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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
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
https://cdn.kscope.io/51faf83684053f6f13109857096d1af9-moh-20200930_g1.jpg
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,California90802
(Address of principal executive offices) (Zip Code)
(562) 435-3666
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 Par Value MOHNew York Stock Exchange
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   Accelerated Filer Non-Accelerated Filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of October 23, 2020, was approximately 59,300,000.


Table of Contents
MOLINA HEALTHCARE, INC. FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS
ITEM NUMBERPage
PART I
1.
2.
3.
4.
PART II
1.
1A.
2.
3.Defaults Upon Senior SecuritiesNot Applicable.
4.Mine Safety DisclosuresNot Applicable.
5.Other InformationNot Applicable.
6.


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In millions, except per-share amounts)
(Unaudited)
Revenue:
Premium revenue$4,768 $4,084 $13,444 $12,085 
Premium tax revenue170 119 477 367 
Health insurer fees reimbursed69  206  
Investment income and other revenue14 40 61 103 
Total revenue5,021 4,243 14,188 12,555 
Operating expenses:
Medical care costs4,098 3,523 11,412 10,360 
General and administrative expenses368 323 1,030 953 
Premium tax expenses170 119 477 367 
Health insurer fees70  209  
Depreciation and amortization23 21 64 68 
Other3  9 5 
Total operating expenses4,732 3,986 13,201 11,753 
Operating income289 257 987 802 
Other expenses, net:
Interest expense27 22 72 67 
Other expense (income), net 2 5 (15)
Total other expenses, net27 24 77 52 
Income before income tax expense262 233 910 750 
Income tax expense77 58 271 181 
Net income$185 $175 $639 $569 
Net income per share - Basic $3.14 $2.81 $10.80 $9.15 
Net income per share - Diluted $3.10 $2.75 $10.65 $8.80 


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In millions)
(Unaudited)
Net income$185 $175 $639 $569 
Other comprehensive income:
Unrealized investment income6  43 17 
Less: effect of income taxes
1  10 4 
Other comprehensive income, net of tax 5  33 13 
Comprehensive income$190 $175 $672 $582 
See accompanying notes.
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CONSOLIDATED BALANCE SHEETS
September 30,
2020
December 31,
2019
(Dollars in millions,
except per-share amounts)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents$3,196 $2,452 
Investments1,769 1,946 
Receivables1,775 1,406 
Prepaid expenses and other current assets213 163 
Total current assets6,953 5,967 
Property, equipment, and capitalized software, net395 385 
Goodwill and intangible assets, net265 172 
Restricted investments93 79 
Deferred income taxes 74 79 
Other assets101 105 
Total assets$7,881 $6,787 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable$2,289 $1,854 
Amounts due government agencies 640 664 
Accounts payable, accrued liabilities and other566 502 
Deferred revenue61 249 
Total current liabilities3,556 3,269 
Long-term debt1,813 1,237 
Finance lease liabilities226 231 
Other long-term liabilities85 90 
Total liabilities5,680 4,827 
Stockholders’ equity:
Common stock, $0.001 par value, 150 million shares authorized; outstanding: 59 million shares at September 30, 2020, and 62 million shares at December 31, 2019
  
Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and outstanding
  
Additional paid-in capital181 175 
Accumulated other comprehensive income37 4 
Retained earnings1,983 1,781 
Total stockholders’ equity2,201 1,960 
Total liabilities and stockholders’ equity$7,881 $6,787 
See accompanying notes.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
OutstandingAmount
(In millions)
(Unaudited)
Balance at December 31, 201962 $ $175 $4 $1,781 $1,960 
Net income— — — — 178 178 
Common stock purchases(3)— (9)— (437)(446)
Termination of warrants— — (30)— — (30)
Other comprehensive loss, net— — — (19)— (19)
Share-based compensation— — 4 — — 4 
Balance at March 31, 202059  140 (15)1,522 1,647 
Net income
— — — — 276 276 
Other comprehensive income, net
— — — 47 — 47 
Share-based compensation
— — 26 — — 26 
Balance at June 30, 2020
59  166 32 1,798 1,996 
Net income— — — — 185 185 
Other comprehensive income, net
— — — 5 — 5 
Share-based compensation— — 15 — — 15 
Balance at September 30, 202059 $ $181 $37 $1,983 $2,201 

Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
OutstandingAmount
(In millions)
(Unaudited)
Balance at December 31, 201862 $ $643 $(8)$1,012 $1,647 
Net income— — — — 198 198 
Adoption of new accounting standard
— — — — 85 85 
Partial termination of warrants— — (103)— — (103)
Other comprehensive income, net— — — 5 — 5 
Share-based compensation1 — 3 — — 3 
Balance at March 31, 201963  543 (3)1,295 1,835 
Net income— — — — 196 196 
Partial termination of warrants— — (321)— — (321)
Other comprehensive income, net— — — 8 — 8 
