Feb 23, 2012
Executives
Juan José Orellana - Joseph Mario Molina - Chairman, Chief Executive Officer and President John C. Molina - Chief Financial Officer, Executive Vice President of Financial Affairs, Treasurer, Director and Member of Compliance Committee Joseph W.
White - Principal Accounting Officer and Vice President of Accounting Terry P. Bayer - Chief Operating Officer
Analysts
Carl R. McDonald - Citigroup Inc, Research Division Charles Andrew Boorady - Crédit Suisse AG, Research Division Scott J.
Fidel - Deutsche Bank AG, Research Division Joshua R. Raskin - Barclays Capital, Research Division Kenneth Lavine - UBS Investment Bank, Research Division Sarah James - Wedbush Securities Inc., Research Division Melissa McGinnis - Morgan Stanley, Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare Fourth Quarter and Year End 2011 Earnings Conference Call.
[Operator Instructions] As a reminder, this conference call is being recorded, Thursday, February 23, 2012. I would now like to turn the conference call over to Juan José Orellana, VP of Investor Relations.
Please go ahead, sir.
Juan José Orellana
Thank you, George. Hello, everyone, and thank you for joining us.
The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and fiscal year ended December 31, 2011. The company's earnings release reporting its results was issued today after the market closed and 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; and Joseph White, our Chief Accounting Officer.
After the completion of our prepared remarks, we will open the call to take your questions. [Operator Instructions] Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act, including, without limitation, statements regarding our earnings per share guidance for 2012, expected 2012 rates, opportunities relating to the migration of dual eligibles into managed care, our enrollment expansion in Texas, our premium revenues in Washington and certification of our Idaho Medicaid Management Information System.
All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report, our Form 10-Q quarterly reports and our Form 8-K current reports.
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 February 23, 2012, and we disclaim any obligation to update such statements except as required by securities laws.
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 molinahealthcare.com. I would now like to turn the call over to Dr.
Mario Molina.
Joseph Mario Molina
Thank you, Juan José. Hello, everyone, and thanks for joining our discussion today.
Let me begin by saying that 2011 was an outstanding year for Molina Healthcare. Were it not for the noncash impairment charge that we took for the loss of our contract in Missouri, we would have reported record earnings for both the fourth quarter and for all of 2011.
Even with the Missouri charge, our cash flow from operations in 2011 was the best we have ever reported. I'll talk more about Missouri in a minute, but first I want to discuss what made 2011 such a good year and what that says about our company's future.
The list of our accomplishments for 2011 is long: We had record cash flows from operations; we lowered our medical care ratio by 60 basis points and increased our medical margin by nearly $125 million; we secured a major position in the Texas market; we reduced our fourth quarter medical care ratio in Florida by 15% over the fourth quarter of 2010; we grew our Medicare membership by over 25%; we grew our Age, Blind and Disabled membership by over 50%; we achieved federal certification of our Medicaid Management Information System in Maine; and we positioned ourselves to participate in the dual eligible opportunity across many of our states. Molina has submitted its notice of intent to apply to capitated fiscal alignment demonstration contracts for 2013 for the dual eligibles in the following states: California, Florida, Michigan, New Mexico, Ohio, Texas, Washington, Wisconsin, Virginia and Illinois.
Currently, 3 of our largest health plans in California, Ohio and Michigan are in states with large initiatives underway to transition the dual eligibles into managed care. In California, Molina Healthcare has submitted its response to the state's request for solutions to provide comprehensive care to dual eligible beneficiaries in the state.
This program will enroll these beneficiaries into health plans beginning in 2013 and continuing through 2015. There are currently 1.2 million beneficiaries with both Medicaid and Medicare in California.
600,000 of them are in the 5 counties Molina serves: San Diego, Riverside, San Bernardino, Los Angeles and Sacramento. The state is going to begin the program in these areas, which the state is expected to identify towards the end of March.
Currently, Molina Healthcare it strategically positioned to serve this population in California with an already established Special Needs Plan that serves nearly 6,500 duals in the state. In Ohio, the state plans to release a revised draft proposal this month for its integrated care delivery system to meet the needs of the dual eligibles.
