Apr 25, 2013
Executives
Juan Jose Orellana - Vice President of Investor Relations 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 Terry P.
Bayer - Chief Operating Officer Joseph W. White - Chief Accounting Officer
Analysts
Ralph Giacobbe - Crédit Suisse AG, Research Division Joshua R. Raskin - Barclays Capital, Research Division Sarah James - Wedbush Securities Inc., Research Division Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division Scott J.
Fidel - Deutsche Bank AG, Research Division Carl R. McDonald - Citigroup Inc, Research Division Michael J.
Baker - Raymond James & Associates, Inc., Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division David H.
Windley - Jefferies & Company, Inc., Research Division Matthew Borsch - Goldman Sachs Group Inc., Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare First Quarter 2013 Earnings Conference Call.
[Operator Instructions] As a reminder, this conference call is being recorded, Thursday, April 25, 2013. I will now turn the conference call over to Juan José Orellana, VP of Investor Relations.
Please go ahead, sir.
Juan Jose 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 first quarter ended March 31, 2013. 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.
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 April 25, 2013 and we disclaim any obligation to update such statements, except as required by the securities laws.
This call is being recorded and a 30-day replay of the conference call will be available at our company's website, 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.
We're very pleased with our performance during the first quarter of 2013. The improved financial performance we achieved in the second half of last year carried over into 2013 as we continued to make improvements to our core operations.
John will be addressing our financial results in greater details during his remarks. But first, I'm going to talk about a number of positive developments that bear noting.
Let's begin with the quick review of events that have taken place since our Investor Day in February. On the dual eligible front, highly-anticipated memorandums of understanding, or MOUs, were signed for Medicare and Medicaid programs in both California and Illinois.
Including the MOU in Ohio, this brings to 3 the number of Medicare and Medicaid MOU signed in Molina markets. Intensive efforts are underway across the company as we prepare to serve the new members that these programs will bring.
All 3 MOUs have aggregate savings targets at or very close to the CMS rate setting process guidance of 1% in year 1; 3% in year 2; and 5% in year 3. This guidance confirms that the CMS commitment to the success of the Medicare and Medicaid programs by preventing overly aggressive savings targets.
Now I will discuss some of the specifics regarding each state's Medicare and Medicaid program. California's implementation of its program, now called CAL-Medi-Connect, will start no earlier than October 2013.
Implementation involves a 12-month phase-in period and passive enrollment of Medicare but it does not include an initial lock-in period, suggesting that Medicare beneficiaries will be able to opt out of the program or switch out plans at any time. As a reminder, the enrollment in managed care for the Medicaid portion of the benefits in our markets is expected to be mandatory.
While the absence of the lock-in period may result in short-term variability in enrollment, the 12-month phase-in should produce a more orderly implementation by avoiding a one-time major influx of patients and providing more time to educate patients about the new program. As a reminder, the long-term revenue projections that we shared at our last Investor Day assumed that our California health plan will participate in Medicare and Medicaid contracts in San Diego, Riverside and San Bernardino counties.
Molina currently holds a primary Medicaid contract in each of these counties where 329 -- I'm sorry, 392,000 total eligibles reside. In Ohio, we will participate in that state's Medicare-Medicaid program in the Southwest, West Central and Central regions, where approximately 48,000 dual eligibles reside and where we will compete with one other health plan in each region.
Dual Eligible beneficiaries will be able to voluntarily enroll beginning in early June with coverage starting September 1, 2013. After this initial voluntary enrollment period, Ohio will begin passively enrolling dual eligibles in the plans.
The schedule for passive enrollment will vary by region, with the Southwest region beginning on November 1, 2013; and Central, as well as West Central, starting on December 1, 2013. Beneficiaries can opt out prior to the passive enrollment and may change plans or opt out of the demonstration at any time.
In Illinois, Medicare-Medicaid plan passive enrollment is expected to begin October of 2013 with an effective date of January 2014. As discussed at our most recent Investor Day, we will be serving the Central Illinois region that has 18,000 dual eligible beneficiaries and we will compete in that market with one other health plan.
Dual eligible beneficiaries will be able to voluntarily enroll for the first 3 months from October to the end of December. Program implementation also includes a 6-month phase-in passive Medicare enrollment period that includes monthly caps on enrollment.
