UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

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

Commission file number: 001-31719

 

Molina Healthcare, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

The number of shares of the issuer’s common stock outstanding as of April 21, 2011 was approximately 30,570,400.

 

 

MOLINA HEALTHCARE, INC.

Index

Part I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010			3
Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 (unaudited)			4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010 (unaudited)			5
Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
Part II — Other Information
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 6. Exhibits			41
Signatures			42
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1:		Financial Statements.

MOLINA HEALTHCARE, INC.

		March 31,				December 31,
		2011				2010
		(Amounts in thousands,
		except per-share data)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	463,792			$	455,886
Investments			337,514				295,375
Receivables			170,418				168,190
Deferred income taxes			15,395				15,716
Prepaid expenses and other current assets			28,608				22,772
Total current assets			1,015,727				957,939
Property and equipment, net			107,757				100,537
Deferred contract costs			37,891				28,444
Intangible assets, net			98,048				105,500
Goodwill and indefinite-lived intangible assets			212,484				212,228
Auction rate securities			20,187				20,449
Restricted investments			49,307				42,100
Receivable for ceded life and annuity contracts			24,155				24,649
Other assets			17,598				17,368
		$	1,583,154			$	1,509,214
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable		$	351,382			$	354,356
Accounts payable and accrued liabilities			113,697				137,930
Deferred revenue			143,273				60,086
Income taxes payable			7,746				13,176
Total current liabilities			616,098				565,548
Long-term debt			165,354				164,014
Deferred income taxes			17,462				16,235
Liability for ceded life and annuity contracts			24,155				24,649
Other long-term liabilities			19,580				19,711
Total liabilities			842,649				790,157
Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 30,552 shares at March 31, 2011 and 30,309 shares at December 31, 2010			31				30
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding			—				—
Additional paid-in capital			255,803				251,627
Accumulated other comprehensive loss			(2,309	)			(2,192	)
Retained earnings			486,980				469,592
Total stockholders’ equity			740,505				719,057
		$	1,583,154			$	1,509,214

See accompanying notes.

MOLINA HEALTHCARE, INC.

		Three Months Ended March 31,
		2011				2010
		(In thousands, except per-share data) (Unaudited)
Revenue:
Premium revenue		$	1,081,438			$	965,220
Service revenue			36,674				—
Investment income			1,594				1,521
Total revenue			1,119,706				966,741
Expenses:
Medical care costs			913,532				822,816
Cost of service revenue			31,221				—
General and administrative expenses			94,436				78,880
Premium tax expenses			36,550				34,546
Depreciation and amortization			12,667				10,061
Total expenses			1,088,406				946,303
Operating income			31,300				20,438
Interest expense			3,603				3,357
Income before income taxes			27,697				17,081
Provision for income taxes			10,309				6,491
Net income		$	17,388			$	10,590
Net income per share:
Basic		$	0.57			$	0.41
Diluted		$	0.56			$	0.41
Weighted average shares outstanding:
Basic			30,392				25,646
Diluted			30,838				25,837

See accompanying notes.

MOLINA HEALTHCARE, INC.

		Three Months Ended
		March 31,
		2011				2010
		(Amounts in thousands)
		(Unaudited)
Net income		$	17,388			$	10,590
Other comprehensive (loss) gain, net of tax:
Unrealized (loss) gain on investments			(117	)			128
Other comprehensive (loss) gain			(117	)			128
Comprehensive income		$	17,271			$	10,718

See accompanying notes.

MOLINA HEALTHCARE, INC.

		Three Months Ended
		March 31,
		2011				2010
		(Dollars in thousands)
		(Unaudited)
Operating activities:
Net income		$	17,388			$	10,590
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			18,094				10,061
Deferred income taxes			1,619				3,094
Stock-based compensation			4,064				2,136
Non-cash interest on convertible senior notes			1,340				1,243
Amortization of premium/discount on investments			1,644				259
Amortization of deferred financing costs			503				344
Unrealized gain on trading securities			—				(540	)
Loss on rights agreement			—				493
Tax deficiency from employee stock compensation			(264	)			(353	)
Changes in operating assets and liabilities:
Receivables			(2,168	)			8,054
Prepaid expenses and other current assets			(8,142	)			(668	)
Medical claims and benefits payable			(2,974	)			11,657
Accounts payable and accrued liabilities			(25,796	)			15,134
Deferred revenue			84,172				(90,664	)
Income taxes			(5,430	)			2,935
Net cash provided by (used in) operating activities			84,050				(26,225	)
Investing activities:
Purchases of equipment			(14,941	)			(5,976	)
Purchases of investments			(104,984	)			(49,439	)
Sales and maturities of investments			61,275				52,967
Net cash paid in business combinations			(3,253	)			(2,430	)
Increase in deferred contract costs			(9,635	)			—
Increase in restricted investments			(7,207	)			(656	)
Change in other noncurrent assets and liabilities			(937	)			426
Net cash used in investing activities			(79,682	)			(5,108	)
Financing activities:
Proceeds from employee stock plans			2,462				—
Excess tax benefits from employee stock compensation			1,076				113
Net cash provided by financing activities			3,538				113
Net increase (decrease) in cash and cash equivalents			7,906				(31,220	)
Cash and cash equivalents at beginning of period			455,886				469,501
Cash and cash equivalents at end of period		$	463,792			$	438,281
Supplemental cash flow information:
Cash paid during the period for:
Income taxes		$	14,068			$	91
Interest		$	269			$	142
Schedule of non-cash investing and financing activities:
Retirement of common stock used for stock-based compensation		$	3,161			$	1,526
Details of business combinations adjustments:
Increase in fair value of assets acquired		$	(256	)		$	—
Decrease in fair value of liabilities assumed			(1,045	)			—
Decrease in payable to sellers			(1,952	)			(2,430	)
Net cash paid in business combinations		$	(3,253	)		$	(2,430	)

See accompanying notes.

