Oct 28, 2009
Executives
Juan José Orellana – Vice President of Investor Relations Dr. Mario Molina – President and Chief Executive Officer John Molina – Chief Financial Officer Joseph White – Chief Accounting Officer Terry Bayer – Chief Operating Officer Dr.
James Howatt – Chief Medical Officer
Analysts
Daryn Miller – Goldman Sachs Joshua Raskin – Barclays Capital Greg Nersessian – Credit Suisse Carl McDonald – Oppenheimer John Rex – J.P. Morgan Craig Silver – Private Investor Tom Carroll – Stifel Nicolaus
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Molina Healthcare’s third quarter conference call. During the presentation, all participants will be in a listen-only mode.
Afterwards, we will conduct a question-and-answer session. (Operator instructions) I would now like to turn the conference over to Juan Jose Orellana, Vice President of Investor Relations.
Juan José Orellana
Hello everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the third quarter ended September 30, 2009.
The company's earnings release reporting its results was issued today after the market closed, and it is now posted for viewing on our company website. On the call with me today are Dr.
Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; Dr. James Howatt, our CMO; and Joseph White, our Chief Accounting Officer.
After the completion of our prepared remarks, we will open the call to take your questions. I also would like to remind you that our comments today contain numerous forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act.
All of our forward-looking statements are based on our current expectations and assumptions that are subject to numerous risks, uncertainties, and other factors that could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release, our 10-K annual report, and our 10-Q quarterly reports filed with the Securities and Exchange Commission.
These reports can be accessed under the Investor Relations tab of our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of October 28, 2009, and we disclaim any obligation to update such statements.
This call is being recorded, and a 30-day replay of the conference call will be available over the Internet through the company's website at www.molinahealthcare.com. I would now like to turn the call over to Dr.
Mario Molina.
Dr. Mario Molina
The third quarter has been challenging for Molina Healthcare. Compared to the third quarter of last year, our premium revenue has grown by 16% and our membership has grown by 14%, but our profitability has suffered due to rising medical care costs.
Our financial performance continues to be affected by many of the same factors we had discussed our during our second quarter conference call. These factors include higher utilization of physician services, higher outpatient costs, and an increase of new members with their higher medical costs.
In the third quarter, emergency room utilization increased in part driven by a resurgence in the 2009 H1N1 flu epidemic. As you know, President Obama recently declared a national emergency due to this novel flu epidemic.
The H1N1 flu first became a factor in the second quarter. Flu activity declined during the summer months, but baseline flu activity remained elevated.
With the return of children to school in the fall, we saw a resurgence of the H1N1 flu beginning in September and continuing through October. As Dr.
Michael Siegel discussed during the second quarter call, the H1N1 flu virus seems to disproportionately attack children and young adults—the patient population that comprises the majority of Molina Healthcare’s membership. Public health officials are vigorously attempting to immunize the public, giving priority to high risk groups such as children and pregnant women.
We’re doing our part to aid in this effort by administering the vaccine in our clinics in California and Virginia; however, the vaccine only recently became available in limited supply, while the H1N1 epidemic began in the second quarter of this calendar year. On another front, the California Health Plan’s results have had a continuing negative effect on our profitability, decreasing our consolidated earnings by $0.58 per share so far this year.
Not all of our contracts in the state are performing poorly. The problems in California are best illustrated by the poor performance under our contracts in Los Angeles County and in Yolo County and the Access for Infants and Mothers or AIM program in San Diego County.
We were required to participate in the AIM program beginning in 2005 as a condition of the approval of our acquisition of Sharp Health Plan’s Medicaid contract in San Diego County. As hospital costs have increased, the premiums for the AIM program have not kept pace with these costs.
As a result, we have given state regulators notice of our intention to leave the AIM program no later than July 2010. Likewise, we have given notice of our intention to leave Yolo County, and we expect that notice to be effective no later than February 2010.