Under the passive enrollment mechanism, beneficiaries will be automatically assigned the plans by the state unless they opt out of the demonstration. Beneficiaries will always have the option to opt out of the demonstration or select an alternative health plan.
Our Illinois award also includes extending Medicaid managed care to 13,000 aged, blind and disabled beneficiaries in Central Illinois, as well as 7,000 eligible beneficiaries in East St. Louis.
Our Illinois ABD contracts are slated to begin ahead of the duals with expected dates of June 2013 in Central Illinois and July 2013 in East St. Louis.
Of course, as we have experienced across various state Medicare programs, the dates are always subject to change and can sometimes be extended. With these significant expansions fast approaching, the decision to raise $550 million in convertible debt in February gives us added comfort that we have additional resources to manage through a period of strong growth.
We are now better positioned to fund extra requirements and to manage to the temporary pent-up demands and higher medical costs that we may experience while transitioning fee-for-service patients into managed care. Another recent development involving our fiscal agent services business in Louisiana.
As you may recall, in 2011, we received notice that the state intended to award the contract for replacement Medicaid Management Information System, or MMIS, to a different vendor. However, in March of this year, the State of Louisiana canceled its contract award to that vendor.
That vendor is currently challenging the contract cancellation. The state has informed us that we will continue to perform under the current contract until the successor is named.
Subject to the pending challenge, it is currently uncertain when a new RFP will be issued and, if so, when the award will become effective. If a new RFP is issued, we intend to participate.
In the meantime, we will continue supporting the state during this period of transition and we'll closely monitor any developments on this front. Now let's turn to the results of our core health plan business.
As I mentioned earlier, the operational results were strong across the health plans and we continue to see improvements despite difficult market conditions in Texas and Wisconsin. At our Texas health plan, we are pleased to have achieved our stated goal to reach financial breakeven by the end of the fourth quarter of 2012.
However, I would like to caution investors that, given a variety of problematic changes in Texas over the past year, profitability between the first quarter of 2012 and the first quarter of 2013 is difficult. By problematic changes, I'm referring to managed care expansions, rate adjustments and benefit carve-ins that we have highlighted during our previous calls.
Now looking ahead in Texas, we believe that the stabilization of that business now enables us to better understand the distribution of services. As a result, we will increase payments to personal attendant services and day activity and health services providers effective July 1, 2013.
John will talk about expected financial impact of this increase on our projected 2013 results. Last quarter, we talked about our progress in improving the financial performance of our Wisconsin health plan.
We are cautiously optimistic that our Wisconsin health plan is, indeed, turning the corner. Contracting efforts and a small rate increase that became effective in July have led to improved financial performance.
Our membership has grown from approximately 46,000 members at the end of the fourth quarter of 2012 to approximately 86,000 members at the end of the first quarter of 2013. Member growth is primarily in Milwaukee and surrounding counties, stemming from UnitedHealthcare's exit from the Southeast Wisconsin.
And at this point, it is too early to say what the impact of the additional membership will be on our Wisconsin health plan performance. Additionally, we experienced improved financial performance in this quarter at our Florida and our Ohio health plans.
On another front, I'm pleased to announce that we've expanded the size of our Board of Directors at Molina from 8 to 11 members and added Steve James, Daniel Cooperman and Dale Wolf as new independent non-executive directors. Steve James is a former audit partner with Ernst & Young with 30 years of experience, providing accounting, auditing and consulting services to health and managed care companies.
Daniel Cooperman is an attorney with the law firm of Bingham McCutchen. He has served as a Senior Vice President, General Counsel and Secretary at both Apple and Oracle.
Finally, Dale Wolf served as Executive Chairman of Correctional Healthcare Companies. He also previously served as Chief Executive Officer, Chief Financial Officer and Treasurer of Coventry Health Care.
We welcome Steve, Daniel and Dale and look forward to their contributions. In summary, during the first quarter, we solidified the progress we made during the second half of 2012.
We strengthened our capital position and we continue to prepare for the opportunities and challenges of the next several years. I would now like to turn the call over to John.
John C. Molina
Thank you, Mario, and good afternoon, everyone. Today, we reported net income of $30 million or $0.64 per diluted share compared to $0.39 per diluted share reported in the first quarter of 2012.
