0001179929 2011-07-21 0001179929 2011-06-30 0001179929 2010-12-31 0001179929 2011-04-01 2011-06-30 0001179929 2010-04-01 2010-06-30 0001179929 2011-01-01 2011-06-30 0001179929 2010-01-01 2010-06-30 0001179929 2009-12-31 0001179929 2010-06-30 iso4217:USD xbrli:shares xbrli:shares iso4217:USD MOLINA HEALTHCARE INC 0001179929 --12-31 No No Yes Accelerated Filer 10-Q false 2011-06-30 Q2 2011 324000000 46065000 459213000 455886000 356600000 295375000 172674000 168190000 16423000 15716000 23246000 22772000 1028156000 957939000 117836000 100537000 42557000 28444000 91237000 105500000 212484000 212228000 18958000 20449000 50330000 42100000 24075000 24649000 14788000 17368000 1600421000 1509214000 341613000 354356000 133005000 137930000 128599000 60086000 5605000 13176000 608822000 565548000 166725000 164014000 14468000 16235000 24075000 24649000 20474000 19711000 834564000 790157000 46000 45000 0.001 0.001 80000 80000 46062 45463 0 0 0.001 0.001 20000 20000 0 0 0 0 262988000 251612000 -1597000 -2192000 504420000 469592000 765857000 719057000 1600421000 1509214000 1128770000 976685000 2210208000 1941905000 36888000 21054000 73562000 21054000 1446000 1599000 3040000 3120000 1167104000 999338000 2286810000 1966079000 949359000 839613000 1862891000 1662429000 39215000 14254000 70436000 14254000 96921000 78079000 191357000 156959000 37709000 34995000 74259000 69541000 12490000 11219000 25157000 21280000 1135694000 978160000 2224100000 1924463000 31410000 21178000 62710000 41616000 3683000 4099000 7286000 7456000 27727000 17079000 55424000 34160000 10287000 6500000 20596000 12991000 17440000 10579000 34828000 21169000 0.38 0.27 0.76 0.55 0.38 0.27 0.75 0.54 45897000 38611000 45743000 38541000 46471000 38926000 46392000 38929000 712000 -355000 595000 -227000 712000 -355000 595000 -227000 18152000 10224000 35423000 20942000 34602000 23912000 -2839000 624000 8374000 4508000 2711000 2509000 -3439000 -560000 1007000 687000 2860000 -2611000 489000 383000 4424000 1598000 2780000 6348000 -12743000 30284000 -8715000 27958000 69498000 -82680000 -7571000 4910000 114898000 25863000 30866000 17523000 183647000 91768000 121434000 116276000 3253000 134400000 16405000 8018000 8230000 4754000 -2190000 -757000 -118777000 -139430000 105000000 1671000 5640000 1543000 1566000 179000 7206000 105051000 3327000 -8516000 469501000 460985000 30863000 6604000 4385000 6222000 3714000 1673000 -256000 -143983000 -1045000 11832000 -1952000 -2249000 <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 1 - us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock--> <!-- xbrl,ns --> <!-- xbrl,nx --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="center" style="font-size: 10pt; margin-top: 0pt"><b></b> </div> <div align="left"> </div> <div align="center" style="font-size: 10pt; margin-top: 0pt"><b> </b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>1. Basis of Presentation</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Organization and Operations</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals and to assist state agencies in their administration of the Medicaid program. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin. As of June&#160;30, 2011, these health plans served approximately 1.6&#160;million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our Molina Medicaid Solutions segment, which we acquired during the second quarter of 2010, provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia, and drug rebate administration services in Florida. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">On June&#160;9, 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state intends to award the contract for a replacement Medicaid Management Information System, or MMIS, to another firm. We have submitted a protest in connection with this notice, and in response the state has issued a stay of the intent to award and all contract negotiations have ceased. Our revenue under the Louisiana MMIS contract from May&#160;1, 2010, the date we acquired Molina Medicaid Solutions, through December&#160;31, 2010, was approximately $32&#160;million. For the six months ended June&#160;30, 2011, our revenue under the Louisiana MMIS contract was approximately $24&#160;million. Until the replacement MMIS is designed, developed, and implemented by the vendor that ultimately enters into a contract with the state, we will continue to perform under the existing MMIS contract, a period which we expect to last at least two years. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Consolidation and Interim Financial Information</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The consolidated financial statements include the accounts of Molina Healthcare, Inc. and all majority owned subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented have been included; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December&#160;31, 2011. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">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&#160;31, 2010. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December&#160;31, 2010 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December&#160;31, 2010 audited financial statements. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Adjustments and Reclassifications</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have adjusted all applicable share and per-share amounts to reflect the retroactive effects of the three-for-two stock split in the form of a stock dividend that was effective May&#160;20, 2011. </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have reclassified certain amounts in the 2010 consolidated statement of cash flows to conform to the 2011 presentation. </div> </div> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 2 - us-gaap:SignificantAccountingPoliciesTextBlock--> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>2. Significant Accounting Policies</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Recognition of Service Revenue and Cost of Service Revenue &#8212; Molina Medicaid Solutions Segment</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the performance of three elements of service. The first of these is the design, development and implementation, or DDI, of a Medicaid Management Information System, or MMIS. The second element, following completion of the DDI element, is the operation of the MMIS under a business process outsourcing, or BPO, arrangement. While providing BPO services, we also provide the state with the third contracted element &#8212; training and IT support and hosting services (training and support). </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Because they include these three elements of service, our Molina Medicaid Solutions contracts are multiple-element arrangements. The following discussion applies to our contracts with multiple elements entered into prior to January&#160;1, 2011, before our prospective adoption of <i>Accounting Standards Update, or ASU, No.&#160;2009-13, Revenue Recognition (Accounting Standards Codification, or ASC, Topic 605) &#8212; Multiple-Deliverable Revenue Arrangements</i>. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">For those contracts entered into prior to January&#160;1, 2011, we have no vendor specific objective evidence, or VSOE, of fair value for any of the individual elements in these contracts, and at no point in the contract will we have VSOE for the undelivered elements in the contract. We lack VSOE of the fair value of the individual elements of our Molina Medicaid Solutions contracts for the following reasons: </div> <div style="margin-top: 10pt"> <table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left"> <tr valign="top" style="font-size: 10pt; color: #000000; background: transparent"> <td width="4%" style="background: transparent">&#160;</td> <td width="3%" nowrap="nowrap" align="left"><b>&#8226;</b></td> <td width="1%">&#160;</td> <td> <div style="text-align: justify">Each contract calls for the provision of its own specific set of products and services, which vary significantly between contracts; and </div></td> </tr> </table> </div> <div style="margin-top: 10pt"> <table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left"> <tr valign="top" style="font-size: 10pt; color: #000000; background: transparent"> <td width="4%" style="background: transparent">&#160;</td> <td width="3%" nowrap="nowrap" align="left"><b>&#8226;</b></td> <td width="1%">&#160;</td> <td> <div style="text-align: justify">The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe systems) and our newer contracts (commercial off-the-shelf technology solutions). </div></td> </tr> </table> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The absence of VSOE within the context of a multiple element arrangement requires us to delay recognition of any revenue for an MMIS contract until completion of the DDI phase of the contract. As a general principle, revenue recognition will therefore commence at the completion of the DDI phase, and all revenue will be recognized over the period that BPO services and training and support services are provided. Consistent with the deferral of revenue, recognition of all direct costs (such as direct labor, hardware, and software) associated with the DDI phase of our contracts is deferred until the commencement of revenue recognition. Deferred costs are recognized on a straight-line basis over the period of revenue recognition. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Provisions specific to each contract may, however, lead us to modify this general principle. In those circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right of the state to refuse acceptance) has been removed. In those circumstances we defer recognition of any revenue at risk (whether DDI, BPO services, or training and support services) until the contingency has been removed. When we defer revenue recognition we also defer recognition of incremental direct costs (such as direct labor, hardware, and software) associated with the revenue deferred. Such deferred contract costs are recognized on a straight-line basis over the period of revenue recognition. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">However, direct costs in excess of the estimated future net revenues associated with a contract may not be deferred. In circumstances where estimated direct costs over the life of a contract exceed estimated future net revenues of that contract, the excess of direct costs over revenue is expensed as a period cost. As noted below, we were unable to defer $7.0&#160;million of direct contract costs associated with our Idaho contract during the second quarter of 2011 because estimated direct costs over the life of the contract exceed estimated future net revenues. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We began to recognize revenue and the related deferred costs associated with our Maine contract in September&#160;2010. </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In Idaho, revenue recognition is expected to begin during the second half of 2012. Consistent with the deferral of revenue, we have deferred recognition of the direct contract costs associated with that revenue. Deferred contract costs, if any, deferred through the date revenue recognition begins will be recognized simultaneously with revenue. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In late April of 2011, Idaho Department of Health and Welfare indicated that it wished to remit to us an amount approximately $5 to $6&#160;million less than the amount of our invoices for the operation of the MMIS in that state for the period June&#160;1, 2010 through December&#160;31, 2010. The Department claimed at that time that we were not in compliance with certain contractual requirements during the period June 1, 2010 through December 31, 2010. We do not believe the basis of the proposed reduction was contractually sound. In June 2011, we reached tentative agreement with the Department regarding the determination of our monthly operating revenue in Idaho. As a result of the tentative agreement, we estimate that revenue from operations in Idaho will be reduced by approximately $3&#160;million for the period June&#160;1, 2010 through June&#160;30, 2011, and by an additional $1&#160;million for the period July&#160;1, 2011 through December&#160;31, 2011. We do not believe that the tentative agreement will result in any reduction to amounts previously expected to be received for operations subsequent to December&#160;31, 2011. As noted above, all revenue associated with our Idaho MMIS contract is currently being deferred. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In assessing the recoverability of the deferred contract costs associated with the Idaho contract at June&#160;30, 2011, we determined that our current estimate of expenses over the life of the Idaho MMIS contract exceeded our current estimate of net revenues to be derived from that contract by approximately $7.0&#160;million. Accordingly, we expensed through cost of service revenue $7.0 million of direct costs associated with the Idaho contract that otherwise would have been recorded as deferred contract costs. The reduction in revenue discussed above, as well as higher expected costs over the term of the contract, have lowered the net amount that we expect to realize under the contract, requiring us to write down deferred contract costs. We currently expect the contract to perform financially at a break-even basis through its initial term. So long as we continue to defer revenue recognition under the contract, we will also continue to defer direct costs associated with the agreement, unless our analysis indicates that the contract is performing at less than break even. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Molina Medicaid Solutions&#8217; deferred revenue totalled $38.6&#160;million at June&#160;30, 2011, and $10.9 million at December&#160;31, 2010, and unamortized deferred contract costs were $42.6&#160;million at June 30, 2011, and $28.4&#160;million at December&#160;31, 2010. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">For all new or materially modified revenue arrangements with multiple elements entered into on or after January&#160;1, 2011, which we expect will consist of contracts entered into by our Molina Medicaid Solutions segment, we apply the guidance contained in ASU No.&#160;2009-13. For these arrangements, we allocate total arrangement consideration to the elements of the arrangement, which are expected to be DDI, BPO, and training and support, because this is consistent with the current elements included in our Molina Medicaid Solutions contracts. The arrangement allocation is performed using the relative selling-price method. When determining the selling price of each element, we first attempt to use VSOE if available. If VSOE is not available, we attempt to use third-party evidence, or TPE, of vendors selling similar services to similarly situated customers on a standalone basis, if available. If neither VSOE nor TPE are available, we use our best estimate of the selling price for each element. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We then evaluate whether, at each stage in the life cycle of the contract, we are able to recognize revenue associated with that element. To the extent that our revenue arrangements have provisions that allow our state customers to refuse acceptance of services performed, we are still required to defer revenue recognition until such state customers accept our performance. Once this acceptance is achieved, we immediately recognize the revenue associated with any delivered elements which differs from our current practice for arrangements entered into prior to January&#160;1, 2011, where the revenue associated with delivered elements is recognized over the final service element of the arrangement because VSOE for the other elements does not exist. As such, we expect that the adoption of ASU No.&#160;2009-13 will result in an overall acceleration of revenue recognition with respect to any multiple-element arrangements entered into on or after January&#160;1, 2011. We have entered into no new or materially modified revenue arrangements with multiple elements since January 1, 2011. </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Premium Deficiency Reserve</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We assess the profitability of each contract by state for providing medical care services to our members and identify any contracts where current operating results or forecasts indicate probable future losses. Anticipated future premiums are compared to anticipated medical care costs, including the cost of processing claims. If the anticipated future costs exceed the premiums, a loss contract accrual is recognized. In the first quarter of 2011, our Wisconsin health plan recorded a premium deficiency reserve in the amount of $3.35&#160;million to medical claims and benefits payable. As of June&#160;30, 2011, the reserve balance was $1.6&#160;million. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Income Taxes</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">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. 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 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 derecognition 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. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The total amount of unrecognized tax benefits was $11.0&#160;million as of June&#160;30, 2011 and December&#160;31, 2010. Approximately $8.4&#160;million of the unrecognized tax benefits recorded at June&#160;30, 2011, relate to a tax position claimed on a state refund claim that will not result in a cash payment for income taxes if our claim is denied. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $7.8&#160;million as of June&#160;30, 2011. We expect that during the next 12&#160;months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $8.9&#160;million due to the expiration of statute of limitations and the resolution to the state refund claim described above. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. As of June&#160;30, 2011, and December&#160;31, 2010, we had accrued $95,000 and $82,000, respectively, for the payment of interest and penalties. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Recent Accounting Pronouncements</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>Revenue Recognition. </i>In late 2009, the Financial Accounting Standards Board, or FASB, issued the following accounting guidance relating to revenue recognition. Effective for interim and annual reporting beginning on or after December&#160;15, 2010, we adopted this guidance in full effective January&#160;1, 2011. </div> <div style="margin-top: 10pt"> <table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left"> <tr valign="top" style="font-size: 10pt; color: #000000; background: transparent"> <td width="4%" style="background: transparent">&#160;</td> <td width="3%" nowrap="nowrap" align="left"><b>&#8226;</b></td> <td width="1%">&#160;</td> <td> <div style="text-align: justify"><i>ASU No.&#160;2009-13, Revenue Recognition (ASC Topic 605) &#8212; Multiple-Deliverable Revenue Arrangements</i>, a consensus of the FASB Emerging Issues Task Force. This guidance modifies previous requirements by requiring the use of the &#8220;best estimate of selling price&#8221; in the absence of vendor-specific objective evidence (&#8220;VSOE&#8221;) or verifiable objective evidence (&#8220;VOE&#8221;) (now referred to as &#8220;TPE&#8221; or third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when more objective evidence of the selling price cannot be determined. By providing an alternative for determining the selling price of deliverables, this guidance allows companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction&#8217;s economics. In addition, the residual method of allocating arrangement consideration is no longer permitted under this new guidance. We have adopted this guidance effective January&#160;1, 2011, and will apply it on a prospective basis for all new or materially modified revenue arrangements with multiple deliverables entered into on or after January&#160;1, 2011. Because we did not enter into any new or materially modified agreements with multiple elements and fixed payments in the six months ended June&#160;30, 2011 that would have been impacted by this guidance, the adoption did not have a material impact on the timing or pattern of revenue recognition. </div></td> </tr> </table> </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div style="margin-top: 6pt"> <table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left"> <tr valign="top" style="font-size: 10pt; color: #000000; background: transparent"> <td width="4%" style="background: transparent">&#160;</td> <td width="3%" nowrap="nowrap" align="left">&#160;</td> <td width="1%">&#160;</td> <td> <div style="text-align: justify">For the year ended December&#160;31, 2010, there would have been no change in revenue recognized relating to multiple-element arrangements if we had adopted this guidance retrospectively for contracts entered into prior to January&#160;1, 2011. </div></td> </tr> </table> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>Goodwill Impairment Testing. </i>In December&#160;2010, the FASB issued the following guidance which modifies goodwill impairment testing. Effective for interim and annual reporting beginning on or after December&#160;15, 2010, we adopted this guidance in full effective January&#160;1, 2011. </div> <div style="margin-top: 10pt"> <table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left"> <tr valign="top" style="font-size: 10pt; color: #000000; background: transparent"> <td width="4%" style="background: transparent">&#160;</td> <td width="3%" nowrap="nowrap" align="left"><b>&#8226;</b></td> <td width="1%">&#160;</td> <td> <div style="text-align: justify"><i>ASU No.&#160;2010-28, Intangibles&#8212;Goodwill and Other (ASC Topic 350) &#8212; When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, </i>a consensus of the FASB Emerging Issues Task Force. This guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The adoption of this guidance did not impact our consolidated financial position, results of operations or cash flows. </div></td> </tr> </table> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>Presentation of Financial Statements. </i>In June&#160;2011, the FASB and International Accounting Standards Board, or IASB, issued the following guidance which modifies how other comprehensive income, or OCI, is reported under U.S. Generally Accepted Accounting Principles, or GAAP, and International Financial Reporting Standards, or IFRS. This guidance is effective for interim and annual reporting beginning on or after December&#160;15, 2011. </div> <div style="margin-top: 10pt"> <table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left"> <tr valign="top" style="font-size: 10pt; color: #000000; background: transparent"> <td width="4%" style="background: transparent">&#160;</td> <td width="3%" nowrap="nowrap" align="left"><b>&#8226;</b></td> <td width="1%">&#160;</td> <td> <div style="text-align: justify"><i>ASU No.