Share-based compensation— — 18 — — 18 
Balance at June 30, 201963  240 5 1,491 1,736 
Net income— — — — 175 175 
Partial termination of warrants— — (90)— — (90)
Share-based compensation— — 10 — — 10 
Balance at September 30, 201963 $ $160 $5 $1,666 $1,831 
See accompanying notes.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
 20202019
(In millions)
(Unaudited)
Operating activities:
Net income$639 $569 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization64 68 
Deferred income taxes(3)7 
Share-based compensation43 29 
Loss (gain) on debt repayment 5 (15)
Other, net2  
Changes in operating assets and liabilities:
Receivables(369)50 
Prepaid expenses and other current assets(98)(6)
Medical claims and benefits payable431 14 
Amounts due government agencies (24)(355)
Accounts payable, accrued liabilities and other55 37 
Deferred revenue(188)(4)
Income taxes34 4 
Net cash provided by operating activities591 398 
Investing activities:
Purchases of investments(670)(1,938)
Proceeds from sales and maturities of investments891 1,890 
Net cash paid in business combinations(62) 
Purchases of property, equipment and capitalized software(64)(30)
Other, net3 (2)
Net cash provided by (used in) investing activities98 (80)
Financing activities:
Proceeds from senior notes offering, net of issuance costs 789  
Repayment of term loan facility(600) 
Common stock purchases
(453) 
Proceeds from borrowings under term loan facility380 220 
Cash paid for partial termination of warrants(30)(514)
Cash paid for partial settlement of conversion option (27)(578)
Cash received for partial settlement of call option27 578 
Repayment of principal amount of convertible senior notes
(12)(240)
Other, net(5)24 
Net cash provided by (used in) financing activities69 (510)
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents
758 (192)
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period
2,508 2,926 
Cash, cash equivalents, and restricted cash and cash equivalents at end of period$3,266 $2,734 
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Nine Months Ended September 30,
20202019
(In millions)
(Unaudited)
Supplemental cash flow information:
Schedule of non-cash investing and financing activities:
Common stock used for share-based compensation$(8)$(7)
Details of business combinations:
Fair value of assets acquired$(106)$ 
Fair value of contingent consideration liabilities40  
Fair value of liabilities assumed4  
Net cash paid in business combinations$(62)$ 
Details of change in fair value of derivatives, net:
(Loss) gain on call option$(2)$124 
Gain (loss) on conversion option2 (124)
Change in fair value of derivatives, net$ $ 
See accompanying notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2020

1. Organization and Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). We currently have two reportable segments: the Health Plans segment and the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
As of September 30, 2020, the Health Plans segment consisted of health plans operating in 15 states and the Commonwealth of Puerto Rico, and served approximately 4.0 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies. The health plans are generally operated by our respective wholly owned subsidiaries in those states and licensed as health maintenance organizations (“HMO”).
Our state Medicaid contracts typically have terms of three to five years, contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. Such contracts are subject to risk of loss in states that issue requests for proposal (“RFPs”) open to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may not be renewed.
In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled; and regions or service areas.
Recent Developments - Health Plans Segment
New York. In September 2020, we entered into a definitive agreement to acquire substantially all of the assets of Affinity Health Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the second quarter of 2021.
In July 2020, we completed the acquisition of certain assets of YourCare Health Plan, Inc. See Note 4, “Business Combinations,” for further information.
Kentucky. In September 2020, we completed the acquisition of certain assets of Passport Health Plan, Inc. See Note 4, “Business Combinations,” for further information.
In May 2020, our Kentucky health plan had been selected as an awardee pursuant to the statewide Medicaid managed care RFP issued by the Kentucky Cabinet for Health and Family Services, Department for Medicaid Services. On October 23, 2020, pursuant to a protest filing appeal with regard to the RFP awards, a court ordered the addition of a sixth health plan to the Kentucky Medicaid program for 2021. That ruling did not rescind the Medicaid contract award to our Kentucky health plan for 2021, nor did it have any impact on the earlier novation of the Passport Medicaid contract to us. The new Medicaid contract is currently expected to begin on January 1, 2021.
