our reserve liability as of December 31, 2014.

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Also at our Ohio health plan, approximately 61,000 members were enrolled in the Medicaid expansion program in 2014. The reserves for such members were partially based on expected costs built into the pricing assumptions because this program was new in 2014. Our costs were ultimately less than those assumed in those pricing assumptions, resulting in an overestimation of our liability as of December 31, 2014.
At our California health plan, more than 100,000 members were enrolled in the Medicaid expansion program in 2014. The reserves for such members were partially based on expected costs built into the pricing assumptions because this program was new in 2014. Our costs were ultimately less than those assumed in those pricing assumptions, resulting in an overestimation of our liability as of December 31, 2014.
At our New Mexico health plan, there was a retroactive increase to the provider fee schedules implemented by the state in mid-2014. This resulted in many claims adjustments paid well after the dates of service, causing an increase in the average time between the date of service and the date of payment. This resulted in an overstatement of the reserves as of December 31, 2014.
11. Debt
As of June 30, 2015, maturities of debt for the years ending December 31 are as follows (in thousands):
 
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
1.125% Notes
$
550,000

 
$

 
$

 
$

 
$

 
$

 
$
550,000

1.625% Notes (1)
301,551

 

 

 

 

 

 
301,551

 
$
851,551

 
$

 
$

 
$

 
$

 
$

 
$
851,551

(1)
The 1.625% Notes have a contractual maturity date in 2044; however, on specified dates beginning in 2018 as described below, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes, or we may redeem any or all of the 1.625% Notes.
Credit Facility. On June 12, 2015, we entered into an unsecured $250 million revolving Credit Facility which will be used to finance working capital needs, acquisitions, capital expenditures, and other general corporate activities. The Credit Facility has a term of 5 years and all amounts outstanding will be due and payable on June 12, 2020. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to $350 million. As of June 30, 2015, no amounts were outstanding under the Credit Facility.
Borrowings under the Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), plus in each case the applicable margin. In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Facility, we are required to pay a quarterly commitment fee.
Although the Credit Facility is not secured by any of our assets, two of our wholly owned subsidiaries, Molina Medicaid Solutions and Molina Medical Management, Inc., have jointly and severally guaranteed our obligations under the Credit Facility.
The Credit Facility contains customary non-financial and financial covenants, including a minimum fixed charge coverage ratio, a maximum debt-to-EBITDA ratio and minimum statutory net worth. We are required to not exceed a maximum debt-to-EBITDA ratio of 4.00 to 1.00. At June 30, 2015, we were in compliance with all financial covenants under the Credit Facility.
1.125% Cash Convertible Senior Notes due 2020. In February 2013, we issued $550.0 million aggregate principal amount of 1.125% cash convertible senior notes (the 1.125% Notes) due January 15, 2020, unless earlier repurchased or converted. Interest on the 1.125% Notes is payable semiannually in arrears on January 15 and July 15 at a rate of 1.125% per annum.
The 1.125% Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 1.125% Notes; equal in right of payment to any of our unsecured indebtedness that is not subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our subsidiaries.
The 1.125% Notes are convertible only into cash, and not into shares of our common stock or any other securities. The initial conversion rate for the 1.125% Notes is 24.5277 shares of our common stock per $1,000 principal amount of the 1.125% Notes. This represents an initial conversion price of approximately $40.77 per share of our common stock. Upon conversion, in lieu of receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount of 1.125% Notes, equal to the settlement amount, determined in the manner set forth in the indenture. We may not redeem the 1.125% Notes prior to the maturity date.
Holders may convert their 1.125% Notes only under the following circumstances:

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during any calendar quarter commencing after the calendar quarter ending on June 30, 2013 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of 1.125% Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
upon the occurrence of specified corporate events; or
at any time on or after July 15, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date.
The 1.125% Notes met the stock price trigger in the quarter ended June 30, 2015, and are convertible to cash through at least September 30, 2015. Because the 1.125% Notes may be converted into cash within 12 months, the $445.2 million carrying amount is reported in current portion of long-term debt as of June 30, 2015.
The 1.125% Notes contain an embedded cash conversion option (the 1.125% Conversion Option), which was separated from the 1.125% Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the 1.125% Conversion Option transaction settles or expires. The initial fair value liability of the 1.125% Conversion Option simultaneously reduced the carrying value of the 1.125% Notes (effectively an original issuance discount). This discount is amortized to the 1.125% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. This has resulted in our recognition of interest expense on the 1.125% Notes at an effective rate of approximately 6%. As of June 30, 2015, the 1.125% Notes have a remaining amortization period of 4.5 years. The 1.125% Notes' if-converted value exceeded their principal amount by approximately $361 million and $93 million as of June 30, 2015 and December 31, 2014, respectively.
1.625% Convertible Senior Notes due 2044. In September 2014, we issued $301.6 million aggregate principal amount of 1.625% convertible senior notes (the 1.625% Notes) due August 15, 2044, unless earlier repurchased, redeemed or converted. Interest on the 1.625% Notes is payable semiannually in arrears on February 15 and August 15, at a rate of 1.625% per annum, beginning on February 15, 2015. In addition, beginning with the semiannual interest period commencing immediately following the interest payment date on August 15, 2018, contingent interest will accrue on the 1.625% Notes during any semiannual interest period in which certain conditions or events occur, or under certain events of default. For example, additional interest of 0.25% per year will be payable on the 1.625% Notes for any semiannual interest period for which the principal amount of 1.625% Notes outstanding is less than $100 million.
The 1.625% Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 1.625% Notes; equal in right of payment to any of our unsecured indebtedness that is not subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our subsidiaries.
The initial conversion rate for the 1.625% Notes is 17.2157 shares of our common stock per $1,000 principal amount of the 1.625% Notes. This represents an initial conversion price of approximately $58.09 per share of our common stock. Upon conversion, we will pay cash and, if applicable, deliver shares of our common stock to the converting holder in an amount per $1,000 principal amount of 1.625% Notes equal to the settlement amount (as defined in the related indenture).
Holders may convert their 1.625% Notes only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of 1.625% Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
upon the occurrence of specified corporate events;

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if we call any 1.625% Notes for redemption, at any time until the close of business on the business day immediately preceding the redemption date;
during the period from, and including, May 15, 2018 to the close of business on the business day immediately preceding August 19, 2018; or
at any time on or after February 15, 2044 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 1.625% Notes, in integral multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
As of June 30, 2015, the 1.625% Notes were not convertible.
We may not redeem the 1.625% Notes prior to August 19, 2018. On or after August 19, 2018, we may redeem for cash all or part of the 1.625% Notes, except for the 1.625% Notes we are required to repurchase in connection with a fundamental change or on any specified repurchase date. The redemption price for the 1.625% Notes will equal 100% of the principal amount of the 1.625% Notes being redeemed, plus accrued and unpaid interest. In addition, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes for cash on August 19, 2018, August 19, 2024, August 19, 2029, August 19, 2034 and August 19, 2039, in each case, at a specified price equal to 100% of the principal amount of the 1.625% Notes to be repurchased, plus accrued and unpaid interest.
Because the 1.625% Notes have cash settlement features, we have allocated the principal amount between a liability component and an equity component. The reduced carrying value on the 1.625% Notes resulted in a debt discount that is amortized back to the 1.625% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. The expected life of the debt is approximately four years, beginning on the issuance date and ending on the first date we may redeem the notes in August 2018. As of June 30, 2015, the 1.625% Notes have a remaining amortization period of 3.1 years. This has resulted in our recognition of interest expense on the 1.625% Notes at an effective rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued, or approximately 5%. The outstanding 1.625% Notes’ if-converted value exceeded their principal amount by approximately $58 million as of June 30, 2015, and did not exceed their principal amount as of December 31, 2014. At June 30, 2015, the equity component of the 1.625% Notes, including the impact of deferred taxes, was $22.9 million.
The principal amounts, unamortized discount (net of premium related to 1.625% Notes), and net carrying amounts of the convertible senior notes were as follows:
 
Principal Balance
 
Unamortized Discount
 
Net Carrying Amount
 
(In thousands)
June 30, 2015:
 
 
 