A request for applications is expected in April for implementation in January of 2013. In Michigan, the state began enrolling dual eligible beneficiaries in Medicaid Health Plans in December of last year.
Members in Special Needs Plans in Michigan are automatically enrolled for their Medicaid benefits with an opportunity to opt out. In addition, the Michigan Department of Community Health has been working under Dual Eligible Integrated Care Plan with a target submission date to CMS of April and a target implementation of January 2013.
On another front, we are just a few days away from our expansion go live date of March 1 in Texas. As a result, over the next few weeks, doctors and patients across multiple Texas service areas will see significant changes in how healthcare is delivered.
Many families and individuals will be selecting a Medicaid Health Plan for the very first time. As we outlined at our Investor Day, we anticipate that our enrollment in Texas will nearly double as a result of this expansion.
We are also well aware that associated with such large expansions are many challenges. Since we were awarded the contract, we have set up extra phone lines and hired additional staff to help with the influx of new members.
In addition, the Texas Health and Human Services Commission and the Molina Healthcare staff in Texas have been hard at work to ensure the seamless transition of members and to minimize problems for our network providers. I had the opportunity to visit the providers in the Rio Grande Valley in Texas last week, and I came away very impressed with their commitment to the Medicaid population and their proactive approach in dealing with the upcoming change.
In Washington, we successfully defended our position against stiff competition. We have learned that Molina was tentatively awarded all existing service areas in 34 counties, while adding one additional county.
The Washington contract will become effective July 2012 and provides managed care services for more than 700,000 Medicaid and basic health beneficiaries while adding 100,000 Age, Blind and Disabled beneficiaries. In the fiscal agent business, Molina Medicaid Solutions was awarded full federal certification in Maine by the centers for Medicare and Medicaid services.
This certification allows the state to receive maximum federal funding for the system. The state of Maine can now claim 75% federal reimbursement for ongoing operations retroactive to September 1, 2010.
Since September 1, 2010, the system in Maine has been processing approximately 1 million claims per month and paying nearly 3,000 providers each week. As a result of not being awarded a new contract in Missouri, our existing contract with the state will expire without renewal on June 30, 2012.
Although we were very disappointed to learn about this outcome, Molina Healthcare remains committed to serving the state of Missouri, our providers and, most importantly, our members by approaching our work with a business-as-usual mindset to meet all of our obligations. At this stage, we are evaluating our options in the state.
We regard this outcome as a short-term issue and a trajectory of recently successful RFP results that include the Washington State Medicaid reprocurement, the Texas CHIP world service area RFP and RFPs for the STAR and STAR+PLUS programs in our existing service areas in Texas, as well as RFPs for the El Paso and Rio Grande service areas. We expect to emerge from this recent challenge stronger and even better prepared to take full advantage of the opportunities our growing field offers.
The anticipated growth in our industry resulting from current and new opportunities confirms that we are in the right place at the right time. As we expand our presence in new and existing programs and markets, it's only natural to expect that we will draw increasing competition.
The increase in competition validates our long-term strategic imperative: emphasizing diversification, so that the company is not overly reliant on any one specific contract. Diversification has been a consistent theme for Molina Healthcare that we expect will continue to contribute to our sustained success.
We're excited for 2012 and the long-term future for the company. Finally, I'm pleased to announce that Garrey Carruthers, a former governor of New Mexico, was elected to serve as a Director.
Governor Carruthers will fill an existing class I Director vacancy and joins Molina Healthcare following a distinguished career in public service in government, higher education and healthcare. Currently Governor Carruthers serves as the Dean of the College of Business of New Mexico State University.
We welcome Governor Carruthers and look forward to his contributions. And now, I'd like to turn the call over to John.
John C. Molina
Thank you, Mario, and hello, everyone. As Mario pointed out, this was a very good quarter and a very good year for the company.
While we reported a loss of $0.72 for the quarter and earnings of only $0.45 for the full year, those results were severely impacted by the Missouri impairment charge. Were it not for the noncash impairment charge we took from Missouri, we would have reported diluted earnings per share of $0.62 for the quarter and $1.79 for the year.
Please note that the Q4 2011 noncash impairment charge does not impact the company's future cash flows, profitability, liquidity or compliance with debt covenants in our credit facility. We also had some other items that impacted our fourth quarter results.