We are also increasing our previously issued guidance to reflect improvements in anticipated earnings per diluted share from $1.45 earnings per diluted share to $1.55 for 2013. I will come back to guidance after reviewing the results for the quarter.
Overall premium revenue grew to $1.5 billion, representing a 17% increase over the first quarter of 2012, mainly due to a shift in member mix, resulting from the growth in our aged, blind and disabled, or ABD programs, which generate higher premium revenue per member. Pharmacy benefit expansion at the Utah health plan and the inclusion of inpatient and pharmacy benefits at our Texas health plan also contributed to our revenue growth.
Medical costs were higher during the first quarter of 2013, primarily due to the shift in patient mix associated with the growth in our ABD patients, as well as the benefit expansions that resulted in higher revenue in Texas and Utah. More importantly, our medical care ratio decreased to 86% when compared to 88% in the first quarter of 2012.
The main drivers for the decrease in medical care ratio included retroactive rate increases for the California health plan and increased margins at the Texas health plan, as well as stable inpatient utilization. As it relates to rate adjustments in California, you will recall from previous conference calls that we've been reserving a portion of premiums received every month since July 2011 for the premium impact of the provider cuts called for by California Assembly Bill 97.
This quarter, we received confirmation from the State of California that it would not be seeking to recover those amounts. As a result, we recognized premium revenue previously reserved at the California health plan, which contributed approximately $18 million to pretax income or $0.24 per diluted share related to 2012 and 2011 periods of service.
In Texas, although the quarter reflects significant improvements to margins compared to last year, a year-over-year comparison is made difficult by significant programmatic changes implemented by the state. Among these changes were the expansion of Medicaid managed care into newer higher-cost regions; the extension of inpatient and pharmacy benefits carved into health plans; and a 4% rate increase, which was effective September 2012.
All of these changes occurred after the first quarter of 2012 but before year-end. During the first quarter of 2013, we also recognized 2 out-of-period accounting adjustments that resulted in a lower reported medical care ratio from the Texas health plan.
First, there was a $6 million out-of-period benefit related to performance measures for fiscal year 2012. Second, a $14 million benefit from favorable development of claims liability established for the health plan at December 31, 2012.
Absent these adjustments, our medical care ratio in Texas would have been approximately 86.6%. General and administrative expenses were flat quarter-over-quarter.
However, as Mario mentioned, the company issued $550 million of cash convertible senior notes in February of 2013. The coupon on these notes is 1 1/8%.
The issuance resulted in a recognition during Q1 of approximately $6 million in debt issuance fees recorded as part of interest expense. The remainder of those issuance fees will be expensed over the 7-year life of the notes.
In addition to providing greater flexibility on statutory equity requirements, issuance of the convertible notes also provides a payoff vehicle for our convertible notes issued in 2007, which mature in 2014. As of March 31, 2013, the company had cash and investments of approximately $1.6 billion.
Our parent company had cash and investments of approximately $450 million. As I mentioned earlier, in light of our strong first quarter results, the company is increasing its previously issued guidance from $1.45 to $1.55 in diluted EPS.
We believe the increase to our 2013 guidance of $0.10 per diluted share is a reasonable estimate in response the positive operating improvements we're seeing across-the-board, balanced by other factors that we anticipate will affect us during the last 3 quarters of the year. These factors include an increase in payment to certain providers in Texas that Mario mentioned and higher performance-based equity compensation.
As Mario mentioned, we will be increasing payments to certain providers in Texas effective July 1, 2013. We expect these payments will increase medical costs during the second half of 2013 by approximately $10 million or $0.13 per share.
Like we discussed in our proxy statement, the company will be increasing its performance-based equity compensation. As a result, we expect to incur approximately $13 million or $0.17 per diluted share of additional performance-based compensation.
We believe that performance-based equity grants better align management with a long-term interest of investors. Again, both the payment of the increases in Texas and the performance-based equity compensation are included in our revisions to guidance of $1.55 EPS, as we are -- now have better visibility into those items.
However, there are still a few items that are excluded from guidance. For example, we have also noted that certain administrative costs associated with membership growth related to the Affordable Care Act in various state duals initiatives were not included in our original or our revised 2013 guidance.
Guidance still excludes these costs due to a lack of current visibility and so the size of membership and the exact timing of the expected dual enrollment start dates. As we learn more, we will update.