MOLINA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Organization and Operations

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.

Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin. As of March 31, 2011, these health plans served approximately 1.6 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.

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.

Consolidation and Interim Financial Information

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 31, 2011. Financial information related to subsidiaries acquired during any year is included only for the period subsequent to their acquisition.

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, 2010. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2010 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2010 audited financial statements.

Reclassifications

We have reclassified certain amounts in the 2010 consolidated statement of cash flows to conform to the 2011 presentation.

2. Significant Accounting Policies

Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which is generally greater than the U.S. federal statutory rate primarily because of state taxes. 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.

The total amount of unrecognized tax benefits was $11.0 million as of March 31, 2011, and $11.0 million as of December 31, 2010. Approximately $8.4 million of the unrecognized tax benefits recorded at March 31, 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 million as of March 31, 2011. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities will decrease by approximately $0.5 million due to the expiration of statute of limitations.

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. As of March 31, 2011, and December 31, 2010, we had accrued $88,000 and $82,000, respectively, for the payment of interest and penalties.

Deferral of Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions Segment

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 — training and IT support and hosting services (training and support).

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 1, 2011, before our prospective adoption of ASU No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements. See discussion below on page 9.

For those contracts entered into prior to January 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:

•

Each contract calls for the provision of its own specific set of products and services, which vary significantly between contracts; and

•

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).

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.

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. In these circumstances, we would also defer recognition of incremental direct costs (such as direct labor, hardware, and software) associated with the contract (whether DDI, BPO services, or training and support services) on which revenue recognition is being deferred. Such deferred contract costs are recognized on a straight-line basis over the period of revenue recognition.

For all new or materially modified revenue arrangements with multiple elements entered into on or after January 1, 2011, which we expect will consist of contracts entered into by our Molina Medicaid Solutions segment, we will apply the guidance contained in ASU No. 2009-13. For these arrangements, we will 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 will be performed using the relative selling-price method. When determining the selling price of each element, we will first attempt to use VSOE if available. If VSOE is not available, we will 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 will use our best estimate of the selling price for each element.

We will 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 will still be required to defer revenue recognition until such state customers accept our performance. Once this acceptance is achieved, we will immediately recognize the revenue associated with any delivered elements which differs from our current practice for arrangements entered into prior to January 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. 2009-13 will result in an overall acceleration of revenue recognition with respect to any multiple-element arrangements entered into on or after January 1, 2011.

We began to recognize revenue and the related deferred costs associated with our Maine contract in September 2010. In Idaho, we expect to begin recognition of deferred contact costs in 2012, in a manner consistent with our anticipated recognition of revenue. Molina Medicaid Solutions’ deferred revenue totaled $36.1 million at March 31, 2011, and $10.9 million at December 31, 2010, and unamortized deferred contract costs were $37.9 million at March 31, 2011, and $28.4 million at December 31, 2010.

Recent Accounting Pronouncements

Revenue Recognition. 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 15, 2010, we adopted this guidance in full effective January 1, 2011.

	•		ASU No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies previous requirements by requiring the use of the “best estimate of selling price” in the absence of vendor-specific objective evidence (“VSOE”) or verifiable objective evidence (“VOE”) (now referred to as “TPE” 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’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 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 1, 2011. Because we did not enter into any new or materially modified agreements with multiple elements and fixed payments in the first quarter of 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.
			For the year ended December 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 1, 2011.

Goodwill Impairment Testing. In December 2010, the FASB issued the following guidance which modifies goodwill impairment testing. Effective for interim and annual reporting beginning on or after December 15, 2010, we adopted this guidance in full effective January 1, 2011.

•

ASU No. 2010-28, Intangibles—Goodwill and Other (Topic 350) — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, 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.

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.

3. Earnings per Share

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

		Three Months Ended
		March 31,
		2011				2010
		(in thousands)
Shares outstanding at the beginning of the period			30,309				25,607
Weighted-average number of shares issued			83				39
Denominator for basic earnings per share			30,392				25,646
Dilutive effect of employee stock options and stock grants (1)			446				191
Denominator for diluted earnings per share (2)			30,838				25,837

4. Share-Based Compensation

At March 31, 2011, we had employee equity incentives outstanding under two plans: (1) the 2002 Equity Incentive Plan; and (2) the 2000 Omnibus Stock and Incentive Plan (from which equity incentives are no longer awarded). On March 1, 2011, our chief executive officer, chief financial officer, and chief operating officer were awarded 100,000 shares, 75,000 shares, and 18,000 shares, respectively, of restricted stock with performance and service conditions. Each of the grants shall vest on March 1, 2012, provided that: (i) the Company’s total operating revenue for 2011 is equal to or greater than $3.7 billion, and (ii) the respective officer continues to be employed by the Company as of March 1, 2012. In the event both vesting conditions are not achieved, the equity compensation awards shall lapse. As of March 31, 2011, we expect these awards to vest in full.

Charged to general and administrative expenses, total stock-based compensation expense for the three months ended March 31, 2011 and 2010 was as follows:

		Three Months Ended
		March 31,
		2011				2010
		(in thousands)
Restricted stock awards		$	3,806			$	1,638
Stock options (including shares issued under our employee stock purchase plan)			258				498
Total stock-based compensation expense		$	4,064			$	2,136

As of March 31, 2011, there was $22.8 million of total unrecognized compensation expense related to unvested restricted stock awards, which we expect to recognize over a remaining weighted-average period of 2.5 years. As of March 31, 2011, there was a nominal amount of unrecognized compensation expense related to unvested stock options, which we expect to recognize in 2011.