Our New Mexico health plan entered into a contract amendment that more closely aligned the calculation of revenue within methodology adopted under the Affordable Care Act. The contract amendment changed the calculation of the amount of revenue that we may recognize relative to medical costs.
This change added about $0.21 to EPS for the fourth quarter. About $0.07 of that amount related to 2010, while the remaining $0.14 related to 2011.
We agreed to settle an arbitration matter in Florida during the fourth quarter and also incurred some costs related to provider contract terminations. All in, these items reduced fourth quarter earnings per diluted share by about $0.10.
Because we have a lot of unusual puts and takes in the quarter, we have added a table at the front of our earnings release to summarize items that you may wish to remove from our reported results to better understand our ongoing operations. In summary, the impairment charge reduced our EPS for the year and quarter by $1.34.
The arbitration and provider termination costs reduced EPS for the year and the quarter by $0.10, and the New Mexico contract amendment increased EPS for the quarter by $0.21. Regarding New Mexico, I want to emphasize that most of the $0.21 benefit relates to the first 3 quarters of 2011.
Only $0.07 of that $0.21 benefit relates to 2010. To reiterate, our fourth quarter represented a strong conclusion to a strong year.
Absent all of the items I discussed, our earnings per diluted share would have been $0.51 for the quarter and $1.82 for the year. Annual premium revenues grew by 15% over 2010 to $4.6 billion and fourth quarter premium revenues grew 20% over the fourth quarter of 2010 to $1.3 billion.
The revenue increase is primarily due to our increased enrollment among our Age, Blind and Disabled population as well as Medicare population, which have higher premiums and resulted in a higher premium revenue per member per month. Premium rate increases remain anemic, and we expect them to be flat to down throughout the year.
Yesterday, the Supreme Court sent the California Medicaid reimbursement case back to the 9th U.S. Circuit Court of Appeals.
As you may recall, the 9th Circuit Court had blocked the Medicaid reductions from taking effect. This action is likely to postpone any immediate resolution and further complicates the state's budget battle.
We continue to reserve as if the rate cut will take effect. Please refer back to our January Investor Day presentation, where we detailed our expectations for state-by-state premium changes.
At the end of the year, our enrollments stood at 1.7 million members. Enrollment was up across the majority of our health plans on a sequential basis, with the bulk of the enrollment gains coming from Texas, where the company began serving ABD members in the first quarter, and in California, where the company began serving new ABD members in the third quarter.
Our Medicare enrollment continues to grow steadily and topped 31,000 members for the year. As a reminder, nearly 80% of our Medicare enrollment is in our dual eligible Special Needs Plan.
For all of 2011, we reduced our medical care ratio to 83.9% compared to 84.5% in 2010. Our medical margin increased by 20% or almost $125 million year-over-year.
The flu had little impact on our fourth quarter results, and it is still too early to comment on the flu impact during the first quarter of 2012. The performance of Molina Medicaid Solutions improved between the third and fourth quarters of 2011, with operating income increasing by over $6 million.
General and administrative expenses grew to 9.6% of total revenue in the fourth quarter of 2011 compared with 9.3% of total revenue in the fourth quarter of 2010. This increase is due to the settlement of an acquisition-related arbitration matter at our Florida health plan, higher variable compensation and employee health care costs and investment and administrative and infrastructure in anticipation of the opportunities in Texas and among our dual eligible population.
EBITDA for the first -- for the full year of 2011 was $155 million, including the $65 million noncash impairment charge, which is a decrease of 7% compared to $166 million in 2010. So without the impairment charge, EBITDA would have been approximately $219 million for the full fiscal year.
Operating cash flow for 2011 increased by $64 million to $225 million compared with $161 million for the same period of 2010. As of December 31, 2011, the company had cash and investments of approximately $893 million.
The parent company had free cash and investments of approximately $24 million. Days and claims payable in the fourth quarter were 40 days, which was up 1 day on a sequential basis.
The company is revising its 2011 -- 2012 EPS guidance discussed at our Investor Day on January 26, 2012, from $1.80 EPS to $1.75 EPS. The primary factor influencing this change was the loss of the Missouri contract, which is now set to expire without renewal on June 30, 2012.