Acquisition of Magellan Complete Care (“MCC”). In April 2020, we entered into a definitive agreement to acquire the MCC line of business of Magellan Health, Inc. The purchase price for the transaction is approximately $820 million, net of certain tax benefits, which we intend to fund with cash on hand. The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close around the end of 2020. In connection with this transaction, Magellan Health, Inc. has agreed to provide certain transition services following the closing.
Texas. In March 2020, the Texas Health and Human Services Commission (“HHSC”) notified our Texas health plan that HHSC had upheld our protest and had canceled all previously awarded contracts associated with the re-procurement awards announced in October 2019 for the ABD program (known in Texas as “STAR+PLUS”). In addition, HHSC canceled the pending re-procurement associated with the TANF and CHIP programs (known in Texas as “STAR/CHIP”). HHSC further indicated that it was deliberating next steps with respect to both re-procurements.
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Puerto Rico. We will exit Puerto Rico’s Medicaid program when our current contract expires on October 31, 2020. We are working closely with the regulatory authorities and the provider community to ensure that our members in Puerto Rico have reliable continuity of care.
Illinois. In March 2020, we terminated our agreement to acquire all of the capital stock of NextLevel Health Partners, Inc. due to the seller’s stated unwillingness to close pursuant to the terms of the acquisition agreement.
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its 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; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated. The consolidated results of operations for the nine months ended September 30, 2020, are not necessarily indicative of the results for the entire year ending December 31, 2020.
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, 2019. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in our December 31, 2019, audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended December 31, 2019.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include:
The determination of medical claims and benefits payable of our Health Plans segment;
Health Plans segment contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;
Health Plans segment quality incentives that allow us to recognize incremental revenue if certain quality standards are met;
Settlements under risk- or savings-sharing programs;
Purchase price allocations relating to business combinations, including the determination of contingent consideration;
The assessment of long-lived and intangible assets, and goodwill for impairment;
The determination of reserves for potential absorption of claims unpaid by insolvent providers;
The determination of reserves for the outcome of litigation;
The determination of valuation allowances for deferred tax assets; and
The determination of unrecognized tax benefits.

2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily convertible into known amounts of cash and have a maturity of three months or less on the date of purchase. The following table reconciles cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows. The restricted cash and cash equivalents presented below are included in “Restricted investments” in the accompanying consolidated balance sheets.
September 30,
 20202019
(In millions)
Cash and cash equivalents$3,196 $2,679 
Restricted cash and cash equivalents70 55 
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the consolidated statements of cash flows
$3,266 $2,734 
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Investments
Our investments are principally held in debt securities, which are grouped into two separate categories for accounting and reporting purposes: available-for-sale securities, and held-to-maturity securities. Available-for-sale (“AFS”) securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income (loss), net of applicable income taxes. Held-to-maturity (“HTM”) 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 arising from credit-related factors with respect to AFS and HTM securities are included in the determination of net income. The cost of securities sold is determined using the specific-identification method.
Our investment policy requires that all our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. 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 AFS securities are classified as current assets without regard to the securities’ contractual maturity dates because they may be readily liquidated. We monitor our investments for credit-related impairment. For comprehensive discussions of the fair value and classification of our investments, see Note 5, “Fair Value Measurements,” and Note 6, “Investments.”
Accrued interest receivable relating to our AFS and HTM securities is presented within “Prepaid expenses and other current assets” in the accompanying consolidated balance sheets, and amounted to $9 million and $12 million at September 30, 2020, and December 31, 2019, respectively. We do not measure an allowance for credit losses on accrued interest receivable. Instead, we write off accrued interest receivable that has not been collected within 90 days of the interest payment due date. We recognize such write offs as a reversal of interest income. No accrued interest was written off during the nine months ended September 30, 2020.