 
 
1.125% Notes
$
550,000

 
$
104,761

 
$
445,239

1.625% Notes
301,551

 
28,621

 
272,930

 
$
851,551

 
$
133,382

 
$
718,169

December 31, 2014:
 
 
 
 
 
1.125% Notes
$
550,000

 
$
114,670

 
$
435,330

1.625% Notes
301,551

 
32,784

 
268,767

 
$
851,551

 
$
147,454

 
$
704,097

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Interest cost recognized for the period relating to the:
 
 
 
 
 
 
 
Contractual interest coupon rate
$
2,772

 
$
3,300

 
$
5,544

 
$
6,600

Amortization of the discount
7,086

 
6,414

 
14,072

 
12,728

 
$
9,858

 
$
9,714

 
$
19,616

 
$
19,328


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Lease Financing Obligations. In 2013, we entered into a sale-leaseback transaction for the sale and contemporaneous leaseback of the Molina Center located in Long Beach, California, and our Ohio health plan office building located in Columbus, Ohio. Due to our continuing involvement with these leased properties, the sale did not qualify for sale-leaseback accounting treatment and we remain the "accounting owner" of the properties. These assets continue to be included in our consolidated balance sheets, and also continue to be depreciated over their remaining useful lives. The lease financing obligation is amortized over the 25-year lease term such that there will be no gain or loss recorded if the lease is not extended at the end of its term. Rent will increase 3% per year through the initial term. Payments under the lease adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income. Such interest expense amounted to $6.3 million and $6.2 million for the six months ended June 30, 2015 and 2014, respectively.
As described and defined in further detail in Note 16, "Related Party Transactions," we entered into a lease for office space in February 2013 consisting of two office buildings. We have concluded that we are the accounting owner of the buildings due to our continuing involvement with the properties. We have recorded $37.1 million to property, equipment and capitalized software, net, in the accompanying consolidated balance sheet as of June 30, 2015, which represents the total cost incurred by the Landlord for the construction of the buildings, net of accumulated depreciation. As of June 30, 2015 and December 31, 2014, the aggregate amount recorded to lease financing obligations, including the current portion, amounted to $40.4 million and $40.6 million, respectively. Payments under the lease adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income. Such interest expense was $2.0 million and $1.1 million for the six months ended June 30, 2015 and 2014, respectively. In addition to the capitalization of the costs incurred by the Landlord, we impute and record rent expense relating to the ground leases for the property sites. Such rent expense is computed based on the fair value of the land and our incremental borrowing rate, and was $0.6 million and $0.4 million for the six months ended June 30, 2015 and 2014, respectively.
12. Derivatives
The following table summarizes the fair values and the presentation of our derivative financial instruments (defined and discussed individually below) in the consolidated balance sheets:
 
Balance Sheet Location
 
June 30, 2015
 
December 31, 2014
 
 
 
(In thousands)
Derivative asset:
 
 
 
 
 
1.125% Call Option
Current assets: Derivative asset
 
$
508,504

 
$

 
Non-current assets: Derivative asset
 
$

 
$
329,323

 

 


 
 
Derivative liability:
 
 
 
 
 
1.125% Conversion Option
Current liabilities: Derivative liability
 
$
508,355

 
$

 
Non-current liabilities: Derivative liability
 
$

 
$
329,194

Our derivative financial instruments do not qualify for hedge treatment, therefore the change in fair value of these instruments is recognized immediately in our consolidated statements of income, and reported in other expense, net. Gains and losses for our derivative financial instruments are presented individually in the consolidated statements of cash flows, supplemental cash flow information.
1.125% Notes Call Spread Overlay. Concurrent with the issuance of the 1.125% Notes in 2013, we entered into privately negotiated hedge transactions (collectively, the 1.125% Call Option) and warrant transactions (collectively, the 1.125% Warrants), with certain of the initial purchasers of the 1.125% Notes (the Counterparties). We refer to these transactions collectively as the Call Spread Overlay. Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the 1.125% Notes), these transactions are intended to offset cash payments due upon any conversion of the 1.125% Notes.
1.125% Call Option. The 1.125% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note 6, "Fair Value Measurements."
1.125% Conversion Option. The embedded cash conversion option within the 1.125% Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the cash conversion