A complete discussion of our assumptions and risk factors associated with our guidance can be found in our Investor Day presentation available at our website. This concludes our prepared remarks.
Operator, we are now ready to take questions.
Operator
[Operator Instructions] Our first question comes from Carl McDonald with Citigroup.
Carl R. McDonald - Citigroup Inc, Research Division
I wanted to focus first on Texas, and just wanted to see the trajectory as you look into 2012, so sort of starting from the, call it 93% loss ratios on 2011, you're guiding for something closer to 90% in 2012. So what gets you comfortable that the base business is going to get better in 2012 relative to all the new membership coming on that presumably will be at a higher loss ratio than 90%?
John C. Molina
Carl, it's John. There are a number of moving pieces in Texas, but we were able to make what we believe are some improvements in the fourth quarter, largely because some of the care requirements -- the sum of [ph] care requirements that began to move away on the population that came in, in the Jefferson Service Area.
The mix that's shifting a little bit for -- a little bit more towards the STAR membership. We also don't have the same profit sharing that we had in 2011.
And we think that we have done a pretty good job of making sure that we're staffed up and prepared for the influx of membership. Now having said all of that, we are expecting that across the entirety of the state, the medical care ratio will be 90% for the entire year.
We're also adding pharmacy and inpatient responsibility, and we generally tend to do pretty well on the pharmacy piece. So while 90% is nothing to write home about, we think that we have put some mechanisms in place to help with the utilization, and we've done some nice work on recontracting some of the challenging hospital contracts.
Long answer, but that's what we said in January, and we're sticking to it.
Carl R. McDonald - Citigroup Inc, Research Division
Okay. And then separate question.
What was the accrual in California for the retroactive rate cut relative to the, I believe, it was $7.5 million in the third quarter?
John C. Molina
Joe, you got that?
Joseph W. White
Yes. Carl, it's Joe.
The $7.5 million, basically, we found out, I think, in November that, that increase we'd expect to have netted down to maybe 6%. It's really 3.5%.
So essentially there was no incremental accrual in the fourth quarter. And in effect, what we had accrued at the end of the third quarter was adequate to take us through the year.
John C. Molina
And Carl, let me just add, despite the recent court decision, we are still accruing as though the rate is going to be decreased.
Joseph W. White
You may recall, Carl, at Investor Day we talked about a roughly 3.5% rate cut [indiscernible] in December 1, 2011. So that's what we're talking about there.
Operator
Our next question comes from Charles Boorady with Crédit Suisse.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
I just wanted to follow up on the California question for a second, because in the last Q, and I think what we talked about last was that the 10% rate cut, if it were to take effect, would have a 6% negative impact on your revenues. Are you now saying that, that same 10% cut would have only a 3%, 3.5% negative impact on your revenue?
Or am I misunderstanding what you just said?
John C. Molina
Charles, the error that we made previously was we applied that 10% to all provider categories, and it turns out that the states did not apply it to all provider types and all provider services. So we had overestimated the impacts previously.
We think we've got it estimated correctly now, and I think it's about a 3.5% hit.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Got it. To revenue, or -- okay, and the 3.5% revenue hit, when you consider everything that gets passed through versus what hit year bottom line, you're saying is about a $7.5 million now for 6 months rather than $7.5 million for a quarter?
Joseph W. White
Yes, $7.5 million for 6 months, that's correct.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Okay, got it. And then do you have any sense for -- I've read a lot about the Supreme Court decision, and it sounds like both sides are claiming victory.
I mean, what's your read on the upshot of the Supreme Court decision today? Does it make more likely or less likely that a 10% cut will ultimately happen?
Joseph Mario Molina
Charles, it's Mario. I really don't know.
I mean, we're just going to have to see how this plays out. I think that one of the things the court said was that circumstances have changed, and that's one of the reasons they sent it back.
So it's not a victory for the state or for the providers. They want further discussion, and we'll just have to see how it plays out.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Got it. Okay, and then just finally on Missouri, in light of your exit there, what's the amount of excess reserves that you have that you think might come back into earnings once you're fully out of that state?
John C. Molina
Charles, we don't have that much in terms of excess reserves that are material. We always keep an adequate amount for adverse deviation in terms of what we reserve, but we also have excess statutory capital.