Premium Revenue Recognition and Premiums Receivable
Premium revenue is generated from our Health Plans segment contracts related to our Medicaid, Medicare and Marketplace programs. Premium revenue is generally received based on per member per month (“PMPM”) rates established in advance of the periods covered. These premium revenues are recognized in the month that members are entitled to receive healthcare services, and premiums collected in advance are deferred. The state Medicaid programs and the federal Medicare program periodically adjust premiums. Additionally, many of our contracts contain provisions that may adjust or limit revenue or profit, as described below. Consequently, we recognize premium revenue as it is earned under such provisions. Liabilities accrued for premiums to be returned under such provisions are recognized as “Amounts due government agencies” in the accompanying consolidated balance sheets, and included the following categories by program:
September 30,
2020
December 31,
2019
(In millions)
Medicaid program:
Minimum MLR and profit sharing$136 $92 
Other83 95 
Medicare program:
Risk adjustment and Part D risk sharing38 14 
Minimum MLR and profit sharing 35 36 
Other30 21 
Marketplace program:
Risk adjustment265 368 
Minimum MLR33 15 
Other20 23 
Total amounts due government agencies$640 $664 
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Contractual Provisions That May Adjust or Limit Revenue or Profit
Medicaid Program
Minimum MLR and Medical Cost Corridors. A portion of our premium revenue may be returned if certain minimum amounts are not spent on defined medical care costs. Under certain medical cost corridor provisions, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold.
Profit Sharing. Our contracts with certain states contain profit sharing provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any.
Retroactive Premium Adjustments. State Medicaid programs periodically adjust premium rates on a retroactive basis. In these cases, we adjust our premium revenue in the period in which we determine that the adjustment is probable and reasonably estimable, and is based on our best estimate of the ultimate premium we expect to realize for the period being adjusted.
Various states have implemented temporary premium refunds and related actions in response to the reduced demand for medical services stemming from COVID-19, which are resulting in a reduction of our medical margin. In some cases, these premium actions are retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal years in 2019. In the second quarter of 2020, we recognized approximately $75 million for certain of these retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. In most of those states, the refund period extended into the third quarter of 2020, and one additional state, Michigan, enacted a premium refund mechanism in the third quarter of 2020. Consequently, we recognized an additional $88 million related to these retroactive premium actions in the third quarter of 2020, resulting in $163 million recognized in the nine months ended September 30, 2020.
It is possible that certain states could increase the level of existing premium refunds, and it is also possible that other states could implement some form of retroactive premium refund during the fourth quarter of 2020. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.
Medicare Program
Risk Adjustment. Our Medicare premiums are subject to retroactive increase or decrease based on the health status of our Medicare members (as measured by member risk score). We estimate our members’ risk scores and the related amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health status, risk scores and Centers for Medicare & Medicaid Services (“CMS”) practices.
Minimum MLR. The Affordable Care Act (“ACA”) established a minimum annual medical loss ratio (“Minimum MLR”) of 85% for Medicare. The medical loss ratio represents medical costs as a percentage of premium revenue. Federal regulations define what constitutes medical costs and premium revenue. If the Minimum MLR is not met, we may be required to pay rebates to the federal government. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income.
Marketplace Program
Risk Corridor Settlement. In April 2020, the United States Supreme Court held that §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute, and that impacted insurers may sue the federal government in the U.S. Court of Federal Claims to recover damages for breach of that obligation. In June 2020, the Claims Court granted us judgment in the amount of $128.1 million for our 2014, 2015, and 2016 Marketplace risk corridor claims, which we received in October 2020. Since we accounted for the judgment as a gain contingency at September 30, 2020, it will be recognized in our fourth quarter 2020 financial results. The judgment does not create additional Minimum MLR rebates.
Risk Adjustment. Under this program, our health plans’ composite risk scores are compared with the overall average risk score for the relevant state and market pool. Generally, our health plans will make a risk adjustment payment into the pool if their composite risk scores are below the average risk score (risk adjustment payable), and will receive a risk adjustment payment from the pool if their composite risk scores are above the average risk score (risk adjustment receivable). We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our consolidated statements of income. As of September 30, 2020, Marketplace risk adjustment payables amounted
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to $265 million and related receivables amounted to $59 million, for a net payable of $206 million. This net payable consisted of $230 million in payables relating to 2020, and $24 million in receivables relating primarily to 2019. As of December 31, 2019, Marketplace risk adjustment payables amounted to $368 million and related receivables amounted to $63 million, for a net payable of $305 million, which related primarily to 2019 and prior periods.
Minimum MLR. The ACA established a Minimum MLR of 80% for the Marketplace. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace policyholders. The Marketplace risk adjustment program is taken into consideration when computing the Minimum MLR. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income.