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option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Conversion Option, refer to Note 6, "Fair Value Measurements."
As of June 30, 2015, the 1.125% Call Option and the 1.125% Conversion Option were classified as a current asset and current liability, respectively, because the 1.125% Notes may be converted within 12 months of June 30, 2015, as described in Note 11, "Debt.”
13. Stockholders' Equity
Stockholders' equity increased $452.7 million during the six months ended June 30, 2015 compared with stockholders' equity at December 31, 2014. The increase was due primarily to the common stock offering described below, net income of $67.1 million, and $13.2 million related to employee stock transactions.
Common Stock Offering. In June 2015, we completed an underwritten public offering of 5,750,000 shares of our common stock, including the over-allotment option, conducted pursuant to an effective shelf registration statement filed with the SEC in May 2015. Net of issuance costs, proceeds from the offering amounted to approximately $373.2 million, or $64.90 per share, resulting in an increase to additional paid-in capital. We will use the proceeds to finance working capital needs, acquisitions, capital expenditures, and other general corporate activities.
1.125% Warrants. In connection with the 1.125% Notes Call Spread Overlay transaction described in Note 12, "Derivatives," we issued 13,490,236 warrants with a strike price of $53.8475 per share. The number of warrants and the strike price are subject to adjustment under certain circumstances. If the market value per share of our common stock exceeds the strike price of the 1.125% Warrants on any trading day during the 160 trading day measurement period under the 1.125% Warrants, we will be obligated to issue to the Counterparties a number of shares equal in value to the product of the amount by which such market value exceeds such strike price and 1/160th of the aggregate number of shares of our common stock underlying the 1.125% Warrants, subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price of the 1.125% Warrants. We will not receive any additional proceeds if the 1.125% Warrants are exercised.
Securities Repurchase Programs. Effective as of February 25, 2015, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock. Stock repurchases under this program may be made through open-market and/or privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and market conditions. This repurchase program extends through December 31, 2015.
Shelf Registration Statement. As noted above, we filed an automatic shelf registration statement on Form S-3 in May 2015 covering the issuance of an indeterminate number of our securities, including common stock, warrants, or debt securities. We may publicly offer securities from time to time at prices and terms to be determined at the time of the offering.
Stock Plans. In connection with our equity incentive plans and employee stock purchase plan, we issued approximately 460,000 shares of common stock, net of shares used to settle employees’ income tax obligations, for the six months ended June 30, 2015.
14. Segment Information
We report our financial performance based on two reportable segments: the Health Plans segment and the Molina Medicaid Solutions segment. Our reportable segments are consistent with how we manage the business and view the markets we serve. Our Health Plans segment consists of our health plans and our direct delivery business. Our health plans represent operating segments that have been aggregated for reporting purposes because they share similar economic characteristics.
Our Molina Medicaid Solutions segment provides MMIS design, development, and implementation; business process outsourcing solutions; hosting services; and information technology support services to state Medicaid agencies.

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We rely on an internal management reporting process that provides segment information to the operating income level for purposes of making financial decisions and allocating resources. The accounting policies of the segments are the same as those described in Note 2, "Significant Accounting Policies." For presentation purposes, the cost of centralized services is reported within the Health Plans segment.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Revenue, continuing operations:
 
 
 
 
 
 
 
Health Plans segment:
 
 
 
 
 
 
 
Premium revenue
$
3,304,372

 
$
2,167,142

 
$
6,275,024

 
$
4,107,479

Premium tax revenue
94,609

 
70,120

 
189,956

 
121,813

Health insurer fee revenue
73,890

 
19,662

 
121,838

 
38,358

Investment income
3,828

 
1,945

 
6,843

 
3,574

Other revenue
948

 
2,938

 
3,251

 
6,196

Molina Medicaid Solutions segment:
 
 
 
 
 
 
 
Service revenue
47,243

 
50,232

 
99,101

 
103,862

 
$
3,524,890

 
$
2,312,039

 
$
6,696,013

 
$
4,381,282

 
 
 
 