Our difficulties in Los Angeles County stem from net premium decreases to HealthNet in the face of rising medical costs. As a reminder, we operate as a subcontractor to HealthNet in Los Angeles County and the premiums we receive reflect the premium paid to HealthNet less a portion they retain for certain administrative functions.
As a result, we have not benefited from administrative leverage as our enrollment in Los Angeles County has grown. Los Angeles County is very large geographically.
It is roughly as large as the state of Connecticut, and if it were a standalone state, it would be one of the top 5 Medicaid markets in the country based on enrollment. We view the county as 10 micro markets, and we are evaluating our performance in each of these micro markets.
In an effort to improve our profitability, we have selectively capped our enrollment in some markets and are restructuring our provider network in certain areas. As a result, there may be declines in our California Health Plan’s enrollment over the next few quarters.
Our response to the challenges posed by these contracts recognizes the differing long-term potential of each contract. We’re often asked why we’ve not chosen to simply exit the California market with its budget problems and large deficits.
To answer this question, we must put California in its proper perspective. We have operated here for three decades and managed through difficult times.
Traditionally, it has been a profitable market for us. California is a large and diverse state, and we operate in six of its 58 counties.
If California were a country, it would have the eighth largest economy in the world, behind Italy and ahead of Brazil and Russia. It is the state with the largest number of Medicaid beneficiaries—about 7 million—and has the second largest Medicaid budget in the country.
All of the current healthcare reform proposals under consideration by congress include expanding the Medicaid program. The three states that stand to benefit the most from the proposed Medicaid expansions are California, Florida, and Texas.
If you believe, as we do, that there will be healthcare reform that includes Medicaid expansion in the future, it is of strategic importance for us to maintain our presence in California and these other states. Part of our strategy is to find a way to maintain a profitable presence in California, Florida, and Texas as we await the implementation of healthcare reform.
The impact of the H1N1 flu epidemic is significant and may grow worse. In addition, we do not know what the effect of the usual seasonal flu will be this winter.
A report issued this month by the Nelson A. Rockefeller Institute of Government reports that 49 states saw total tax collections fall during the second quarter of 2009 and that overall state tax collection experienced a record drop of 17%.
Therefore, as virtually all states face budget problems, premium rate increases are uncertain, as are optional Medicaid benefits. With the cessation of federal stimulus package payments to states at the end of 2010, states may begin to tighten their eligibility requirements.
All of these things could result in declining premium revenue. This changing landscape requires us to rethink our strategy.
For the past few years, we pursued an aggressive growth strategy. We have nearly our enrollment over the past 6 years and have diversified geographically, but this has placed some pressure on our profit margins.
In the near term, our number one goal is to improve our profitability. This does not mean that forego opportunities to grow and diversify the company, but we will increasingly view these opportunities selectively and only through the lens of improved profitability.
We will pursue those opportunities that yield profitable growth and diversification. We will continue to examine end-market acquisition opportunities as they have traditionally been the most accretive.
We will continue to aggressively pursue opportunities to strip out unnecessary costs wherever we find them. We will follow a network strategy that emphasizes more selective provider networks to both improve quality outcomes and deliver more cost-effective care.
We will do all of this without sacrificing quality or abandoning our commitment to have all of our health plans accredited by the National Committee on Quality Assurance. In the near term, this may mean capping enrollment in some areas or exiting markets where premiums are inadequate to support our goals.
Enrollment will drop in some markets as a result of this strategy. However, our goal is to build a stronger, more profitable organization as we position the company to take it advantage of the long-term trends in healthcare reform.
In closing, I want to stress two things—first, Molina Healthcare has been in this business for nearly 30 years. We have the experience and financial resources to succeed in this environment and emerge stronger than before.
Second, we remain committed to our mission and optimistic about our long-term prospects. We are a company arranging for the essential healthcare services to a growing and vulnerable population.
We have a unique opportunity, and we intend to make the best of it. I would now like to turn the call over to John who will discuss the company’s third quarter performance in greater detail.
John Molina
Earnings for the third quarter of 2009 were $0.33 per fully diluted share. Net income was $9 million for the quarter compared to $16 million reported for the third quarter of 2008.