We also anticipate that at some point in the near future, we will reach resolution with the California Department of Health Care Services on our other rate disputes in California associated with premium rates dating back to 2003 and 2004. However, we currently do not have enough information to predict the financial impact of any settlement.
This concludes our prepared remarks. Operator, we're ready to take questions.
Operator
[Operator Instructions] Our first question comes from the line of Ralph Giacobbe.
Ralph Giacobbe - Crédit Suisse AG, Research Division
I guess just a first real quick one. Just to be clear, in terms of the guidance of $1.55, is that going off the assumption of the $0.64 number in 1Q?
John C. Molina
Yes, it is, Ralph. And again, what we wanted to do here is provide a balance for a better underlying operating results, some one-time benefits and some of the additional charges that we know are coming in for the balance of the year.
Ralph Giacobbe - Crédit Suisse AG, Research Division
Okay. And then I guess I just wanted to -- I was hoping you could help me deal with some more context around the Texas provider payments.
Some more details on exactly who that's going to and just the rationale around that.
Terry P. Bayer
This is Terry Bayer. We are making a payment adjustment in the form of an increase to both the traditional caregiver providers, the personal attendant services and then the adult day health.
Those are the 2 categories, chiefly. There may be some additional homecare providers as we go through the details.
And the rationale is simply a better understanding of our underlying service bases and the cost structure on the plan. Last year, we were hit with a significant enrollment when we first started out and we wanted to be very cautious as to how we spent the revenue we were given by the state.
And as the rate increase came in and our experience gained, we were able to make an increase.
Ralph Giacobbe - Crédit Suisse AG, Research Division
Okay. And if I could sneak one more in.
Maybe just an update on where you stand in terms of the exchanges, how much you would expect to participate? How your negotiation with providers is going and the rate you expect to get?
Joseph Mario Molina
Well, Ralph, this is Mario. We do intend to participate in exchanges in those states where we have Medicaid contracts.
We're making good progress. I think the provider contracting is going fairly well.
And we anticipate being ready to participate in those programs on time.
Operator
Our next question comes from the line of Josh Raskin with Barclays.
Joshua R. Raskin - Barclays Capital, Research Division
I want to ask the same question, just maybe getting back to Terry on the Texas providers. So I understand you have a better understanding of your cost structure and you got the rate increases.
But what's the business rationale? Were you having trouble keeping docs in the network?
And were there access issues or why -- sort of why not just wait until, I don't know, the end of the year or something for annual negotiation?
Joseph Mario Molina
Josh, this is Mario. It's a combination of things.
First of all, as we have a better understanding in the patterns of utilization now, we can see where the costs are. The other problem is that in some of those -- in some cases, we are actually paying providers more than what they would've been paid under Medicaid.
So we're trying to come back to a more rational payment system that more fairly compensates the providers for what they're doing and aligns with traditional patterns. So it's really a function of the experience that we've gained over the past year.
We have plenty of providers. In fact, I think, we probably have more homecare providers now than we did a year ago, so getting more contractors has not been a problem.
Joshua R. Raskin - Barclays Capital, Research Division
So is it more you were denying certain requests for home health and now you're expecting a higher level of utilization of those services and that's what that's selling to or...
Joseph Mario Molina
No, I think it's more the case of getting it all rightsized. Again, as I pointed out, in some cases, we're actually pretty providers too much; other providers may have been paid too little.
Now that we see where the actual utilization is, we can adjust the payments accordingly and that's what we're doing.
Joshua R. Raskin - Barclays Capital, Research Division
Okay. I guess next question, any progress in terms of discussions with the state in California around a potential deal, sort of like what HealthNet did with their Medicaid program.
Joseph Mario Molina
Yes. Our next meeting to negotiate with the state is scheduled in about 3 weeks.
Joshua R. Raskin - Barclays Capital, Research Division
Okay. Do you would expect -- is that meeting in terms of you would expect some resolution at that point?
Or is that just another in the series of meetings?
Joseph Mario Molina
I think we're very close to getting a resolution.
Joshua R. Raskin - Barclays Capital, Research Division
Okay. Got you.
And just last question. On MMIS, I know it's a tough quarter in the fourth quarter.
Do you guys have an operating income number for that segment in the first quarter? I know you don't break it out in the press release anymore.