And if you're talking about the excess debt cap, it's probably $25 million or $30 million, which we can -- we'll be able to deploy for other things.
Joseph W. White
That's not a P&L impact, though.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
So they will -- okay, so there will be no P&L impact from any excess statutory capital.
Joseph W. White
Correct. So Charles, let me express it this way.
We do not ever intentionally carry excess reserves in our liability. So the reserve that we recorded at 12/31 is our best estimate of that reserve.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Got it. You said that once you're out of there, if you discover that there was excess, does that just come back into the P&L in the form of earnings or...
Joseph W. White
Yes.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Okay. And at this point, you don't think that's going to be material, is that what you're implying?
Joseph W. White
That's correct, it will not be material.
Operator
Our next question comes from Scott Fidel with Deutsche Bank.
Scott J. Fidel - Deutsche Bank AG, Research Division
First question, maybe just sticking on Missouri. Maybe if you could just talk about what you thought the key reasons were on why you weren't awarded another contract there.
Joseph Mario Molina
Scott, this is Mario. We haven't had a chance yet to examine the scoring, and so it would be premature for us to comment on that.
Scott J. Fidel - Deutsche Bank AG, Research Division
Okay. Then just a separate question on just the provider termination costs that you cited in the 4Q report.
Maybe if you could just elaborate a bit on that in terms of which markets did those provider terms relate to and how many providers were actually terminated from the network?
Joseph W. White
This is Joe speaking. It's 2 or 3 providers spread across 2 or 3 states for a total impact of maybe $2 million, $2.5 million.
Scott J. Fidel - Deutsche Bank AG, Research Division
Okay. And then just a question, just on the RFS out in California and the Legislative Analyst's Office recently put out a report and supporting moving forward with the pilot but sort of cautioning against moving too quickly on the state-wide expansion.
And just sort of interested in sort of how much pull does that outfit have in terms of influencing the legislature and in sort of the way things stand in terms of timing of a pilot versus a broader state-wide expansion?
Joseph Mario Molina
This is Mario. We disagree with the Legislative Analyst's report for 3 reasons.
First, many states across the country are going forward with similar programs, and there's been a lot of research done on this, so I don't think that a pilot is necessary. Second, this is really a federal initiative.
The federal government wants to move the dual eligible beneficiaries into managed care programs that combine the funding for both to provide better coordinated care. And finally, I think it's unfair to the beneficiaries themselves to withhold coordinated care programs that can better serve their needs and make sure that they're getting the benefits that they're entitled to.
So for all those reasons, we disagree with the Legislative Analyst's Office, and we side with the Governor on this.
John C. Molina
And I would just add one other thing, and that is we just talked about the difficulty California has had in cutting the provider rates. Their budget's not getting any better, and this will save money.
Operator
Our next question comes from Josh Raskin with Barclays Capital.
Joshua R. Raskin - Barclays Capital, Research Division
Just -- first question, I just want to make sure I understood the New Mexico change in revenues. What exactly does that mean that you've changed the recognition to be more in line with PPACA as it relates to cost?
I guess I'm just not sure exactly what you were looking at there.
Joseph W. White
It's Joe speaking. To distill a lot of detail, essentially, the contract amendment modifies the definition of revenue, in effect, modifies the denominator and the calculation of medical costs over revenue.
It also changed the minimum percentage to 85% over the life of the contract. So it -- those 2, the change in definition of revenue and the assignment of an 85% minimum over the life of contract, triggered the accounting recognitions.
Joshua R. Raskin - Barclays Capital, Research Division
So Joe, were you accruing contra revenue that no longer gets accrued? Is that why the revenues went out?
Joseph W. White
That is correct, that is correct.
Joshua R. Raskin - Barclays Capital, Research Division
Okay, okay. Got you, makes sense now.
And then, I guess, as it relates to California and their request for solutions, what -- I think it's due this week. What sort of recommendations are you providing the state?
What do you think would be most helpful for California if they manage the duals?
Terry P. Bayer
Josh, it's Terry. I think as we've shared with you, we have a care model that we believe, if we can bring in and have a single funding stream and be given the opportunity to coordinate all aspects of care, including the long-term support services, the long-term care residents, et cetera, that we will be able to improve the quality of the outcomes, coordinate all of the services, reduce the fragmentation and ultimately, bring about reduced cost and a better outcome.