Our 2009 third quarter revenue increased 16% or $123 million compared to the third quarter of 2008. Enrollment growth was very strong across all of our markets.
Our enrollment now exceeds 1.4 million members and grew by 43,000 members or 3% in the third quarter alone. However, these accelerated enrollment trends are adding to significant medical margin pressure.
In absolute numbers, Florida and California added the most members during the quarter. However, on a year to date basis, Florida and California are also the two states exhibiting the highest medical care ratios.
We believe that as we streamline our networks and transition towards a more tightly managed organization, our financial results will improve. As Mario noted, the company has a long-term commitment to California and Florida, and we’re taking steps to improve the profitability of our health plans in those states.
This may result in a reduction in membership in certain markets in connection with our restructuring of our provider networks and tighter utilization management. Our medical care ratio increased from 84.6% in the third quarter of 2008 to 86.7% in the third quarter of 2009.
This is an increase of 210 basis points year over year and a slight 10 basis point decrease over the prior quarter ended June 30, 2009. Nearly half of this year over year increase can be attributed to the California health plan.
As previously discussed, our primary concern is to improve the financial performance of our California Health Plan. Our medical cost trends continue to be consistent with those identified by the company during the second quarter 2009.
Except in the case of outpatient costs where both utilization and unit costs have increased, our medical costs continue to be the result of higher utilization rather than higher unit costs. The increase in medical costs was most pronounced in connection with physician and outpatient costs.
Together, these costs increased nearly 9% on a per member per month basis compared with the third quarter of 2008. Emergency room costs increased due to both higher emergency room utilization as well as unit costs.
H1N1 and the costs associated with recently enrolled members also remained key contributors to the higher medical costs. Now let me discuss what we’re experiencing as a result of the 2009 H1N1 flu.
As Mario pointed out, the disease attack rate is highest in person under age 25. This group constitutes a significant portion of our membership and is therefore more likely to have a greater impact on our results.
The increased utilization trends resulting from the H1N1 flu season were most pronounced in California and Michigan, where 40% of our current enrollment resides. It is important to note that since the H1N1 flu is a new phenomenon, it is difficult to predict what its impact will be on our fourth quarter results.
However, during our third quarter, some of the key indicators we focused on to assess the severity of the flu season reflected dramatically elevated activity. For example, at our company-operated primary care clinics in California, we saw a 50% increase in visits for flu-related illness.
Flu-related call volumes to our national nurse advice line increased by nearly 300%, and pharmacy costs related to respiratory illness increased by 14% when compared to the third quarter of 2008. The impact to our medical costs of H1N1-related activity was an increase of approximately 50 basis points in the medical care ratio compared to the third quarter of 2008.
As discussed during the second quarter, the company continues to observe the same trends reported by most of our peers, where providers are billing for more intensive levels of care than they were a year ago. Please refer to the table in our discussion of physician and outpatient costs in today’s press release for year to date information.
We continue to excel at controlling our administrative costs during this difficult environment. G&A expenses in the third quarter were 10.7% of total revenue, or $98 million, as compared to 11.1% of total revenue for the third quarter of 2008, or $88 million.
Core G&A expenses decreased 50 basis points to 7.5% of total revenue for the third quarter of 2009 as compared to 8% for the third quarter of 2008. The decrease in core G&A compared with the third quarter of 2008 was primarily due to administrative leverage as a result of premium and enrollment growth.
Cash flow remained strong. Cash flow provided by operations in the third quarter increased to $130 million compared with cash flow used in operations totaling $20 million for the same period in 2008.
This is an increase of $150 million. Excluding restricted investments, the company had cash and investments of approximately $680 million.
The parent company had free cash and investments of approximately $54 million, including auction rate securities with fair value of $17 million. Our balance sheet remains strong with a current ratio of 1.68.