Quality Incentives
At many of our health plans, revenue ranging from approximately 1% to 4% of certain health plan premiums is earned only if certain performance measures are met. Such performance measures are generally found in our Medicaid and MMP contracts. As described in Note 1, “Organization and Basis of Presentation–Use of Estimates,” recognition of quality incentive premium revenue is subject to the use of estimates.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the periods presented and prior periods.
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(In millions)
Maximum available quality incentive premium - current period
$69 $47 $195 $138 
Quality incentive premium revenue recognized in current period:
Earned current period$63 $46 $180 $109 
Earned prior periods19 5 23 35 
Total$82 $51 $203 144 
Quality incentive premium revenue recognized as a percentage of total premium revenue
1.7 %1.2 %1.5 %1.2 %
Receivables
Receivables consist primarily of amounts due from government agencies, which may be subject to potential retroactive adjustments. Because substantially all our receivable amounts are readily determinable and substantially all of our creditors are governmental authorities, our allowance for credit losses is insignificant.
September 30,
2020
December 31,
2019
(In millions)
Government receivables$1,180 $1,056 
Pharmacy rebate receivables175 150 
Health insurer fee reimbursement receivables180 5 
Other240 195 
Total$1,775 $1,406 
Reinsurance
We bear underwriting and reserving risks associated with our health plan subsidiaries. Until the second quarter of 2020, we limited our risk of catastrophic losses solely by maintaining high deductible reinsurance coverage with a highly-rated, unaffiliated insurance company (the “third-party reinsurer”). Beginning in the second quarter of 2020, we now retain certain of these risks through our wholly-owned, captive insurance subsidiary (the “captive”). We continue to reduce our exposure to significant catastrophic losses by insuring levels of coverage, with the third-party reinsurer, for losses in excess of what we retain with the captive. Because we remain liable to our policyholders in the event the third-party reinsurer is unable to pay its portion of the losses, we continually monitor the third-party reinsurer’s financial condition, including its ability to maintain high credit ratings. We report reinsurance premiums as
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a reduction to premium revenue, while related reinsurance recoveries are reported as a reduction to medical care costs. Intercompany transactions with our captive are eliminated in consolidation.
Premium Deficiency Reserves on Loss Contracts
We assess the profitability of our medical care policies to identify groups of contracts where current operating results or forecasts indicate probable future losses. If anticipated future variable costs exceed anticipated future premiums and investment income, a premium deficiency reserve is recognized. In the third quarter of 2020, we recognized a premium deficiency reserve of $10 million for our Medicaid contract in Puerto Rico. As described in Note 1, “Organization and Basis of Presentation,” we will exit Puerto Rico’s Medicaid program when our current contract expires on October 31, 2020. No premium deficiency reserve was recorded as of December 31, 2019.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments, receivables, and restricted investments. Our investments and a portion of our cash equivalents are managed by professional portfolio managers operating under documented investment guidelines. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels. Our investments consist primarily of investment-grade debt securities with final maturities of less than 10 years, or less than 10 years average life for structured securities. Restricted investments are invested principally in cash, cash equivalents, and U.S. Treasury securities. Concentration of credit risk with respect to accounts receivable is limited because our payors consist principally of the federal government, and governments of each state or commonwealth in which our health plan subsidiaries operate.
Health Insurer Fee
Under the ACA, the federal government imposes an annual fee, or excise tax, on health insurers for each calendar year (the “HIF”). Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. The HIF was reinstated in 2020, but the Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020. The HIF is allocated to health insurers based on each health insurer's share of net premiums for all U.S. health insurers in the year preceding the assessment. Our HIF liability for 2020 is $277 million, of which $271 million was accrued as of January 1, 2020 and an additional $6 million was accrued in the second quarter, with a corresponding deferred expense asset amortized to expense through December 31, 2020, on a straight-line basis. We settled the 2020 HIF liability in September 2020. The HIF is not deductible for income tax purposes. Due to the reinstatement of the HIF in 2020, our effective tax rate is higher in 2020 compared with 2019.
Under the Medicaid program, we must secure additional reimbursement from our state partners for this added cost. We have obtained a contractual commitment or are receiving payments from all states in which we operate Medicaid programs to reimburse us for the HIF, and such HIF revenue is being recognized ratably throughout the year.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which generally differs from the U.S. federal statutory rate primarily because of foreign and state taxes, nondeductible expenses such as the HIF, certain compensation, and other general and administrative expenses.
