Mixed reaction; Molina's IPO goes well, but not all observers cheer

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Mixed reaction; Molina's IPO goes well, but not all observers cheer

by Laura B. Benko
Jul 07, 2003

Molina Healthcare elicited both cheers and jeers from industry observers last week when it joined the growing ranks of publicly traded Medicaid managed-care companies.

The Long Beach, Calif.-based Medicaid insurer raised $115.5 million July 1 in an initial public offering of 6.6 million shares at $17.50 apiece. The company, which covers 511,000 Medicaid beneficiaries in California, Michigan, Utah and Washington state, now has an estimated market value of $434 million.

Molina follows in the footsteps of rivals Amerigroup Corp., Virginia Beach, Va., and Centene Corp., St. Louis, both of which went public in late 2001 (See related story this page). Several of the nation's other largest Medicaid plans also are owned by publicly traded commercial insurers, including Health Net, UnitedHealth Group and WellPoint Health Networks.

Medicaid plans are going public because it gives them readier access to capital and hence greater security at a time when government reimbursement rates remain volatile, said Thomas Carroll, an analyst with Legg Mason Wood Walker in Baltimore. ''This is certainly the way the industry is headed,'' he said.

But analysts say Molina's decision to finally hold its long-delayed IPO attests to the continued viability of the managed Medicaid market for private health insurers. The company filed a registration statement with the Securities and Exchange Commission in December 2002 but put off pursuing its offering until last month because of unfavorable market conditions. It's among just a handful of IPOs this year, compared with 107 last year.

Publicly traded Medicaid HMOs have continued to thrive financially despite budget shortfalls in several states. Healthcare analysts say that's because the companies' size and expertise allow them to manage the care of Medicaid beneficiaries at a lower cost than traditional fee-for-service Medicaid. ''These companies are a solution for the states,'' Carroll said. ''They provide a
coordinated system of care, and they take over the risk for states.''

Thirty-eight states require some form of Medicaid managed care, while others are warming to the concept, Carroll said. Some 23 million, or 49%, of the nation's 47 million Medicaid beneficiaries are now enrolled in managed-care plans, according to the Centers for Medicare and Medicaid Services.

Managed Medicaid plans are steeling themselves for reimbursement cuts in some states, but most say they can offset any rate reductions with increases in membership. That's because the companies receive set monthly payments from the government based on their Medicaid enrollment, not on the number of patients treated or service provided. So as long as they keep medical costs in check, total revenue will continue to grow.

Molina has boosted its membership by 71% over the past two years through internal growth and acquisitions. It's already among the nation's top 15 managed-care firms, and ranks No. 51 on Inc. magazine's current list of the 10 fastest-growing U.S. companies that conduct business in inner cities.

Despite the rosy projections, some industry observers have criticized Molina and other for-profit Medicaid plans for reaping hefty profits while serving low-income patients, particularly at a time when states are slashing health programs and doctors are losing money caring for Medicaid patients.

Nearly half of all doctors in California, or 44%, are unwilling to treat patients covered by Medi-Cal, the state's Medicaid program, according to a recent study by the California HealthCare Foundation's Medi-Cal Policy Institute, Oakland (June 23, p. 34).

Last year, Molina earned $30.5 million, up from just $2.6 million in 1998. Annual revenue climbed to $644.2 million from $136 million during the same period. In 2002, 4.7% of revenue went to profits, 7.6% went to operating income and 9.5% went to administrative costs and overhead, according to the company's IPO prospectus.

''Molina has a record of diverting patient dollars to profits,'' said Jerry Flanagan, consumer advocate with the Foundation for Taxpayer & Consumer Rights, Santa Monica, Calif. ''And that trend will become even more dramatic now that it 's gone public, because Wall Street emphasizes healthy bottom lines over healthy patients.''

Molina executives did not return phone calls seeking comment. In regulatory filings, however, the company attributes its financial growth to its ability to provide efficient medical care and its experience serving culturally diverse communities. It caters to patients in inner cities, focusing on
African-Americans, Asians, Hispanics and Russians.

According to its Web site, ''Molina's success is based on the fact that it has focused primarily on the Medicaid and low-income population, and is committed to case management, member outreach and low-literacy programs.''

But Flanagan and others suggest Molina is benefiting because its non-English-speaking members do not see doctors when they should and may not complain when they are denied care. Molina and other Medicaid HMOs in California also can readily shift care of severely ill children to state programs such as California Children's Services, reducing their exposure to some of the most
expensive cases.

California's latest annual performance report on the state's 22 managed Medi-Cal plans found that Molina ranked near the bottom on some key measures in 2002. As first reported in the Los Angeles Times in May, 48.6% of children covered by Molina last year received all their required immunizations by age 2, compared with a statewide average of 59.2% among managed Medi-Cal plans and 79.3% for the category's best performer, not-for-profit Community Health Group,
San Diego.

Overall, however, ''there seems to be no immediate difference'' in the quality of care provided by for-profit or publicly traded Medicaid plans and their not-for-profit counterparts, said Chris Perrone, director of the Medi-Cal Policy Institute.

While he would not comment on Molina specifically, Perrone said many managed Medi-Cal plans were reducing hospitalizations by providing better preventive care and encouraging members to see doctors rather than making costly emergency-room visits. Some plans are even reimbursing physicians at higher Medicare rates to maintain adequate provider networks, he added.

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