Now, I’d like to address our outlook for the remainder of 2009. Due to several factors that make it particularly difficult to predict the company’s short term medical costs and earnings, including the 2009 H1N1 flu epidemic and the declaration of national emergency by the president, higher utilization associated with new members, and state budgetary shortfalls including the uncertainty surrounding the passage of the Michigan State budget, the company is withdrawing those elements of its 2009 guidance related to its medical care costs and earnings.
All other elements remain the same as previously provided. Please refer to our press release for an outline of all elements that remain the same.
This concludes our prepared remarks. We are now ready to take questions.
Operator
(Operator Instructions) Our first question comes from the line of Daryn Miller – Goldman Sachs.
Daryn Miller – Goldman Sachs
Your MCR year over year is up over 200 basis points. Did you say only 50 basis points of that was due to H1N1?
John Molina
That’s right, Daryn.
Daryn Miller – Goldman Sachs
Was there any incentive comp reversal in the third quarter?
John Molina
No.
Daryn Miller – Goldman Sachs
Just thinking back to last year where we had an issue where guidance was actually lowered and that happened. Was there a reason why it wasn’t lowered this time?
Dr. Mario Molina
Why what wasn’t lowered, Daryn?
Daryn Miller – Goldman Sachs
Incentive compensation with the change in the outlook?
Joseph White
I think the difference may have been, as I recall last year, we probably had something on the books when we lowered guidance versus we didn’t have anything accrued at this time.
Daryn Miller – Goldman Sachs
So, you haven’t accrued yet for that?
Joseph White
That’s correct.
Daryn Miller – Goldman Sachs
On the Florida MCR at 95%, are you accruing to a target there or is that what the state is running at? Just provide a little bit more clarity as to what cost elements if it is higher, what is driving that higher?
John Molina
Daryn, what’s driving it higher than what we’d like and expect to see is that patients are going through a transition phase from the MediPass to the full risk HMO. As a result of that, we have to keep continuity of care, so certain drugs that are not on our formulary, we’ve got to continue to supply for a period of time.
We expect over time we will bring that down below 90, but that’s an actual number; it’s not a target number.
Daryn Miller – Goldman Sachs
That’s specifically related to the population that’s transitioning then?
John Molina
Correct.
Operator
.
Joshua Raskin – Barclays Capital
Can you talk a little about the timing of the recognition of these issues and why not preannounce the quarter? It doesn’t look like you guys are sort of even in the ballpark.
John Molina
Josh, I think that the first two months of the quarter are running pretty well. We had some issues in the third month of the quarter which brought the earnings down for the whole quarter, so there was really no reason or time to do the preannouncement.
Joshua Raskin – Barclays Capital
Following up on that, it sounded like the summer months were okay from a flu perspective, and it picked up in September and October. If we assume 50 basis points is about $4.5 million and we make the assumption of something in the ballpark of $4 million in the month of September, do you think you’ll be profitable in the fourth quarter?
John Molina
This is why we withdrew that element of guidance.
Joshua Raskin – Barclays Capital
What’s differentiating Molina from some of your competitors even in the state of California? Is it the clinics or is it population or county mix?
I’m just sort of curious why and certainly others have mentioned this. It just seems the magnitude for you guys seem to be particularly harsh.
Dr. Mario Molina
I think it’s a combination of things. Part of it as we mentioned has to do with the LA County contract where we are getting less than the full premium revenue because HealthNet withholds a portion for administrative functions.
A lot of it is driven by higher hospital cost and some of it has to do with some of these other contracts like Yolo County which we’re exiting and the AIM program which we’re exiting, so it’s really a mix of all of those things. In terms of what others are saying, I don’t know.
I don’t know who else has reported it in California and what they have said, but this is our experience, and as John pointed out, the first two months of the quarter, we were right on track with our guidance, and September was a very difficult month.
Operator
.
Greg Nersessian – Credit Suisse
My first question was just on the timing of when think you guys might update the guidance. Are you going to wait till you report the actual fourth quarter or is there going to be an interim announcement?
What are your thoughts on that right now?
Dr. Mario Molina
Right now we are not planning to give guidance for the fourth quarter if that’s what you’re asking.