The effective tax rate may be subject to fluctuations during the year as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including projected pretax earnings, 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.
Recent Accounting Pronouncements Adopted
Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was subsequently modified by several ASUs issued in 2018 and 2019. We adopted Topic 326 effective January 1, 2020, using the modified retrospective approach. Under this method we recognized the cumulative effect of adopting the standard as an adjustment to the opening balance of retained earnings on January 1, 2020, which was immaterial.
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Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by a change in the reference rate from the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued, if certain conditions are met. ASU 2020-04 is effective immediately and expires after December 31, 2022. We are evaluating the effect of reference rate reform and this guidance on our contracts and other transactions.
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, nor does management expect such pronouncements to have, a significant impact on our present or future consolidated financial statements.


3. Net Income per Share
The following table sets forth the calculation of net income per share:
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In millions, except net income per share)
Numerator:
Net income$185 $175 $639 $569 
Denominator:
Shares outstanding at the beginning of the period58.7 62.2 61.9 62.1 
Weighted-average number of shares issued:
Stock purchases  (2.8) 
Stock-based compensation  0.1 0.1 
Denominator for basic net income per share58.7 62.2 59.2 62.2 
Effect of dilutive securities: (1)
Warrants 0.8  1.8 
Stock-based compensation0.9 0.6 0.8 0.6 
Denominator for diluted net income per share59.6 63.6 60.0 64.6 
Net income per share - Basic (2)
$3.14 $2.81 $10.80 $9.15 
Net income per share - Diluted (2)
$3.10 $2.75 $10.65 $8.80 
______________________________
(1)    The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method. All warrants outstanding as of December 31, 2019, were settled in the first quarter of 2020. For more information refer to Note 9, “Stockholders' Equity.”
(2)    Source data for calculations in thousands.
    
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4. Business Combinations
In the third quarter of 2020, we closed on two business combinations in the Health Plans segment, consistent with our strategy to grow in our existing markets and expand into new markets. For both transactions, we applied the acquisition method of accounting, where the total purchase price was allocated, or preliminarily allocated, to the tangible and intangible assets acquired and liabilities assumed, based on their fair values as of the acquisition dates. We expect to complete the final determination of the purchase price allocations as soon as practicable, but no later than one year following the closing date in accordance with Accounting Standards Codification Topic 805, Business Combinations. The table below illustrates the intangible assets acquired, by major class, for the two acquisitions. Acquisition-related costs were insignificant.
New York. On July 1, 2020, we closed on the acquisition of certain assets of YourCare Health Plan, Inc., a Medicaid health plan, for a cash purchase price of $42 million. In connection with this transaction, we added approximately 47,000 Medicaid members in New York. We recorded goodwill of $31 million for this transaction, which is deductible for income tax purposes. The goodwill recorded relates to future economic benefits arising from expected synergies to be achieved, including the use of our existing infrastructure to support the added membership.
Kentucky. On September 1, 2020, we closed on the acquisition of certain assets of Passport Health Plan, Inc., a Medicaid health plan. Effective on that same date, the Kentucky Medicaid agency approved the novation of Passport’s Medicaid contract to Molina Healthcare of Kentucky, Inc. As a result, we added approximately 325,000 Medicaid members in Kentucky. As of September 30, 2020, the purchase price allocation was preliminary due to the proximity of the acquisition date to September 30, 2020, and the time and level of effort required to develop fair value measurements for the assets acquired and liabilities assumed.
The estimated total purchase price of $60 million includes our initial cash payment of $20 million in September 2020, plus estimated contingent consideration which consists primarily of an amount due to the seller for members we enroll in the open enrollment period for the 2021 plan year, over a minimum threshold, which resulted in an initial contingent consideration liability of $40 million. We expect to settle this liability in the first quarter of 2021. Contingent consideration liabilities are remeasured to fair value at each quarter until the contingencies are resolved with fair value adjustments, if any, recorded to operations. See further information in Note 5, “Fair Value Measurements.” We recorded goodwill of $27 million for this transaction, which is deductible for income tax purposes. The goodwill recorded relates to future economic benefits arising from the assembled workforce, and the future growth associated with the member contract rights that are incremental to the contract rights identified.
The following table presents the intangible assets identified in the transactions described above. The weighted-average amortization period for the identified intangible assets, in the aggregate, is 10.7 years.