Unvested restricted stock and restricted stock activity for the three months ended March 31, 2011 is summarized below:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested balance as of December 31, 2010			835,749			$	23.32
Granted			455,000				34.50
Vested			(244,321	)			24.13
Forfeited			(45,687	)			25.79
Unvested balance as of March 31, 2011			1,000,741				28.09

The total grant date fair value of restricted shares granted during the three months ended March 31, 2011 and 2010 was $15.6 million and $9.4 million, respectively. The total fair value of restricted shares vested during the three months ended March 31, 2011 and 2010 was $8.6 million and $4.2 million, respectively. Stock option activity during the three months ended March 31, 2011 is summarized below:

														Weighted
														Average
						Weighted				Aggregate				Remaining
						Average				Intrinsic				Contractual
						Exercise				Value (in				Term
		Shares				Price				Thousands)				(Years)
Stock options outstanding as of December 31, 2010			513,614			$	30.59
Exercised			(83,931	)			28.29
Forfeited			(7,267	)			32.51
Stock options outstanding as of March 31, 2011			422,416				31.02			$	3,995				4.5
Stock options exercisable and expected to vest as of March 31, 2011			422,118				31.01			$	3,994				4.5
Exercisable as of March 31, 2011			417,616				30.97			$	3,973				4.5

5. Fair Value Measurements

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

The carrying amount of the convertible senior notes was $165.4 million and $164.0 million as of March 31, 2011, and December 31, 2010, respectively. Based on quoted market prices, the fair value of the convertible senior notes was approximately $213.1 million and $188.4 million as of March 31, 2011, and December 31, 2010, respectively.

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

As of March 31, 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, “Investments,” for further information regarding fair value.

We also held investments in auction rate securities which are designated as available-for-sale, and are reported at fair value of $20.2 million (par value of $24.0 million) as of March 31, 2011.

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 March 31, 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 March 31, 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 March 31, 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.

As a result of the increase in fair value of auction rate securities designated as available-for-sale, we recorded pretax unrealized gains of $0.3 million and $0.2 million to accumulated other comprehensive income (loss) for the three months ended March 31, 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.

Until July 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) allowed us to exercise rights (the “Rights”) to sell the eligible auction rate securities at par value to this firm between June 30, 2010 and July 2, 2012, and (2) 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 30, 2010, and July 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 million). Substantially all of the difference between par value and fair value on these securities was recovered through the rights agreement. For the three months ended March 31, 2010, we recorded pretax gains of $0.5 million on the auction rate securities underlying the Rights.

We accounted for the Rights as a freestanding financial instrument and, until July 2, 2010, recorded the value of the Rights under the fair value option. For the three months ended March 31, 2010, we recorded pretax losses of $0.5 million on the Rights, attributable to the decline in the fair value of the Rights. When the remaining eligible auction rate securities were sold at par value on July 1, 2010, the value of the Rights was zero.

Our assets measured at fair value on a recurring basis at March 31, 2011, were as follows:

		Total				Level 1				Level 2				Level 3
		(In thousands)
Corporate debt securities		$	224,985			$	224,985			$	—			$	—
Government-sponsored enterprise securities			39,372				39,372				—				—
Municipal securities			37,906				37,906				—				—
U.S. treasury notes			31,996				31,996				—				—
Certificates of deposit			3,255				3,255				—				—
Auction rate securities (available-for-sale)			20,187				—				—				20,187
		$	357,701			$	337,514			$	—			$	20,187

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

		(Level 3)
		(In thousands)
Balance at December 31, 2010		$	20,449
Total gains (realized or unrealized):
Included in other comprehensive income			288
Settlements			(550	)
Balance at March 31, 2011		$	20,187
The amount of total gains for the period included in other comprehensive income attributable to the change in unrealized gains relating to assets still held at March 31, 2011		$	288

In 2010, we recorded a $2.8 million liability for contingent consideration related to the acquisition of our Wisconsin health plan. As of March 31, 2011, we have determined that there is 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:

		(Level 3)
		(In thousands)
Balance at December 31, 2010		$	(2,800	)
Total gains included in earnings			2,800
Balance at March 31, 2011		$	—

6. Investments

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

		March 31, 2011
						Gross								Estimated
						Unrealized								Fair
		Cost				Gains				Losses				Value
		(In thousands)
Corporate debt securities		$	227,099			$	176			$	2,290			$	224,985
Government-sponsored enterprise securities (GSEs)			39,668				75				371				39,372
Municipal securities (including non-current auction rate securities)			62,293				66				4,266				58,093
U.S. treasury notes			31,982				102				88				31,996
Certificates of deposit			3,255				—				—				3,255
		$	364,297			$	419			$	7,015			$	357,701

		December 31, 2010
						Gross								Estimated
						Unrealized								Fair
		Cost				Gains				Losses				Value
		(In thousands)
Corporate debt securities		$	179,124			$	193			$	1,388			$	177,929
GSEs			59,790				293				370				59,713
Municipal securities (including non-current auction rate securities)			55,247				78				4,313				51,012
U.S. treasury notes			23,864				114				60				23,918
Certificates of deposit			3,252				—				—				3,252
		$	321,277			$	678			$	6,131			$	315,824

The contractual maturities of our investments as of March 31, 2011 are summarized below.

		Amortized				Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	194,237			$	192,592
Due one year through five years			146,330				145,064
Due after five years through ten years			230				286
Due after ten years			23,500				19,759
		$	364,297			$	357,701

Gross realized gains and gross realized losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Total proceeds from sales and maturities of available-for-sale securities were $61.3 million and $48.5 million for the three months ended March 31, 2011 and 2010, respectively. Net realized investment gains for the three months ended March 31, 2011, and 2010 were $157,000 and $14,000, respectively.

We monitor our investments for other-than-temporary impairment. For investments other than our municipal securities, we have determined that unrealized gains and losses at March 31, 2011, and December 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.