And simply, we've been doing this now for a number of years in our Special Needs Plan where we're serving the duals except for that last piece, which is covered by Medicaid in terms of long-term care. So we've got the experience with the Special Needs Plans, and we're going to build on that and pick up this long-term services portion, which includes a lot of social and nonmedical needs being met for these patients.
So we submitted the care model, and we're looking forward to implementing it in all of our markets if the state so desires.
Joshua R. Raskin - Barclays Capital, Research Division
Okay, that's helpful. And I'm sorry just one last one, if I could sneak it in.
Just the transition from capitation of fee-for-service in Michigan and Washington, the cost ticked up there because you're moving, I guess, from cap to fee-for-service. Is that intentional or what -- and if so, why would you want to do that?
Joseph W. White
It's Joe speaking. And this is the transition that happened in Washington effective 12/31/2010 and then in Michigan during the course of the year.
Our general feeling is that we favor arrangements that are more fee-for-service based because it helps in encouraging providers to send in their account or [ph] data. We collect that information as we pay claims, which is helpful from a patient care perspective and a rate setting perspective with the state.
I'd say for -- in most circumstances, those agreements, that change was voluntary. I can't speak to the physicians on the other end, but again, we favor -- well, we do capitate the arrangements and we're okay with it when necessary.
We do like the greater visibility into patient care than a fee-for-service arrangement can give us.
Joseph Mario Molina
This is Mario. I also think that it's ironic, given all the discussion in Washington about accountable care organizations, we increasingly see the providers moving away from capitation and back towards fee-for-service payments.
Joshua R. Raskin - Barclays Capital, Research Division
You like it more -- you're saying just because of the claims visibility, you're actually getting the claims. It doesn't sound like it's necessarily financially more or less attractive one way or the other?
Joseph Mario Molina
That's correct.
Operator
Our next question comes from Ken Lavine with UBS.
Kenneth Lavine - UBS Investment Bank, Research Division
Just had a question on your Washington state business, now that it looks like you have some enhanced clarity compared to the January Investor Day on how the membership may shake out there. Just want to get your updated thoughts on what the MLR should look like here in 2012.
I think your Investor Day, it showed something like an 80%, 86% target for '12, which is a pretty sharp ramp versus 2011 and particularly one where you exited 2011 from. So just kind of looking for a little better clarity with what the moving parts are there?
And then this 86%...
John C. Molina
The thing that's driving that is primarily the addition of the ABD members, which we would anticipate would come in at a higher MCR out the gate just because you've got pent-up demand. So we also think that there may be some shift in mix as folks who aren't heavy utilizers on the TANF side may switch plans or may not re-enroll.
And then you got pressure on the premiums. Washington does have a pretty significant budget deficit still.
And there's pressure on the rates.
Kenneth Lavine - UBS Investment Bank, Research Division
Okay. And I guess the post-RFP, post the new contract, that's a second half event and normally would really impact the third and fourth quarters.
So with the MLRs for that -- for those quarters be maybe closer to 90% in Washington?
Joseph Mario Molina
I think -- this is Joe speaking. I think they will certainly be higher, I know that will go as high as 90%.
But we don't give quarterly guidance, but I think it's fair to say we've modeled higher MCRs in the second half of the year for Washington, yes.
Kenneth Lavine - UBS Investment Bank, Research Division
Okay. And how should we think about any sort of diminished SG&A leverage if any, as a result of kind of some of the foregone membership here in Washington?
I think you had talked at one of your Investor Days a few years ago about the incremental earnings accretion from Ohio, from some membership that you picked up from a planned exit, from a competitor exit. And I think you have cited something like 2% incremental administrative expense.
Is that in the ballpark for, I guess, kind of the reversed sort of leverage here?
John C. Molina
I think you're going to see sort of a trade-out, Ken. As we move from a primarily TANF population, we're going to lose some membership.
We'll pick it up as we get the ABD, but they have higher needs both on the medical but also the administrative. So we're not looking at decreases in staff, even though the absolute number of patients is going to go down.
So I think it sort of gets washed out.