Greg Nersessian – Credit Suisse
So we won’t know what the fourth quarter looks like until you actually report it?
Dr. Mario Molina
Correct.
Greg Nersessian – Credit Suisse
And no plan to do an investor day or anything like that you typically schedule in January.
John Molina
We are going to have the investor day. I think right now it’s slotted for towards the end of January, January 20 or something, and we give our outlook for the year at that point, and we plan to do that.
Greg Nersessian – Credit Suisse
But that would be before you report the fourth quarter?
John Molina
Correct, as we do every year.
Greg Nersessian – Credit Suisse
So you’ll give an update on 2009 obviously then when you’re giving the 2010 guidance?
John Molina
To the extent we have greater clarity on what’s going on, yes.
Greg Nersessian – Credit Suisse
How much membership is in the Yolo and the San Diego programs that you’re getting out of?
Dr. Mario Molina
Those books of business are pretty small, but they are running significant losses, and that’s why we’re exiting. You’re not going to see a big impact on overall membership, but you should see an improvement in profitability as a result.
Greg Nersessian – Credit Suisse
Have you talked to HealthNet yet about the situation? Is there a change in mind to reassess that relationship?
Dr. Mario Molina
We have regular ongoing conversations with HealthNet.
Greg Nersessian – Credit Suisse
You mentioned that you’re meeting with regulators on the coding. Has that happened yet?
Have you started to talk to them yet? What’s been the response on the ER coding so far?
Dr. Mario Molina
I don’t think that we have met with any government agencies with regard to this yet. We’re still gathering the data.
We want to be very careful and very thoughtful about this.
Greg Nersessian – Credit Suisse
So no sense of how the regulators are going to approach this up-coding issue?
Dr. Mario Molina
No, but I do think it seems to be fairly widespread.
Operator
.
Carl McDonald – Oppenheimer
I just wanted to get a better sense of how far along the spectrum the results in California are. If you were to pull out the three counties that you highlighted, would rest of the California business be profitable or is it just that these three counties are losing a lot of money and the other counties are not losing quite as much?
Joseph White
It’s fair to say that the other counties are marginally profitable.
Operator
.
John Rex – J.P. Morgan
How did you adjust handling the $7.8 million Texas payment that reduced revenues and drove the cost ratio in that quarter so far up? I assume that all relates to prior quarters.
Is that correct?
Joseph White
It would relate to the contract year ending 08/31/09 plus obviously the stub period starting the new year in September. I think the best way to handle that is we breakout premium and medical cost by state in the back of the earnings release.
I would take the 09/30/09 year to date number there as a run rate.
John Rex – J.P. Morgan
What strikes me though is most of that didn’t relate to the third quarter, the vast majority of it, and so if I back out that impact, I end up with an MCR of something like 85.9%.
Joseph White
I would just caution to the extent that an adjustment to that doesn’t relate to quarters before this. Also much of that is driven by claims development in previous quarters too.
There’s a constant process of truing up the amount owed to Texas under the experience rebate, so to the extent, we might be going back and increasing or decreasing a portion of the rebate in prior quarters, we’re also driven by having to go back and increase or decrease our estimate of medical expenses for that quarter.
John Rex – J.P. Morgan
My point on this though is that but for that you wouldn’t have missed the quarter essentially? That’s the myth, and when you look down the line items across the different markets, the sequential change in the loss ratio is frankly for most of them is modest, many improved; you do that and you’re in an improved position, so I guess what I’m struggling with is what were you thinking you were going to do in the 3Q then if absent this Texas adjustment you would have been running, you would have been inline, you would have actually made the quarter, then what were we actually thinking because it actually looks like it would have been okay absent that?
Joseph White
There is an adjustment to Texas revenue every quarter based upon the development and experience rebate, so I don’t think it’s correct to say that we anticipated no adjustment to revenue during Q3 when we set guidance.
John Molina
The other thing I would say is that most of the states are performing pretty well. You’re right.