Joseph W. White
It's Joe speaking. You can lift it from -- it was what we expected, pretty much.
You can lift it from the -- you can lift it from the income statement. It's a revenue of about $50 million, expense of $40 million, so about a $10 million operating revenue.
Joshua R. Raskin - Barclays Capital, Research Division
All right. So that's actually a lot...
Joseph W. White
Observing the service revenue percentage.
Joshua R. Raskin - Barclays Capital, Research Division
So that's a lot better then, right? I mean, I think you guys had $8 million or so last year in the first quarter and then $0.5 million or so in the fourth quarter and so, sequentially, were up to $10 million?
Joseph W. White
Well, fourth quarter, remember, was hit by a lot of -- fourth quarter was hit by a lot of one-time charges. I think overall, we're expecting, if you were to remove those fourth -- and we went through this in guidance in New York, if you were to remove those fourth quarter charges from 2012, we're going to see a little bit lower performance in 2013, just getting some contract changes.
But it's, suffice to say, it's moving along just like we expected when we gave guidance back in February.
Operator
Our next question comes from Sarah James with Wedbush.
Sarah James - Wedbush Securities Inc., Research Division
I hate to keep going back to this but I'm still just a little bit confused about the voluntary payment increase in Texas. So I'm just wondering if this is just a straight-up unit price increase for what you're paying per hour.
Or if maybe there is a shift to a different cost structure here, like a flat per week or per month that you think, in the long run, will benefit you. And I guess what I'm trying to get at from that is also if it is just hourly increase, if you're going to see these personal attendants starting to persuade the people they care for to switch over to Molina and if that may drive some sort of negative selection.
Joseph Mario Molina
Well, again, this is about paying the providers correctly, based on the utilization of services that we're seeing in the distribution. And I don't think that we expect to see any shifts in the patient population.
Likewise, I don't expect to see much of a change in our provider network. I think this really reflects having a year's worth of data under our belts.
And I think that we made some incorrect assumptions initially when we started paying the claims and we were able to correct those.
Sarah James - Wedbush Securities Inc., Research Division
Got it. And could you guys update us on the impact of the Medicare risk model update?
And how do you see that impacting your payments?
Terry P. Bayer
On Medicare? With the current?
Sarah, just sort of flesh out that a little bit more. You mean in terms of the sequestration cuts?
Or just in general Medicare advantage pricing?
Sarah James - Wedbush Securities Inc., Research Division
In the updates to the risk scores, United had talked about it being maybe 200 basis points based on their book. WellPoint had said it was closer to -- or sorry, United is 250 and WellPoint, 200.
So I know it hits every company different based on what the risk scores of your book is and what the health conditions are. So if you guys could just talk a little bit about how you're seeing it working through based on...
Terry P. Bayer
Well, let me just back up. We're not prepared to really quote any direct impact from risk scores.
There were some cuts to the Medicare rates by -- as a cause of sequestration and we have passed those onto the providers. That's separate.
Now when you start talking about risk scores, we are still submitting additional information to CMS and waiting for information that we will receive sometime in June, which will reset our rates considering our risk course. That'll be a retro back to January and then going forward from July.
But we don't yet have the results from our more recent submissions. And by that, I mean, we seek additional information from the medical records to ensure that we've appropriately documented the diagnoses.
We get them into CMS and then they award us associated revenue.
Operator
Our next question comes from Peter Costa with Wells Fargo.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
The California subcontractor relationships that exist between yourselves and other Medicaid plans, have you furthered the conversations with those regarding the duals if that will carry to the dual eligibles? Where does that stand at this point?
Joseph Mario Molina
That issue is currently is ongoing.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
So there's no further view on your part as to whether that will continue or not?
Joseph Mario Molina
Not at this point. We're not prepared to comment any further at this point.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
Okay. And in terms of the settlement with California.
One of your competitors has already done that settlement and then gave them a rate going forward. You talked about settlement regarding historical issues.
Do you expect to be paid any amount historically? Or do you think that'll all be resolved, more or less, in a rate structure going forward?
John C. Molina
It's our -- this is John. It's our assumption that the State of California is going to want all the settlements to be on the same construct.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
Okay. And given that they already have that and have for some time now, almost 2 quarters now, with one of your competitor plans, what is the holdup?