Approximately 35% of our investment in municipal securities consists of auction rate securities. As described in Note 5, “Fair Value Measurements,” the unrealized losses on these investments were caused primarily by the illiquidity in the auction markets. Because the decline in market value is not due to the credit quality of the issuers, and because we do not intend to sell, nor is it more likely than not that we will be required to sell, these investments before recovery of their cost, we do not consider the auction rate securities that are designated as available-for-sale to be other-than-temporarily impaired at March 31, 2011.

The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a loss position for 12 months or more as of March 31, 2011.

		In a Continuous Loss								In a Continuous Loss
		Position								Position
		for Less than 12 Months								for 12 Months or More								Total
		Estimated								Estimated								Estimated
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Corporate debt securities		$	143,883			$	1,962			$	11,248			$	328			$	155,131			$	2,290
GSEs			9,974				104				6,331				267				16,305				371
Municipal securities			25,274				330				24,765				3,936				50,039				4,266
U.S. treasury notes			17,455				66				5,722				22				23,177				88
		$	196,586			$	2,462			$	48,066			$	4,553			$	244,652			$	7,015

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

		In a Continuous Loss								In a Continuous Loss
		Position								Position
		for Less than 12 Months								for 12 Months or More								Total
		Estimated								Estimated								Estimated
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Corporate debt securities		$	103,225			$	1,060			$	10,490			$	328			$	113,715			$	1,388
GSEs			13,014				71				7,539				299				20,553				370
Municipal securities			18,884				117				25,271				4,196				44,155				4,313
U.S. treasury notes			5,480				40				6,806				20				12,286				60
		$	140,603			$	1,288			$	50,106			$	4,843			$	190,709			$	6,131

7. Receivables

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

		March 31,				December 31,
		2011				2010
		(In thousands)
Heath Plans segment:
California		$	40,141			$	46,482
Michigan			12,465				13,596
Missouri			22,623				22,841
New Mexico			10,382				18,310
Ohio			20,904				21,622
Washington			10,315				14,486
Wisconsin			6,639				5,437
Others			6,200				5,187
Total Health Plans segment			129,669				147,961
Molina Medicaid Solutions segment			40,749				20,229
		$	170,418			$	168,190

Our Utah health plan may be entitled to receive additional premium revenue from the state of Utah as an incentive payment for saving the state of Utah money in relation to fee-for-service Medicaid during the period 2003 through August 31, 2009. The final resolution of this matter, and the amount that may be realized by the Utah health plan, is currently uncertain and contingent upon future events. When additional information is known or agreement is reached with the state, we will recognize the resulting amount of revenue, if any, in our consolidated financial statements. No receivables for this matter have been established at March 31, 2011.

In late April of 2011, the Idaho Department of Administration delivered a letter to Molina Medicaid Solutions indicating that it wished to remit to Molina an amount approximately $5 to $6 million less than the amount of Molina’s invoices for its operation of the MMIS in that state for the period June 1, 2010 through December 31, 2010. We do not believe that the basis for the reduced payment amount is contractually sound, and have not adjusted our financial statements to reflect the requested reduction. We are currently deferring recognition of all revenue as well as all direct costs (which constitute the majority of our costs) in Idaho until the MMIS in that state receives certification from the Centers for Medicare and Medicaid Services, or CMS, which we expect to occur in 2012. Any adjustments, if necessary, to the amount of our receivable from the state of Idaho will be made as more information becomes available.

8. Restricted Investments

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

		March 31,				December 31,
		2011				2010
		(In thousands)
California		$	372			$	372
Florida			7,981				4,508
Insurance Company			4,682				4,689
Michigan			1,000				1,000
Missouri			507				508
New Mexico			15,888				15,881
Ohio			9,069				9,066
Texas			3,501				3,501
Utah			2,791				1,279
Washington			151				151
Wisconsin			260				260
Other			3,105				885
		$	49,307			$	42,100

The contractual maturities of our held-to-maturity restricted investments as of March 31, 2011 are summarized below.

		Amortized				Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	46,432			$	46,462
Due one year through five years			2,750				2,743
Due after five years through ten years			125				155
		$	49,307			$	49,360

9. Long-Term Debt

Credit Facility

We are a party to an Amended and Restated Credit Agreement, dated as of March 9, 2005, as amended by the first amendment on October 5, 2005, the second amendment on November 6, 2006, the third amendment on May 25, 2008, the fourth amendment on April 29, 2010, and the fifth amendment on April 29, 2010, among Molina Healthcare Inc., certain lenders, and Bank of America N.A., as Administrative Agent (the “Credit Facility”) for a revolving credit line of $150 million that matures in May 2012. The Credit Facility is intended to be used for general corporate purposes. As of March 31, 2011, and December 31, 2010, there was no outstanding principal balance under the Credit Facility. However, as of March 31, 2011, our lenders had issued two letters of credit in the aggregate principal amount of $10.3 million in connection with the contract of MMS with the states of Maine and Idaho.

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 March 31, 2011, we were in compliance with all financial covenants in the Credit Facility.

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 million current principal amount of the convertible senior notes, although the $187.0 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.

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 14, 2010 (on a pro forma basis). Effective as of August 15, 2010, the maximum consolidated leverage ratio under the Credit Facility reverted back to 2.75 to 1.0.

Convertible Senior Notes

As of March 31, 2011, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior Notes due 2014 (the “Notes”) 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 21.3067 shares of our common stock per $1,000 principal amount of the Notes. This represents an initial conversion price of approximately $46.93 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances.