&#160;2011-05, Comprehensive Income (ASC Topic 220) &#8212; Presentation of Comprehensive Income, </i>a consensus of the FASB Emerging Issues Task Force. This guidance eliminates the option to present components of OCI as part of the statement of changes to stockholders&#8217; equity. All filers are required to present all non-owner changes in stockholders&#8217; equity in a single statement of comprehensive income or in two separate but consecutive statements. We do not expect the adoption of this guidance to impact our consolidated financial position, results of operations or cash flows. </div></td> </tr> </table> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, or AICPA, and the Securities and Exchange Commission, or SEC, did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements. </div> </div> </div> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 3 - us-gaap:EarningsPerShareTextBlock--> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>3. 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Share-Based Compensation</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">At June&#160;30, 2011, we had employee equity incentives outstanding under two plans: (1)&#160;the 2002 Equity Incentive Plan; and (2)&#160;the 2000 Omnibus Stock and Incentive Plan (from which equity incentives are no longer awarded). On March&#160;1, 2011, our chief executive officer, chief financial officer, and chief operating officer were awarded 150,000 shares, 112,500 shares, and 27,000 shares, respectively, of restricted stock with performance and service conditions. Each of the grants shall vest on March&#160;1, 2012, provided that: (i)&#160;the Company&#8217;s total operating revenue for 2011 is equal to or greater than $3.7&#160;billion, and (ii)&#160;the respective officer continues to be employed by the Company as of March&#160;1, 2012. In the event both vesting conditions are not achieved, the equity compensation awards shall lapse. 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margin-left: 0in; "> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>5. Fair Value Measurements</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, trade accounts payable, medical claims and benefits payable, long-term debt, and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For a comprehensive discussion of fair value measurements with regard to our current and non-current investments, see below. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The carrying amount of the convertible senior notes was $166.7&#160;million and $164.0&#160;million as of June&#160;30, 2011, and December&#160;31, 2010, respectively. Based on quoted market prices, the fair value of the convertible senior notes was approximately $215.8&#160;million and $188.4&#160;million as of June&#160;30, 2011, and December&#160;31, 2010, respectively. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">To prioritize the inputs we use in measuring fair value, we apply a three-tier fair value hierarchy. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As of June&#160;30, 2011, we held certain assets that are required to be measured at fair value on a recurring basis. These included current investments in investment-grade debt securities that are designated as available-for-sale, and are reported at fair value based on market prices that are readily available (Level 1). See Note 6, &#8220;Investments,&#8221; for further information regarding fair value. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We also held investments in auction rate securities which are designated as available-for-sale, and are reported at fair value of $19.0&#160;million (par value of $22.4&#160;million) as of June&#160;30, 2011. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our investments in auction rate securities are collateralized by student loan portfolios guaranteed by the U.S. government. We continued to earn interest on substantially all of these auction rate securities as of June&#160;30, 2011. Due to events in the credit markets, the auction rate securities held by us experienced failed auctions beginning in the first quarter of 2008. As such, quoted prices in active markets were not readily available during the majority of 2008, 2009, and 2010, and continued to be unavailable as of June&#160;30, 2011. To estimate the fair value of these securities, we used pricing models that included factors such as the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security would have a successful auction. The estimated values of these securities were also compared, when possible, to valuation data with respect to similar securities held by other parties. We concluded that these estimates, given the lack of market available pricing, provided a reasonable basis for determining the fair value of the auction rate securities as of June&#160;30, 2011. For our investments in auction rate securities, we do not intend to sell, nor is it more likely than not that we will be required to sell, these investments before recovery of their cost. </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As a result of changes in the fair value of auction rate securities designated as available-for-sale, we recorded pretax unrealized gains of $0.7&#160;million and pretax unrealized losses of $0.2&#160;million to accumulated other comprehensive income (loss)&#160;for the six months ended June&#160;30, 2011, and 2010, respectively. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income (loss). If we determine that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as appropriate. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Until July&#160;2, 2010, we held certain auction rate securities (designated as trading securities) with an investment securities firm. In 2008, we entered into a rights agreement with this firm that (1)&#160;allowed us to exercise rights (the &#8220;Rights&#8221;) to sell the eligible auction rate securities at par value to this firm between June&#160;30, 2010 and July&#160;2, 2012, and (2)&#160;gave the investment securities firm the right to purchase the auction rate securities from us any time after the agreement date as long as we received the par value. On June&#160;30, 2010, and July&#160;1, 2010, all of the eligible auction rate securities remaining at that time were settled at par value. During 2010, the aggregate auction rate securities (designated as trading securities) settled amounted to $40.9 million par value (fair value $36.7&#160;million). Substantially all of the difference between par value and fair value on these securities was recovered through the rights agreement. For the six months ended 2010, we recorded pretax gains of $2.9&#160;million on the auction rate securities underlying the Rights. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We accounted for the Rights as a freestanding financial instrument and, until July&#160;2, 2010, recorded the value of the Rights under the fair value option. For the six months ended 2010, we recorded pretax losses of $2.6&#160;million on the Rights, attributable to the decline in the fair value of the Rights. 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</div></td> <td>&#160;</td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000">&#160;</td> <td>&#160;</td> </tr> <!-- End Table Body --> </table> </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In 2010, we recorded a $2.8&#160;million liability for contingent consideration related to the acquisition of our Wisconsin health plan. In the first quarter of 2011, we determined that there was no liability for contingent consideration relating to the acquisition. The liability for contingent consideration related to this acquisition was measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The following table presents a roll forward of this liability for 2011: </div> <div align="center"> <table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%"> <!-- Begin Table Head --> <tr valign="bottom"> <td width="86%">&#160;</td> <td width="3%">&#160;</td> <td width="1%">&#160;</td> <td width="9%">&#160;</td> <td width="1%">&#160;</td> </tr> <tr style="font-size: 10pt" valign="bottom"> <td>&#160;</td> <td>&#160;</td> <td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>(Level 3)</b></td> <td>&#160;</td> </tr> <tr style="font-size: 10pt" valign="bottom"> <td>&#160;</td> <td>&#160;</td> <td nowrap="nowrap" align="center" colspan="2"><b>(In thousands)</b></td> <td>&#160;</td> </tr> <!-- End Table Head --> <!-- Begin Table Body --> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Balance at December&#160;31, 2010 </div></td> <td>&#160;</td> <td nowrap="nowrap" align="left">$</td> <td align="right">(2,800</td> <td nowrap="nowrap">)</td> </tr> <tr valign="bottom"> <td> <div style="margin-left:15px; text-indent:-15px">Total gains included in earnings </div></td> <td>&#160;</td> <td>&#160;</td> <td align="right">2,800</td> <td>&#160;</td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">&#160; </div></td> <td>&#160;</td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000">&#160;</td> <td>&#160;</td> </tr> <tr valign="bottom" style="background: #cceeff"> <td> <div style="margin-left:15px; text-indent:-15px">Balance at June&#160;30, 2011 </div></td> <td>&#160;</td> <td align="left">$</td> <td align="right">&#8212;</td> <td>&#160;</td> </tr> <tr style="font-size: 1px"> <td> <div style="margin-left:15px; text-indent:-15px">&#160; </div></td> <td>&#160;</td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000">&#160;</td> <td>&#160;</td> </tr> <!-- End Table Body --> </table> </div> </div> </div> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 6 - us-gaap:MarketableSecuritiesTextBlock--> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>6. 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Total proceeds from sales and maturities of available-for-sale securities were $60.1&#160;million and $42.8 million for the three months ended June&#160;30, 2011, and 2010, respectively. Total proceeds from sales and maturities of available-for-sale securities were $121.4&#160;million and $91.3&#160;million for the six months ended June&#160;30, 2011, and 2010, respectively. Net realized investment gains for the three months ended June&#160;30, 2011, and 2010 were $21,000 and $43,000 respectively. Net realized investment gains for the six months ended June&#160;30, 2011, and 2010 were $178,000 and $57,000 respectively. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We monitor our investments for other-than-temporary impairment. For investments other than our municipal securities, we have determined that unrealized gains and losses at June&#160;30, 2011, and December&#160;31, 2010, 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. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Approximately 32% of our investment in municipal securities consists of auction rate securities. As described in Note 5, &#8220;Fair Value Measurements,&#8221; the unrealized losses on these investments were caused primarily by the illiquidity in the auction markets. Because the decline in market value is not due to the credit quality of the issuers, and because we do not intend to sell, nor is it more likely than not that we will be required to sell, these investments before recovery of their cost, we do not consider the auction rate securities that are designated as available-for-sale to be other-than-temporarily impaired at June&#160;30, 2011. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The following tables segregate those available-for-sale investments that have been in a continuous loss position for less than 12&#160;months, and those that have been in a loss position for 12&#160;months or more as of June&#160;30, 2011. </div> <div align="center"> <table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%"> <!