Do you perceive their contract to be somehow not as good as what you're looking for? Or does the state want to give you a different contract for some reason?
What exactly is the holdup at this point?
John C. Molina
I think the biggest holdup is that there's an awful lot of stuff going on right now at the Department of Health Care Services, trying to do Medicaid expansion, moving with a bunch of the -- to shift members into the Medicaid program, trying to get duals off. So it's more of a factor that they've got a lot of competing priorities, then there's any adverse discussions going on with us.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
Okay. And then just a last question, if you don't mind.
Help me out with the math a little bit on the fees on the debt going forward. $6 million this quarter, just a straight 1 1/8% would be like $1.5 million in future quarters.
But I know there are some fees and other things that affect the actual expense line. Can you help us understand impact quarterly?
Joseph W. White
It's Joe speaking, Peter. We recall the expenses on the offering were about $16.5 million or $17 million.
There's a proration of those expenses between the convert and the elements of the call spread. That pro-debt, that's proration.
What is assigned to the call spread gets expensed immediately, which is why we mentioned that calling at about $6 million of expenses tied into the -- for fees for the first quarter. So the remaining $11 million -- $10 million to $11 million or so were amortized pro rata over the life of the notes.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
Great. That's the only other impact to -- besides the interest itself?
Joseph W. White
Correct.
Operator
Our next question comes from the line of Scott Fidel with Deutsche Bank.
Scott J. Fidel - Deutsche Bank AG, Research Division
First question, just if you have any updates you can give us on how the conversations are proceeding with the states around the industry tax for 2014 and feedback from the states on how they plan to build that into the rates. Obviously, there's already been a lot of focus on Florida with that, but just interested if any of your other states has given you any feedback yet so far.
Joseph Mario Molina
This is Mario. We have not gotten a lot of feedback on that issue but I think that, perhaps, the best piece of information we have is a letter that was written by the Republican Governors Association, acknowledging that this is a tax that's going to affect state Medicaid programs.
Scott J. Fidel - Deutsche Bank AG, Research Division
Okay. Then just wanted to return just to the Medicare question, I think that Sarah had asked.
And I think, Terry, you talked a little bit about the 2013 impacts. But just interested if you've been able to do the analysis, the company's been able to do analysis yet on the proposed change to the risk adjustment model, the HCC model that starts in 2014 with the 75% phase-in, just given particularly some feedback that's been out in the industry about those changes to the risk adjustment model, having a more significant impact on higher acuity members with higher frailty.
So just interested if you're thinking there could be a more significant impact to Medicare SNP plans, granted, though, that Medicare is a pretty small amount of your overall revenue.
John C. Molina
You're right. Right now, Medicare is a smaller portion of our revenue and we're still looking at what we think the projected impact will be.
Scott J. Fidel - Deutsche Bank AG, Research Division
Okay. Then just last question.
Can you break out what the revenues are that you're accruing from the Louisiana MIS contract? Just interested in what the overall mix of revenues from that contract is relative to the total MIS book.
John C. Molina
I think it's around $35 million a year.
Operator
Our next question comes from Carl McDonald from Citigroup.
Carl R. McDonald - Citigroup Inc, Research Division
To help with the -- just understanding the run rate in the first quarter. Was there any impact from the flu?
I know it didn't have much of a hit in the fourth quarter.
Joseph W. White
It's Joe speaking. Certainly, the external indicators indicate that flu was more prevalent in our parts, at least in our states.
I won't say our markets. We saw more TAMIFLU utilization.
But overall, we just didn't see anything this quarter that would indicate it was anything out the normal in terms of the flu season. We haven't quantified anything for the simple reason we haven't seen any indication there's a whole lot abnormal to quantify.
Carl R. McDonald - Citigroup Inc, Research Division
Okay. And then it's a smaller market for you, but you talked about in Utah a 16% rate increase.
The loss ratio in the market certainly picked up a little bit in the first quarter but not nearly as much as what a 16% rate cut would imply. So just be interested in whether that cut didn't go through to the full effect or if you were able to offset the bulk of it and, if so, how?
Joseph W. White
Well, there's a lot to -- it's Joe speaking. There's -- bear in mind, there's a lot of factors in Utah beyond that Medicaid rate cut, which was -- it was a cut of 16%.
Utah has a high percentage of Medicare membership. Among our states, it's the highest with Medicare membership selectivity.
