California Medical Costs Rise for Molina

We are maintaining our fair value estimate for Molina Healthcare MOH after the company reported good first-quarter results. First-quarter premium revenue increased 18% from the prior year, driven by premium increases, business mix shifts, and 10% higher membership. The medical cost ratio (medical costs as a percentage of premium revenue) deteriorated in the quarter, to 86.1% from 85.8%. California is causing the most trouble for Molina at the moment, as the medical cost ratio there increased to 94.5% from 88.2% in the prior-year quarter. Molina will have to bring this metric down dramatically if it wants to continue operating in California over the long run. On the other hand, the company made significant progress in Ohio by negotiating more favorable contracts with health-care providers and a 5% rate increase with regulators. The medical cost ratio in Ohio improved to 84.3% from 90.3% last year.