We have seen an increase in the flu across virtually all the states. It has had an impact, and I think that it probably is going to get worse because I don’t think the flu season has peaked yet, but for the most part, the other states are performing well.
There are a few isolated problems. Clearly, California is having a big negative impact on our earnings, and that has to be addressed.
The issue with Texas somewhat difficult to deal with from an accounting standpoint because as Joe points out it’s a rolling number, but we think that we have a pretty good handle on that, and as he points out, going forward, if you use the year to date numbers as a run rate, you can kind of project what Texas is going to look like. There are a few issues we’ve got to deal with.
Some of them are clearly within our control. They have to do with contracting, they have to do with premium rates and network strategy.
Some of them like the flu epidemic due to the H1N1 and perhaps the second flu epidemic coming from the seasonal flu later in the year are outside of our control, but as I mentioned, I think the long-term prospects are good. There are some problems that have to be dealt with, but most of these are things that we cannot control.
John Rex – J.P. Morgan
Where would you have expected California to come in this quarter? It went up 50 basis points, from 91.7 to 92.3.
Were you expecting that to improve a couple of hundred basis points? Again, I’m just trying to find what was so out of line with where your head may have been?
John Molina
Traditionally, third quarter has the lowest medical care ratio, and as I think I pointed out earlier the first two months, we were running along with what we expected. It really was a couple of factors largely in September that frankly if you look it at what’s happening with the flu season, the H1N1, we just don’t know if that’s going to continue to go up.
At some point it’s got to peak, but we don’t know if it’s going to peak in October, November, or December, and that’s having a big impact on us because of our population and frankly the inabilities to tell if this is going to be outpatient or inpatient related, so I would echo Mario’s points. We have a number of states that are doing well.
California, we expected it to bounce back some, and it didn’t.
John Rex – J.P. Morgan
What was the order of magnitude that you expected? I’m just trying to get an idea of what was the correct…
John Molina
I don’t want to go into giving projections by state John, but we have been working on the California issues and other issues as well. Remember we talked in the second quarter about terminating the contract in Washington for basic health.
Now, that contract will run out through the remainder of the year, but it’s a problem. A number of the contracts we terminated in California have rolling termination dates, and so one of the points that I wanted to make on this call is that when we tell you we’re going to take an action, it’s not immediate.
Some of these have 90-, 120-, 270-day notice requirements, so we can tell you that we’re making a change, but this is a little bit like the battleship analogy. This thing doesn’t turn on a dime.
I don’t want you to think that we’re sleep at the switch, but by the same token, some of these things do take time to see the results.
John Rex – J.P. Morgan
You’re saying we shouldn’t think of this excess $7.8 million Texas payment for a run rate also. Is that correct?
I am not sure if I understand why we shouldn’t think of it ex-fact though.
Joseph White
John, I want to say there are many factors in any given quarter that both work favorably and unfavorably in the results, and I think to attach attention to any specific one is probably not the wisest approach.
John Rex – J.P. Morgan
Any detail on Michigan you can offer or comments on Michigan?
John Molina
What aspect of Michigan, John?
John Rex – J.P. Morgan
I think that was one that you’re citing specifically.
John Molina
The problem in Michigan right now is that we don’t know what’s going to happen with the budget. We were told originally to expect 4.5% rate increase, and then the budget did not pass.
There has been a 1-month extension. We could know by end of this week or early next week what the budget situation is.
On the other hand, they may not pass the budget; we may not get a rate increase. They may modify provider rates.
They may do another extension. It’s really up in the air.
With California, we’re sort of used to this. They never pass the budget on time it seems, but this is a new phenomenon in Michigan, and as I pointed out, the states are under a lot of pressure, and we don’t know for sure what’s going to happen.
When the stimulus package money goes away at the end of 2010, the states are going to face tremendous pressure unless something is done, and we don’t expect the number of people on Medicaid to drop much in 2010, so all these things taken together make it a pretty uncertain environment for us right now in the fourth quarter.