The proceeds from the issuance of such convertible debt instruments have been allocated between a liability component and an equity component. We have determined that the effective interest rate of the Notes is 7.5%, principally based on the seven-year U.S. treasury note rate as of the October 2007 issuance date, plus an appropriate credit spread. The resulting debt discount is being amortized over the period the Notes are expected to be outstanding, as additional non-cash interest expense. As of March 31, 2011, we expect the Notes to be outstanding until their October 1, 2014 maturity date, for a remaining amortization period of 42 months. The Notes’ if-converted value did not exceed their principal amount as of March 31, 2011. At March 31, 2011, the equity component of the Notes, net of the impact of deferred taxes, was $24.0 million. The following table provides the details of the liability amounts recorded:

		As of				As of
		March 31,				December 31,
		2011				2010
		(in thousands)
Details of the liability component:
Principal amount		$	187,000			$	187,000
Unamortized discount			(21,646	)			(22,986	)
Net carrying amount		$	165,354			$	164,014

		Three Months Ended
		March 31,
		2011				2010
		(in thousands)
Interest cost recognized for the period relating to the:
Contractual interest coupon rate of 3.75%		$	1,753			$	1,753
Amortization of the discount on the liability component			1,340				1,243
Total interest cost recognized		$	3,093			$	2,996

10. Stockholders’ Equity

In connection with the plans described in Note 4, “Share-Based Compensation,” we issued approximately 243,000 shares of common stock, net of shares retired to settle employees’ income taxes, for the three months ended March 31, 2011. For the three months ended March 31, 2011, the $4.2 million increase to additional paid-in capital was generated by employee stock plans transactions.

11. Segment Reporting

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.

We rely on an internal management reporting process that provides segment information to the operating income level for purposes of making financial decisions and allocating resources. The accounting policies of the segments are the same as those described in Note 2, “Significant Accounting Policies.” The cost of services shared between the Health Plans and Molina Medicaid Solutions segments is charged to the Health Plans segment.

Operating segment revenues and profitability for the three months ended March 31, 2011 and 2010 were as follows:

						Molina
						Medicaid
		Health Plans				Solutions				Total
		(In thousands)
Three months ended March 31, 2011
Premium revenue		$	1,081,438			$	—			$	1,081,438
Service revenue			—				36,674				36,674
Investment income			1,594				—				1,594
Total revenue		$	1,083,032			$	36,674			$	1,119,706
Operating income		$	29,606			$	1,694			$	31,300
Three months ended March 31, 2010
Premium revenue		$	965,220			$	—			$	965,220
Service revenue			—				—				—
Investment income			1,521				—				1,521
Total revenue		$	966,741			$	—			$	966,741
Operating income		$	20,438			$	—			$	20,438

Reconciliation to Income before Income Taxes

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Segment operating income		$	31,300			$	20,438
Interest expense			(3,603	)			(3,357	)
Income before income taxes		$	27,697			$	17,081

Segment Assets

						Molina
						Medicaid
		Health Plans				Solutions				Total
		(In thousands)
As of March 31, 2011		$	1,383,447			$	199,707			$	1,583,154
As of December 31, 2010		$	1,333,599			$	175,615			$	1,509,214

12. Commitments and Contingencies

Legal

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

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

Provider Claims

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

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

Regulatory Capital and Dividend Restrictions

Our principal operations are conducted through our health plan subsidiaries operating in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin. Our health plans are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was $432.4 million at March 31, 2011, and $397.8 million at December 31, 2010. 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) 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.

As of March 31, 2011, our health plans had aggregate statutory capital and surplus of approximately $441.6 million compared with the required minimum aggregate statutory capital and surplus of approximately $274.1 million. All of our health plans were in compliance with the minimum capital requirements at March 31, 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.

13. Related Party Transactions

We have an equity investment in a medical service provider that provides certain vision services to our members. We account for this investment under the equity method of accounting because we have an ownership interest in the investee that confers significant influence over operating and financial policies of the investee. As of both March 31, 2011 and December 31, 2010, our carrying amount for this investment totaled $4.4 million. For the three months ended March 31, 2011 and 2010, we paid $5.4 million and $4.4 million, respectively, for medical service fees to this provider.

14. Subsequent Event

On April 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 distribution of the dividend will be made on May 20, 2011.

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

Forward Looking Statements

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

•

significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;

•

uncertainties regarding the impact of the Patient Protection and Affordable Care Act, including its possible repeal, judicial overturning of the individual insurance mandate, the effect of various implementing regulations, and uncertainties regarding the likely impact of other federal or state health care and insurance reform measures;

•

management of our medical costs, including seasonal flu patterns and rates of utilization that are consistent with our expectations;

•

the success of our efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states, and our ability to grow our revenues consistent with our expectations;

•

the accurate estimation of incurred but not reported medical costs across our health plans;

•

risks associated with the continued growth in new Medicaid and Medicare enrollees;

•

retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments, including Medicaid pharmaceutical rebates;

•

the continuation and renewal of the government contracts of both our health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed;

•

the timing of receipt and recognition of revenue and the amortization of expense under the state contracts of Molina Medicaid Solutions in Maine and Idaho;

•

additional administrative costs and the potential payment of additional amounts to providers and/or the state by Molina Medicaid Solutions as a result of MMIS implementation issues in Idaho;

•

government audits and reviews, including the audit of our Medicare plans by CMS;

•

changes with respect to our provider contracts and the loss of providers;

•

the establishment of a federal or state medical cost expenditure floor as a percentage of the premiums we receive, and the interpretation and implementation of medical cost expenditure floors, administrative cost and profit ceilings, and profit sharing arrangements;

•

the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures;

•

approval by state regulators of dividends and distributions by our health plan subsidiaries;

•

changes in funding under our contracts as a result of regulatory changes, programmatic adjustments, or other reforms;

•

high dollar claims related to catastrophic illness;

•

the favorable resolution of litigation or arbitration matters;

•

restrictions and covenants in our credit facility;

•		the relatively small number of states in which we operate health plans;
•		the availability of financing to fund and capitalize our acquisitions and start-up activities and to meet our liquidity needs;

•

a state’s failure to renew its federal Medicaid waiver;

•

an inadvertent unauthorized disclosure of protected health information;

•

changes generally affecting the managed care or Medicaid management information systems industries;

•

increases in government surcharges, taxes, and assessments; and

•

changes in general economic conditions, including unemployment rates.