 
 
 
 
Income from continuing operations before income tax expense:
 
 
 
 
 
 
 
Health Plans segment
$
102,585

 
$
21,986

 
$
171,025

 
$
36,005

Molina Medicaid Solutions segment
13,043

 
10,441

 
26,833

 
20,689

Operating income, continuing operations
115,628

 
32,427

 
197,858

 
56,694

Other expenses, net
14,914

 
13,984

 
29,780

 
27,762

 
$
100,714

 
$
18,443

 
$
168,078

 
$
28,932

15. Commitments and Contingencies
Legal Proceedings. The health care and business process outsourcing industries are 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 and penalties, exclusion from participating in publicly funded programs, and the repayment of previously billed and collected revenues.
We are involved in legal actions in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. We have accrued liabilities for certain matters for which we deem the loss to be both probable and estimable. Although we believe that our estimates of such losses are reasonable, these estimates could change as a result of further developments of these matters. The outcome of legal actions is inherently uncertain and such pending matters for which accruals have not been established have not progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to estimate a range of possible loss, if any. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these pending matters could have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
State of Louisiana. On June 26, 2014, the state of Louisiana filed a Petition for Damages against Molina Medicaid Solutions, Molina Healthcare, Inc., Unisys Corporation, and Paramax Systems Corporation, a subsidiary of Unisys, in the Parish of Baton Rouge, 19th Judicial District, versus number 631612. The Petition alleges that between 1989 and 2012, the defendants utilized an incorrect reimbursement formula for the payment of pharmaceutical claims. We believe we have several meritorious defenses to the claims of the state, and any liability for the alleged claims is not currently probable or reasonably estimable.
USA and State of Florida ex rel. Charles Wilhelm. On July 24, 2014, Molina Healthcare, Inc. and Molina Healthcare of Florida, Inc. were served with a Complaint filed under seal on December 5, 2012 in District Court for the Southern District of Florida by relator, Charles C. Wilhelm, M.D., Case No. 12-24298. The Complaint alleges that in late 2008 and early 2009, in connection with the acquisition of Florida NetPass under which Molina Healthcare of Florida, Inc. began conducting business in the state of Florida, the defendants failed to adequately staff the plan and provide other services, resulting in a disproportionate number of sicker beneficiaries of Florida NetPass moving back into the Florida fee-for-service Medicaid program. This alleged conduct purportedly resulted in a violation of the federal False Claims Act. Both the United States of

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America and the state of Florida have declined to intervene. We believe we have several meritorious defenses to the claims of the relator, and any liability for the alleged claims is not currently probable or reasonably estimable.
United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc., et al. On or around October 14, 2014, Molina Healthcare of California, Molina Healthcare of California Partner Plan, Inc., Mobile Medical Examination Services, Inc. (MedXM), and other health plan defendants were served with a Complaint previously filed under seal in the Central District Court of California by relator, Anita Silingo, Case No. SACV13-1348-FMO(SHx). The Complaint alleges that MedXM improperly modified medical records and otherwise took inappropriate steps to increase members’ risk adjustment scores, and that the defendants, including Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc., purportedly turned a “blind eye” to these unlawful practices. The Department of Justice has declined to intervene. We believe that we have several meritorious defenses to the claims of the relator, and any liability for the alleged claims is not currently probable or reasonably estimable.
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 health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. Regulators in some states may also attempt to enforce capital requirements upon us that require the retention of net worth in excess of amounts formally required by statute or regulation. Such statutes, regulations and informal capital requirements also restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, 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 approximately $1,005 million at June 30, 2015, and $859 million at December 31, 2014. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such cash, cash equivalents and investments amounted to $536.4 million and $202.6 million as of June 30, 2015 and December 31, 2014, respectively.
The National Association of Insurance Commissioners (NAIC), adopted rules effective December 31, 1998, which, if implemented by the states, set 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 which may vary from state to state.
As of June 30, 2015, our health plans had aggregate statutory capital and surplus of approximately $1,071 million compared with the required minimum aggregate statutory capital and surplus of approximately $589 million. All of our health plans were in compliance with the minimum capital requirements at June 30, 2015