John Rex – J.P. Morgan
You had spiked it out distinctly from others, so I just didn’t know if there is something else unique about the market that was on your mind.
John Molina
It’s mainly the budget issue and the fact that they are continuing to pay us at last year’s rates, not the higher rates that we were told to expect.
Operator
(Operator Instructions). The next question comes from the line of Craig Silver – Private Investor.
Craig Silver – Private Investor
I would like to ask your opinion on this healthcare reform. Maybe can tell your thoughts on the public options being discussed.
Is that good, bad, or neutral for our company?
John Molina
It’s kind of a difficult question, Craig, but I think that for Molina Healthcare, it’s really neutral. What we basically do is contract with the government to provide health care, and we do it through the Medicaid program, the CHIP program, and the Medicare program.
The public option that is being discussed is really an alternative for commercial plants, so I don’t know that it’s going to have much of an impact on us, and we’ve not really taken a position on the plan.
Craig Silver – Private Investor
You’re showing a $10.9 million business purchase in the quarter. Could you explain what that purchase was?
Joseph White
That’s a combination of activity on three fronts. It’s a true-up on our purchase of our Missouri health plan back in the last quarter of 2007.
It’s a small acquisition in Laredo, Texas to transition 9000 members to the company, and it’s also partial payment of an acquisition in Florida as we transition members from HealthPass into our Florida HMO.
Craig Silver – Private Investor
You also had an increase in our intangibles for the year of over $20 million. Was that also acquisitions?
Joseph White
Yes, the bulk of it being in Florida.
Craig Silver – Private Investor
You’re showing $21 million increase in intangibles, but our purchases of transactions is only $10.9 million.
Joseph White
There is an accounting twist to that. Essentially, the acquisition is being accomplished in stages, so we’ve essentially got a payable to the sellers in Florida recorded that’s not showing as an actual cash payment to them yet in the cash flow statement because we haven’t released those funds yet.
Craig Silver – Private Investor
Do we expect these acquisitions to improve our earnings substantially?
Joseph White
I think that the Florida acquisition is an ongoing process. It’s not a new thing that’s going to change things much.
The acquisition in Texas is small, and I think that we’re doing that in conjunction with the expectation that we’ll be expanding through the Texas CHIP program in the fall of 2010 as a result of the RFP.
Craig Silver – Private Investor
It’s very good that we’re continuing to flow cash. It’s good to see our cash balance grow.
What’s the possibility of starting to see a dividend for shareholders? I think that would open up our stock to some more mutual funds that need income.
Joseph White
It’s something that’s been discussed in the past, but right now, I don’t anticipate a dividend in the near future.
Craig Silver – Private Investor
It would helpful for our shareholders and would certainly open our stock up to more funds that are looking for not just growth but for income.
Joseph White
In John and Mario, you’re talking to two of the largest shareholders in the company, and we would certainly benefit from a dividend, so we’re aware of that.
Craig Silver – Private Investor
You’re also benefiting from restricted share purchasing and other things that shareholders are not, so keep that in mind.
Operator
Our final question comes from the line of Tom Carroll – Stifel Nicolaus.
Tom Carroll – Stifel Nicolaus
This chart you have on page 5, the emergency room visits per 1000, that shows the change year over year in the different levels, if there is 100 ER visits in a year on a normalized basis, how many fit into each of those buckets, and what does this year look like?
John Molina
Normal conventional wisdom is a bell-shaped curve. For example, if you look at the American College of Emergency Physicians’ guidelines on this, a level 1 is a wound check, and a level 5 is a multi-system exam, so it’s really a bell-shaped curve.
Most of this stuff falls in level 3, and so that’s why you can see why given the changes we’ve outlined in the table here, why it’s having an impact on our cost structure.
Dr. Mario Molina
The distribution is skewing to the higher codes, and this is a new phenomenon that we’re working on. It’s a little strange.
Tom Carroll – Stifel Nicolaus
Thank you.
Dr. Mario Molina
That concludes our call. Thank you for joining us, and we’ll speak to you at the end of the fourth quarter.