Investors should refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurances that any results or events projected or contemplated by our forward-looking statements will in fact occur.

This document and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report and the audited financial statements and Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview

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. Our business comprises our Health Plans segment, consisting of licensed health maintenance organizations serving Medicaid populations in ten states, and our Molina Medicaid Solutions segment, which provides design, development, implementation, and business process outsourcing solutions to Medicaid agencies in an additional five states. We also have a direct delivery business that currently consists of 16 primary care community clinics in California and two primary care community clinics in Washington; additionally, we manage three county-owned primary care clinics under a contract with Fairfax County, Virginia.

Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin. These health plans served approximately 1.6 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals as of March 31, 2011. 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.

On May 1, 2010, we acquired a health information management business which we now operate under the name, Molina Medicaid Solutions^SM. Our Molina Medicaid Solutions segment provides design, development, implementation, and business process outsourcing solutions to state governments for their Medicaid Management Information Systems, or MMIS. MMIS is a core tool used to support the administration of state Medicaid and other health care entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provide drug rebate administration services for the Florida Medicaid program.

We report our financial performance based on the following two reportable segments: Health Plans; and Molina Medicaid Solutions.

First Quarter Performance Summary

The following table and narrative briefly summarizes our financial and operating performance for the three months ended March 31, 2011. Comparable metrics for the first quarter of 2010 are also shown. All ratios, with the exception of the medical care ratio and the premium tax ratio, are shown as a percentage of total revenue. The medical care ratio and the premium tax ratio are computed as a percentage of premium revenue because there are direct relationships between premium revenue earned, and the cost of health care and premium taxes.

		Three Months Ended March 31,
		2011				2010
		(Dollar amounts in thousands, except
		per-share data)
Earnings per diluted share		$	0.56			$	0.41
Premium revenue		$	1,081,438			$	965,220
Service revenue		$	36,674			$	—
Operating income		$	31,300			$	20,438
Net income		$	17,388			$	10,590
Total ending membership			1,647,000				1,482,000
Premium revenue			96.6	%			99.8	%
Service revenue			3.3				—
Investment income			0.1				0.2
Total revenue			100.0	%			100.0	%
Medical care ratio			84.5	%			85.3	%
General and administrative expense ratio			8.4	%			8.2	%
Premium tax ratio			3.4	%			3.6	%
Operating income			2.8	%			2.1	%
Net income			1.6	%			1.1	%
Effective tax rate			37.2	%			38.0	%

Our first quarter of 2011 was marked by strong membership growth, flat PMPM revenue, and lower medical costs. Compared with the first quarter of 2010, earnings per share in the first quarter of 2011 were up 37%, premium revenues were up 12%, operating income was up 53%, and aggregate membership grew by 11%. Meanwhile, the aggregate medical care ratio of our health plans declined by 80 basis points. Our larger and more established health plans performed the strongest in the quarter, with each of California, Ohio, Utah, and Washington having lower medical care ratios compared with the first quarter of 2010. Our Florida and Wisconsin health plans continue to face challenges, which we are working to address. Medicare enrollment exceeded 24,000 members at March 31, 2011, and Medicare premium revenue for the quarter was $85.4 million compared with $50.3 million in the first quarter of 2010. With respect to our Molina Medicaid Solutions business, our system stabilization efforts in Idaho and Maine are taking longer and are more costly than we had anticipated. However, our profit margins in our fiscal agent contracts in New Jersey, Louisiana, and West Virginia remain stable.

We remain concerned about state budget deficits, which are not expected to improve during the remainder of 2011. Accordingly, the rate environment for our health plans remains uncertain. However, our Missouri health plan has received notification that it will receive a blended rate increase of approximately 5% effective July 1, 2011. On May 5, 2011, we learned that our responsive bid in Arizona in connection with the re-procurement of the ALTCS program (Acute + Long Term Care Services) was not successful. The Company is in the process of reviewing and evaluating the bid scores and may file a protest as warranted. We continue to await the results of Molina Medicaid Solutions’ responsive bid in Louisiana to retain its MMIS contract in that state.

Composition of Revenue and Membership

Health Plans Segment

Our Health Plans segment derives its revenue, in the form of premiums, chiefly from Medicaid contracts with the states in which our health plans operate. Premium revenue is fixed in advance of the periods covered and, except as described in “Critical Accounting Policies” below, is not generally subject to significant accounting estimates. For the three months ended March 31, 2011, we received approximately 94% of our premium revenue as a fixed per-member per-month, or PMPM, amount, pursuant to our Medicaid contracts with state agencies, our Medicare contracts with the Centers for Medicare and Medicaid Services, or CMS, and our contracts with other managed care organizations for which we operate as a subcontractor. These premium revenues are recognized in the month that members are entitled to receive health care services. The state Medicaid programs and the federal Medicare program periodically adjust premium rates.

For the three months ended March 31, 2011, we received approximately 6% of our premium revenue in the form of “birth income” — a one-time payment for the delivery of a child — from the Medicaid programs in all of our state health plans except New Mexico. Such payments are recognized as revenue in the month the birth occurs.

The amount of the premiums paid to us may vary substantially between states and among various government programs. PMPM premiums for the Children’s Health Insurance Program, or CHIP, members are generally among our lowest, with rates as low as approximately $75 PMPM in California. Premium revenues for Medicaid members are generally higher. Among the Temporary Assistance for Needy Families, or TANF, Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums range between approximately $100 in California to $230 in Missouri. Among our Medicaid Aged, Blind or Disabled, or ABD, membership, PMPM premiums range from approximately $320 in Utah to $1,000 in Ohio. Contributing to the variability in Medicaid rates among the states is the practice of some states to exclude certain benefits from the managed care contract (most often pharmacy and catastrophic case benefits) and retain responsibility for those benefits at the state level. Medicare membership generates the highest PMPM premiums, at nearly $1,200 PMPM.