Operator
Our next question comes from Sarah James with Wedbush.
Sarah James - Wedbush Securities Inc., Research Division
I just wanted to follow up a little bit on the California dual opportunity. I'm seeing that there is such a variance in the proposals.
I was wondering if you could give us some insight on who you think will ultimately be making that decision, if it's going to be collaborative or coming from one part of the state government versus another? And then what the timing is that you're looking for the final word on how the rollout will happen?
Joseph Mario Molina
This is Mario. In terms of when we will get the final word out, I would imagine it will come with the state budget when that gets resolved.
In terms of who's going to drive this, I think a lot is going to be driven by the governor, and I think that there are -- there is support and a legislature as well for this expansion. I think that people are increasingly realizing that coordinated care is much better for this dual eligible population than the current fragmented fee-for-service system.
And we're seeing it not just in California, not just in Sacramento, but we're seeing that in the statehouses across the country. This is a growing trend, and we expect it to continue, and perhaps, even accelerate over 2013.
Sarah James - Wedbush Securities Inc., Research Division
Okay. And on some of the cost comments that were made in the press release, one of them mentioned utilization down 2%.
So I was just wondering if you could comment if that's across all markets or any geography in particular, and if there's any change in the trend for birthrates or flu cost?
Joseph W. White
It's Joe speaking. What we've seen in the utilization has been pretty generalized.
It has been, I'd say, very generalized. Births.
First, we continue to show a drop in birth income, which would suggest some drop in birthrates. And flu, I don't think we have enough information to talk anything about.
We don't see a whole lot of it as normal [ph].
Operator
Unfortunately, due to time constraints, we have time for only one more question. Our last question comes from Melissa McGinnis with Morgan Stanley.
Melissa McGinnis - Morgan Stanley, Research Division
I guess sticking with the California duals. If in the event that the state sort of puts the 10 county expansion on hold, and we only get the 4 county expansion via the RFS, what's your understanding of how the state is maybe deciding which 4 counties are the best places to pilot this program?
Joseph Mario Molina
That's a really good question. This is Mario.
It's hard to know. I think it's going to depend a lot on the responses they get to the RFS.
They have encouraged the local initiatives and the commercial plans to cooperate, and we have certainly done that in the Inland Empire and in San Diego and in concert with L.A. Care and HealthNet in Los Angeles County.
And Los Angeles County is the largest county, so you might look for it to start there. But one of the other large regions in California is the Inland Empire.
So I think those things are going to drive this. The other thing to think about is do they want to diversify the model?
Do they want to do a 2 plan model and, for example, maybe a geographic managed care model like San Diego County. We just going to have to wait and see.
Melissa McGinnis - Morgan Stanley, Research Division
Okay, great. And then as all of us think through the revenue opportunity and ultimately, the earnings opportunity, given your experience with Medicare offerings and the margins we can usually see on the Medicare side of the business and your experience in California and then maybe thinking through the incremental G&A benefit you get from end-market expansions, what do you think incremental margins on a dual contract can really look like for a health plan?
Are we thinking more like Medicaid margins? Maybe a blend of -- I mean, Medicaid margins?
More a blend of Medicare and Medicaid? How are you thinking about that?
John C. Molina
I think initially -- this is John. At least for the first year, it's probably going to be much closer to a Medicaid-type margin.
And the reason I say that is, the big additional piece, as Terry points out, are the Personal Care Services, the Personal Attendant Services, which really aren't even medical in nature but they are an important and expensive piece of the care continuum. And most of the states are going to try and have very long runways for continuity of care.
So at least initially, there is going to be not a lot we are going to be able to influence on that piece, but it will come over time as we are able to keep those patients out of the nursing homes and out of the hospital. But I would not suspect that we're going to get Medicare-type of margins initially.
Operator
Dr. Molina, I'll turn the call back to you.
Joseph Mario Molina
Well, I just want to say thank you to all the employees. We saw marked improvements in operations, both on the health plan side and on the Molina Medicaid Solutions part of the business this year.
And it was an outstanding year, blemished unfortunately by the Missouri contract loss, which we had to take in 2011, even though the contract loss won't actually take place until 2012. So my thanks to all my fellow employees, and we will see you at the next earnings call.
Operator
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.