And that Medicare business is going to be factored into the MCR you've seen in the financials. We also have a pretty strong, a pretty hard CHIP product there, it's a pretty strong CHIP membership.
And lastly, we had the pharmacy benefit carved in this year. And then we relay onto that, I think the team there has done some very good work with patient care that has positively impacted both patient care and medical costs.
So I think you have to look at the context of all of those other factors there. And it was a 16% cut but it's -- when you layer it with 3 or 4 other factors, it ameliorated that in the consolidated results.
Operator
Our next question comes from Michael Baker with Raymond James.
Michael J. Baker - Raymond James & Associates, Inc., Research Division
I was wondering if you could update us with respect to your strategy around behavioral health management in light of, over time, you addressing or managing the duals. Trying to get a better sense for whether that will vary market by market, if there are plans, at this point, to insource some of the capability.
Just trying to get a general sense of your thoughts on that part of the business.
Terry P. Bayer
This is Terry. Yes, we are insourcing our behavioral health management.
And over time, we've been doing that for a number of years as contracts with outside vendors expired. We have recently hired a new physician leader for our behavioral health initiatives company-wide.
And we have an overall philosophy on the integration of behavioral and physical health, as well as extensive community-based social support system. So that's the overall philosophy.
It will be tweaked state-by-state because there are varying state regulations that often play into the fold, as well as an incorporation of the pharmacy benefit. So in general, insourced and same philosophy.
Michael J. Baker - Raymond James & Associates, Inc., Research Division
So can you give us a sense on which markets are still outsourced?
Terry P. Bayer
No.
John C. Molina
And we don't want to provide that level of detail.
Operator
Our next question comes from Kevin Fischbeck with Bank of America.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
I guess it sounds like California, I think, gave the plans, the dual rates, a couple of days ago. I don't know if you had any initial views on those rates.
Joseph Mario Molina
And we received the rates night before last. We're still analyzing them.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. So it's too early to have any kind of initial view on it?
Joseph Mario Molina
Correct.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. And then I guess you mentioned that the California settlement, the prior period, fortunately, had some costs associated with it.
But then you mentioned an ongoing $400,000 benefit per month to premium. Are there any costs associated with that?
Or is that a good number to think about as a net number as well?
Joseph Mario Molina
It's Joe speaking. There'll be a small number of costs associated with that, but very small.
So we'll keep 80% or 90% of that amount.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. And then this $0.06 performance bonus related to Texas.
So it sounds like Texas has changed the methodology for performance bonus for 2012. Is that change going to maintain in 2013?
Therefore, is there a view that, that $0.06 is now recurring? Or are you kind of booking that more normally going forward?
Joseph W. White
No, the state -- it's Joe speaking. The state changed the metrics in 2013.
So this will have no impact in 2013.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
No impact in 2013. Okay.
And then any update on the Medicaid-Medicare parity for physicians? How are you incorporating that in your guidance?
And did that have an impact on your numbers?
John C. Molina
You mean that program that went into effect on January 1?
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Yes.
Joseph Mario Molina
No. No update yet.
We're still waiting for the states to give us guidance on how to pay that and get those state plan amendments done.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. Is that supposed to be a net neutral to you?
Or is there an impact either way?
Joseph Mario Molina
It should be, more or less, neutral to us, although because we have to staff model clinics, there may be some positive impact because as we employ these physicians, some of that money will remain with the company.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. And then last question, just trying to understand the 2 data points that you mentioned as headwinds to the guidance for this year.
So if I think about that the Texas provider rate increase, I guess that's about $0.13 this year. But I guess it will be $0.26 for the full year next year?
Is that the right way to think about that?
Joseph W. White
All things being equal, that's correct.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Is there any thought that your paying them more might result in a better rate increase, prospectively, and that the net number for next year might be less than the annualized second half of this year?
Joseph Mario Molina
I don't think so. I think the rates are going to be based on utilization and based on risk adjustments.
So I don't think paying the providers more is necessarily going to lead to us getting a greater rate increase.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. And then as far as the executive incentive comp number, it sounded like that only was in place for March.
So that $13 million, which might be $0.16, $0.17, that number is going to be more like $16 million next -- for the full year next year?