The following table sets forth the approximate total number of members by state health plan as of the dates indicated:

		March 31,				December 31,				March 31,
		2011				2010				2010
Total Ending Membership by Health Plan:
California			347,000				344,000				353,000
Florida			66,000				61,000				52,000
Michigan			225,000				227,000				226,000
Missouri			82,000				81,000				78,000
New Mexico			90,000				91,000				92,000
Ohio			248,000				245,000				228,000
Texas			128,000				94,000				40,000
Utah			80,000				79,000				75,000
Washington			341,000				355,000				338,000
Wisconsin(1)			40,000				36,000				—
Total			1,647,000				1,613,000				1,482,000
Total Ending Membership by State for our Medicare Advantage Plans(1):
California			5,300				4,900				2,700
Florida			600				500				300
Michigan			6,700				6,300				4,200
New Mexico			700				600				600
Ohio			400				—				—
Texas			600				700				500
Utah			6,700				8,900				7,100
Washington			3,300				2,600				1,600
Total			24,300				24,500				17,000
Total Ending Membership by State for our Aged, Blind or Disabled Population:
California			14,100				13,900				13,400
Florida			10,300				10,000				8,900
Michigan			32,000				31,700				32,700
New Mexico			5,600				5,700				5,800
Ohio			28,200				28,200				26,700
Texas			51,200				19,000				18,100
Utah			8,200				8,000				7,900
Washington			4,300				4,000				3,500
Wisconsin(1)			1,700				1,700				—
Total			155,600				122,200				117,000

Molina Medicaid Solutions Segment

Molina Medicaid Solutions’ MMIS contracts extend over a number of years, and cover the life of the MMIS from inception through at least the first five years of its operation. The contracts are subject to extension by the exercise of an option, and also by renewal of the base contract. The contracts have a life cycle beginning with the design, development, and implementation of the MMIS and continuing through the operation of the system. Payment during the design, development, and implementation phase of the contract, or the DDI phase, is generally based upon the attainment of specific milestones in systems development as agreed upon ahead of time by the parties. Payment during the operations phase typically takes the form of either a flat monthly fee or payment for specific measures of capacity or activity, such as the number of claims processed, or the number of Medicaid beneficiaries served by the MMIS. Contracts may also call for the adjustment of amounts paid if certain activity measures exceed or fall below certain thresholds. In some circumstances, revenue recognition may be delayed for long periods while we await formal customer acceptance of our products and/or services. In those circumstances, recognition of a portion of our costs may also be deferred.

Under our contracts in Louisiana, New Jersey, and West Virginia, we provide primarily business process outsourcing and technology outsourcing services, because the development of the MMIS solution has been completed. Under these contracts, we recognize outsourcing service revenue on a straight-line basis over the remaining term of the contract. In Maine, we completed the DDI phase of our contract effective September 1, 2010. In Idaho, we expect to complete the DDI phase of our contract during 2011. We began revenue and cost recognition for our Maine contract in September 2010, and expect to begin revenue and cost recognition for our Idaho contract in 2012.

Additionally, Molina Medicaid Solutions provides pharmacy rebate administration services under a contract with the state of Florida.

Composition of Expenses

Health Plans Segment

Operating expenses for the Health Plans segment include expenses related to the provision of medical care services, G&A expenses, and premium tax expenses. Our results of operations are impacted by our ability to effectively manage expenses related to medical care services and to accurately estimate medical costs incurred. Expenses related to medical care services are captured in the following four categories:

•

Fee-for-service — Expenses paid for specific encounters or episodes of care according to a fee schedule or other basis established by the state or by contract with the provider.

•

Capitation — Expenses for PMPM payments to the provider without regard to the frequency, extent, or nature of the medical services actually furnished.

•

Pharmacy — Expenses for all drug, injectible, and immunization costs paid primarily through our pharmacy benefit manager.

•

Other — Expenses for medically related administrative costs of approximately $24.4 million, and $19.6 million, for the three months ended March 31, 2011, and 2010, respectively, including certain provider incentive costs, reinsurance, costs to operate our medical clinics, and other medical expenses.

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

Molina Medicaid Solutions Segment

Cost of service revenue consists primarily of the costs incurred to provide business process outsourcing and technology outsourcing services under our contracts in Louisiana, Maine, New Jersey, West Virginia, and Florida, as well as certain selling, general and administrative expenses. Additionally, certain indirect costs incurred under our contracts in Maine (prior to exiting the DDI phase of that contract in September, 2010) and Idaho are also expensed to cost of services.

In some circumstances we may defer recognition of incremental direct costs (such as direct labor, hardware, and software) associated with a contract if revenue recognition is also deferred. Such deferred contract costs are amortized on a straight-line basis over the remaining original contract term, consistent with the revenue recognition period. We began to recognize deferred costs for our Maine contract in September 2010, at the same time we began to recognize revenue associated with that contract. In Idaho, we expect to begin recognition of deferred contact costs in 2012, in a manner consistent with our anticipated recognition of revenue.

Results of Operations

Three Months Ended March 31, 2011 Compared with the Three Months Ended March 31, 2010

Health Plans Segment

Premium Revenue

Premium revenue grew 12% in the three months ended March 31, 2011 compared with the three months ended March 31, 2010, due to a membership increase of 11%. Consolidated premium revenue increased by approximately 1% on a PMPM basis. Medicare enrollment exceeded 24,000 members at March 31, 2011, and Medicare premium revenue was $85.4 million for the three months ended March 31, 2011, compared with $50.3 million for the three months ended March 31, 2010.