-- Begin Table Head --> <tr valign="bottom"> <td width="28%">&#160;</td> <td width="3%">&#160;</td> <td width="1%">&#160;</td> <td 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margin-top: 10pt; text-indent: 4%">During the second quarter of 2011, we settled certain claims we had made against the state of Utah regarding the savings share provision of our contract in effect from 2003 through June of 2009. Additionally, we recognized a liability for certain overpayments received from the state for the period 2003 through 2009. As a result of these developments, we recognized $6.9&#160;million in premium revenue without any corresponding charge to expense during the second quarter of 2011. </div> </div> </div> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 8 - us-gaap:HeldToMaturitySecuritiesTextBlock--> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>8. Restricted Investments</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Pursuant to the regulations governing our Health Plan subsidiaries, we maintain statutory deposits and deposits required by state Medicaid authorities in certificates of deposit and U.S. treasury securities. Additionally, we maintain restricted investments as protection against the insolvency of capitated providers. 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Long-Term Debt</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Credit Facility</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We are a party to an Amended and Restated Credit Agreement, dated as of March&#160;9, 2005, as amended by the first amendment on October&#160;5, 2005, the second amendment on November&#160;6, 2006, the third amendment on May&#160;25, 2008, the fourth amendment on April&#160;29, 2010, and the fifth amendment on April&#160;29, 2010, among Molina Healthcare Inc., certain lenders, and Bank of America N.A., as Administrative Agent (the &#8220;Credit Facility&#8221;) for a revolving credit line of $150&#160;million that matures in May&#160;2012. The Credit Facility is intended to be used for general corporate purposes. As of June&#160;30, 2011, and December&#160;31, 2010, there was no outstanding principal balance under the Credit Facility. However, as of June&#160;30, 2011, our lenders had issued two letters of credit in the aggregate principal amount of $10.3&#160;million in connection with the Molina Medicaid Solutions contracts with the states of Maine and Idaho. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">To the extent that in the future we incur any obligations under the Credit Facility, such obligations will be secured by a lien on substantially all of our assets and by a pledge of the capital stock of our health plan subsidiaries (with the exception of the California health plan). The Credit Facility includes usual and customary covenants for credit facilities of this type, including covenants limiting liens, mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other distributions, capital expenditures, investments, and a fixed charge coverage ratio. The Credit Facility also requires us to maintain a ratio of total consolidated debt to total consolidated EBITDA of not more than 2.75 to 1.00 at any time. At June 30, 2011, we were in compliance with all financial covenants in the Credit Facility. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The commitment fee on the total unused commitments of the lenders under the Credit Facility is 50 basis points on all levels of the pricing grid, with the pricing grid referring to our ratio of consolidated funded debt to consolidated EBITDA. The pricing for LIBOR loans and base rate loans is 200 basis points at every level of the pricing grid. Thus, the applicable margins under the Credit Facility range between 2.75% and 3.75% for LIBOR loans, and between 1.75% and 2.75% for base rate loans. The Credit Facility carves out from our indebtedness and restricted payment covenants under the Credit Facility the $187.0&#160;million current principal amount of the convertible senior notes, although the $187.0&#160;million indebtedness is included in the calculation of our consolidated leverage ratio. The fixed charge coverage ratio under the Credit Facility is required to be no less than 3.00x. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The fifth amendment increased the maximum consolidated leverage ratio under the Credit Facility to 3.50 to 1.0 for the first and second quarters of 2010 and through August&#160;14, 2010 (on a pro forma basis). Effective as of August&#160;15, 2010, the maximum consolidated leverage ratio under the Credit Facility reverted back to 2.75 to 1.0. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Convertible Senior Notes</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As of June&#160;30, 2011, $187.0&#160;million in aggregate principal amount of our 3.75% Convertible Senior Notes due 2014 (the &#8220;Notes&#8221;) remain outstanding. The Notes rank equally in right of payment with our existing and future senior indebtedness. The Notes are convertible into cash and, under certain circumstances, shares of our common stock. The initial conversion rate is 31.9601 shares of our common stock per one thousand dollar principal amount of the Notes. This represents an initial conversion price of approximately $31.29 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances. </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The proceeds from the issuance of the Notes have been allocated between a liability component and an equity component. We have determined that the effective interest rate of the Notes is 7.5%, principally based on the seven-year U.S. treasury note rate as of the October&#160;2007 issuance date, plus an appropriate credit spread. The resulting debt discount is being amortized over the period the Notes are expected to be outstanding, as additional non-cash interest expense. 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Stockholders&#8217; Equity</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">On April&#160;27, 2011, we announced that our board of directors authorized a 3-for-2 stock split of our common stock to be effected in the form of a stock dividend of one share of our stock for every two shares outstanding. The dividend was distributed on May&#160;20, 2011. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In connection with the plans described in Note 4, &#8220;Share-Based Compensation,&#8221; we issued approximately 599,000 shares of common stock, net of shares retired to settle employees&#8217; income tax obligations, for the six months ended June&#160;30, 2011. For the six months ended June&#160;30, 2011, the $11.4&#160;million increase in additional paid-in capital was primarily generated by employee stock plan transactions. </div> </div> </div> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 11 - us-gaap:SegmentReportingDisclosureTextBlock--> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>11. Segment Reporting</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our reportable segments are consistent with how we manage the business and view the markets we serve. In the second quarter of 2010, we added a segment to our internal financial reporting structure as a result of the acquisition of Molina Medicaid Solutions. We report our financial performance based on two reportable segments: Health Plans and Molina Medicaid Solutions. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">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. 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text-indent:-15px">&#160; </div></td> <td>&#160;</td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000">&#160;</td> <td>&#160;</td> <td>&#160;</td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000">&#160;</td> <td>&#160;</td> <td>&#160;</td> <td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000">&#160;</td> <td>&#160;</td> </tr> <!-- End Table Body --> </table> </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> </div> </div> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 12 - us-gaap:CommitmentsAndContingenciesDisclosureTextBlock--> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>12. Commitments and Contingencies</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Legal</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and regulations include significant fines, exclusion from participating in publicly funded programs, and the repayment of previously billed and collected revenues. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We are involved in various legal actions in the normal course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. These actions, when finally concluded and determined, are not likely, in our opinion, to have a material adverse effect on our business, consolidated financial position, cash flows, or results of operations. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Provider Claims</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">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. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">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. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Regulatory Capital and Dividend Restrictions</i></b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"> Our health plans 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, and restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was $438.5 million at June&#160;30, 2011, and $397.8&#160;million at December&#160;31, 2010. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The National Association of Insurance Commissioners, or 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)&#160;rules. Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin have adopted these rules, which may vary from state to state. California and Florida have not yet adopted NAIC risk-based capital requirements for HMOs and have not formally given notice of their intention to do so. Such requirements, if adopted by California and Florida, may increase the minimum capital required for those states. </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As of June&#160;30, 2011, our health plans had aggregate statutory capital and surplus of approximately $448.0 million compared with the required minimum aggregate statutory capital and surplus of approximately $273.6 million. All of our health plans were in compliance with the minimum capital requirements at June&#160;30, 2011. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements. </div> <!-- Folio --> <!-- /Folio --> </div> <!-- PAGEBREAK --> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> </div> </div> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 13 - us-gaap:RelatedPartyTransactionsDisclosureTextBlock--> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; "> <div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>13. Related Party Transactions</b> </div> <div align="justify" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have an equity investment in a medical service provider that provides certain vision services to our members. We account for this investment under the equity method of accounting because we have an ownership interest in the investee that confers significant influence over operating and financial policies of the investee. As of both June&#160;30, 2011, and December&#160;31, 2010, our carrying amount for this investment totaled $4.4&#160;million. For the three months ended June&#160;30, 2011 and 2010, we paid $6.6&#160;million, and $5.3&#160;million, respectively, for medical service fees to this provider. For the six months ended June&#160;30, 2011 and 2010, we paid $11.9&#160;million, and $9.7 million, respectively, for medical service fees to this provider. </div> </div> </div> All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock split in the form of a stock dividend that was effective May 20, 2011. All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock split in the form of a stock dividend that was effective May 20, 2011.