Fair ValueLife
 (In millions)(Years)
Intangible asset by type:
Contract rights - member list$24 5-10
Trade name 15 16
Provider network8 10
$47 

5. Fair Value Measurements
We generally consider the carrying amounts of current assets and current liabilities 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 the three-tier fair value hierarchy. For a description of the methods and assumptions that we use to a) estimate the fair value; and b) determine the classification according to the fair value hierarchy for each financial instrument, refer to our 2019 Annual Report on Form 10-K, Note 4, “Fair Value Measurements.”
As of September 30, 2020, our Level 3 financial instruments recorded at fair value on a recurring basis included contingent consideration liabilities of $40 million, in connection with the Kentucky acquisition described in Note 4, “Business Combinations.” Such liabilities are reported in “Accounts payable, accrued liabilities and other” in the accompanying consolidated balance sheets. The fair value of the contingent consideration was estimated using a
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simulation-based option pricing model through the end of the measurement period of approximately 5 months, and included certain non-observable inputs. The key assumptions included a U.S. Treasury based risk-free rate of return, expected asset volatility of 35%, expected revenue volatility of 9%, forecasted membership enrollment, and other estimated revenue, asset and payment correlations and discount rates. The model produced an estimated range of undiscounted amounts Molina could pay under the contingent consideration arrangement of $25 million to $75 million.
Our financial instruments measured at fair value on a recurring basis at September 30, 2020, were as follows:
Observable InputsDirectly or Indirectly Observable InputsUnobservable Inputs
Total(Level 1) (Level 2) (Level 3)
 (In millions)
Corporate debt securities$1,041 $ $1,041 $ 
Mortgage-backed securities417  417  
Municipal securities168  168  
Asset-backed securities136  136  
Certificates of deposit5  5  
U.S. Treasury notes2  2  
Total assets$1,769 $ $1,769 $ 
Contingent consideration liabilities$40 $ $ $40 
Total liabilities$40 $ $ $40 
Our financial instruments measured at fair value on a recurring basis at December 31, 2019, were as follows:
Observable InputsDirectly or Indirectly Observable InputsUnobservable Inputs
Total(Level 1)(Level 2)(Level 3)
 (In millions)
Corporate debt securities$1,178 $ $1,178 $ 
Mortgage-backed securities420  420  
Municipal securities78  78  
Asset-backed securities127  127  
Certificates of deposit1  1  
U.S. Treasury notes86  86  
GSEs49  49  
Other7  7  
Subtotal1,946  1,946  
Call option derivative asset29   29 
Total assets $1,975 $ $1,946 $29 
Conversion option derivative liability$29 $ $ $29 
Total liabilities$29 $ $ $29 
The net changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the nine months ended September 30, 2020.
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Derivatives
The following table summarizes the fair values and the presentation of our derivative financial instruments in the accompanying consolidated balance sheets:
Balance Sheet LocationSeptember 30,
2020
December 31,
2019
 (In millions)
Derivative asset:
Call optionCurrent assets: Prepaid expenses and other current assets$ $29 
Derivative liability:
Conversion optionCurrent liabilities: Accounts payable, accrued liabilities and other$ $29 
For additional information regarding our derivative financial instruments, see Note 11, “Debt,” and Note 12, “Derivatives,” in our 2019 Annual Report on Form 10-K.
In the first quarter of 2020, we received $27 million for the settlement of the call option derivative asset, and we paid $39 million to settle the outstanding $12 million principal amount of the 1.125% Convertible Notes, and settle the related conversion option. For more information, refer to Notes 8, “Debt,” and 9, “Stockholders' Equity.”
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our notes payable are classified as Level 2 financial instruments. Fair value for these securities is determined using a market approach based on quoted market prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
 September 30, 2020December 31, 2019
Carrying
Amount
Fair ValueCarrying
Amount
Fair Value
 (In millions)
4.375% Notes
$789 $816 $ $ 
5.375% Notes
697 731 696 745 
4.875% Notes
327 337 327 340 
Term loan facility (1)
  220 220 
1.125% Convertible Notes (1)
  12 42 
Total$1,813 $1,884 $1,255 $1,347 
______________________
(1)For more information on financing activities, refer to Note 8, “Debt.”

6. Investments
Available-for-Sale
We consider all our investments classified as current assets to be available-for-sale. The following tables summarize our investments as of the dates indicated:
 September 30, 2020
Amortized CostGross UnrealizedEstimated Fair Value
 GainsLosses
 (In millions)
Corporate debt securities$1,007 $