Medical Care Costs

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

		Three Months Ended March 31,
		2011												2010
										% of												% of
		Amount				PMPM				Total				Amount				PMPM				Total
Fee-for-service		$	655,884			$	133.78				71.8	%		$	566,879			$	128.06				68.9	%
Capitation			128,682				26.25				14.1				137,132				30.98				16.7
Pharmacy			91,576				18.68				10.0				90,071				20.35				10.9
Other			37,390				7.63				4.1				28,734				6.48				3.5
Total		$	913,532			$	186.34				100.0	%		$	822,816			$	185.87				100.0	%

The medical care ratio decreased to 84.5% in the three months ended March 31, 2011, compared with 85.3% for the three months ended March 31, 2010. Total medical care costs increased less than 1% PMPM, while medical care costs for our Medicaid membership decreased by approximately 2% PMPM.

•

Pharmacy costs (adjusted for the state’s retention of the pharmacy benefit in Ohio effective February 1, 2010) increased approximately 5% PMPM.

•

Capitation costs decreased approximately 15% PMPM, primarily due to the transition of members in Michigan and Washington into fee-for-service networks.

•

Fee-for-service costs increased approximately 4% PMPM, partially due to the transition of members from capitated provider networks into fee-for-service networks. Fee-for-service and capitation costs combined increased less than 1% PMPM.

•

Hospital admissions per thousand members per year decreased approximately 7%.

•

Pharmacy utilization was essentially flat, with the increase in costs being driven by higher costs per prescription.

The medical care ratio of the California health plan decreased to 84.3% in the three months ended March 31, 2011, from 86.8% in the three months ended March 31, 2010, as higher premium revenue PMPM more than offset an increase of approximately 27% in pharmacy costs and an increase of approximately 5% in fee-for-service costs.

The medical care ratio of the Florida health plan increased to 96.6% in the three months ended March 31, 2011, from 88.7% in the three months ended March 31, 2010, primarily due to higher fee-for-service and capitation costs, which more than offset lower pharmacy costs. We have undertaken a number of measures — focused on both utilization and unit cost reductions — to improve the profitability of the Florida health plan. The Florida health plan’s medical care ratio decreased from 100.2% in the fourth quarter of 2010.

The medical care ratio of the Michigan health plan increased to 81.2% in the three months ended March 31, 2011, from 80.8% in the three months ended March 31, 2010, as higher physician and outpatient facility fee-for-service costs and higher pharmacy costs more than offset lower capitation costs.

The medical care ratio of the Missouri health plan increased to 93.6% in the three months ended March 31, 2011, from 83.5% in the three months ended March 31, 2010, due to higher fee-for-service costs.

The medical care ratio of the New Mexico health plan increased to 82.8% in the three months ended March 31, 2011, from 77.4% in the three months ended March 31, 2010, as lower fee-for-service costs failed to offset the impact of a premium rate decrease of approximately 8.5% PMPM.

The medical care ratio of the Ohio health plan decreased to 74.6% in the three months ended March 31, 2011, from 79.1% in the three months ended March 31, 2010, due to an increase in Medicaid premium PMPM of approximately 4.5% effective January 1, 2011, and flat fee-for-service costs.

The medical care ratio of the Texas health plan increased to 91.1% in the three months ended March 31, 2011, from 82.5% in the three months ended March 31, 2010. Effective February 1, 2011, we added approximately 30,000 ABD Medicaid members in the Dallas-Fort Worth area, and effective September 1, 2010, we added approximately 54,000 members state-wide who are covered under CHIP.

The medical care ratio of the Utah health plan decreased to 79.3% in the three months ended March 31, 2011, from 105.0% in the three months ended March 31, 2010, primarily due to reduced fee-for-service costs in the outpatient facility and physician categories and an increase in Medicaid premium PMPM of approximately 7% effective July 1, 2010. Lower fee-for-service costs were the result of both lower unit costs and lower utilization.

The medical care ratio of the Washington health plan decreased to 86.6% in the first quarter of 2011 from 90.3% in the three months ended March 31, 2010. Lower capitation costs more than offset higher fee-for-service and higher pharmacy costs. Pharmacy costs for the Washington health plan’s Medicaid members grew approximately 22% PMPM.

The medical care ratio of the Wisconsin health plan (acquired September 1, 2010) was 118.1% in the three months ended March 31, 2011. The Wisconsin health plan recorded a premium deficiency reserve of $3.35 million in the first quarter of 2011. Absent that premium deficiency reserve, the Wisconsin health plan’s medical care ratio would have been approximately 98% for the three months ended March 31, 2011.

Health Plans Segment Operating Data

The following table summarizes member months, premium revenue, medical care costs, medical care ratio, and premium taxes by health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in thousands):

						Three Months Ended March 31, 2011
		Member				Premium Revenue								Medical Care Costs								Medical				Premium Tax
		Months(1)				Total				PMPM				Total				PMPM				Care Ratio				Expense
California			1,041			$	134,976			$	129.63			$	113,737			$	109.24				84.3	%		$	1,902
Florida			192				49,222				256.63				47,568				248.01				96.6				17
Michigan			678				164,760				243.06				133,728				197.28				81.2				9,846
Missouri			245				55,166				225.33				51,608				210.79				93.6				—
New Mexico			271				84,606				311.93				70,038				258.21				82.8				1,965
Ohio			737				230,340				312.68				171,752				233.15				74.6				17,775
Texas			349				80,811				231.49				73,615				210.88				91.1				1,340
Utah			236				67,935				287.77				53,839				228.06				79.3				—
Washington			1,034				195,272				188.81				169,116				163.52				86.6				3,642
Wisconsin(2)			120				16,417				137.25				19,380				162.02				118.1				—
Other(3)			—				1,933				—				9,151				—				—				63
			4,903			$	1,081,438			$	220.58			$	913,532			$	186.34				84.5	%		$	36,550