John C. Molina
It probably depends on when the performance measures are met. And let's face it, if the performance measures are met, that means we're doing a great job with our -- executing our strategic plan.
So let's hope that gets fully expensed.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. But I guess all else equals, I mean, assuming you hit it this year and next year, the number next year will be about $3 million higher than the number this year?
Joseph W. White
Well, it's Joe speaking. Those -- the compensation committee, the company revisits those measures and that compensation every year.
So it's a little bit premature to speculate on what that would mean for next year.
Operator
Our next question comes from the line of Brian Wright [ph] with Monte Press [ph].
Unknown Analyst
Real quick. And I apologize if I may have missed this.
But the midyear RSA proposed rate increase in Texas, is that included in the numbers? Or are you going to benefit from that at all?
Joseph W. White
There was a slight adjustment to our rates, Brian, but for the most part, those were targeted at service areas that we don't participate in.
Unknown Analyst
So nothing for Hidalgo then?
Joseph Mario Molina
We're not expecting to see much of a rate increase as a result, no.
Operator
Our next question comes from the line of David Windley with Jefferies.
David H. Windley - Jefferies & Company, Inc., Research Division
So I believe that you're continuing to not include in guidance an amount of admin spend to prepare for what I think is Medicaid expansion 2014. I guess I wonder, a couple of things: one, what elements of visibility are you still waiting to get to be able to quantify that; and then, two, is that essentially an onboarding expense that would be somewhat one-time?
Or is that a step-up to a higher level of expense for an admin standpoint for that amount?
John C. Molina
This is John. If you recall with our Investor Day, we sort of broke our rate in this class into a couple of buckets.
One was just the basic infrastructure that we've got to do regardless. That's setting up the new benefit packages and the IT systems, getting the provider contracts written for things like exchanges, et cetera.
And then the other piece was that variable piece, really tied to the membership increases. And it's a latter piece that we don't have great visibility on yet with respect to some of the Medicaid expansions, some of the exchanges or insurance market prices and some with the duals.
And these are programs that we think will take flight in 2014. But in a number of our states: Texas; Florida; Ohio; Michigan, we don't know as of today what the Medicaid expansion is going to look like.
We don't know if they're going to be ready to start marketing their insurance marketplace in October. So we have the basic infrastructure piece but it's the variable piece that the additional employees that we have to hire to handle a membership that we don't quite know yet.
And as soon as we get some information on when these programs are expected to start and how many people they're expecting to cover, we can then adjust our guidance and give you folks additional information.
David H. Windley - Jefferies & Company, Inc., Research Division
Got it. And so your description, that answers the second part of my question, which is that should be an ongoing expense.
Once you ramp that up, that will be in place to service that higher membership.
John C. Molina
Correct. But it will be ramped up because of the higher membership.
David H. Windley - Jefferies & Company, Inc., Research Division
Right. Right.
Coming back to just earnings and wanting to make sure I understand and reconcile some of the pieces. So in the first quarter, the $0.64, relative to Street 25, am I right that about $0.24 is California retro rate?
Texas retro is about $0.08? And then on the flip side, your additional carrying costs for debt are about $0.08 as well?
Is that pretty close?
John C. Molina
Yes. I've articulated the main sort of one-time items in the quarter.
However, as you've listened to our calls, we're really hesitant just to focus on a few one-time items. There's lots of stuff happening in the business, up and down, that we don't point out.
So that's why we hate to just look at a quarter isolation and say, "That's a run rate." That's a point, not a run rate.
Operator
Our next question comes from the line of Matt Borsch with Goldman Sachs.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
A question on the -- just right back on the earnings trajectory. The $0.08 that you referenced, wasn't that already reflected in the Investor Day guidance when you brought -- when you did the new debt issuance?
Maybe...
Joseph Mario Molina
I'm sorry, it's Joe, the $0.08, a portion of it was, yes. We fine-tuned our calculation of expense for the year and I think there's about a -- I think expense recognition for the year is going to be about $3 million, $2 million or $3 million more than we anticipated back in New York.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
All right. I get it.
I get it. Because it just looks like your outlook for the back 9 months is maybe somewhat conservative in light of some of the margin improvement that you're seeing.
And I know you're not giving quarterly guidance but, I mean, is the trajectory going to be sort of $0.20, $0.30, $0.40, as we look ahead? Or is it going to be less sloped?
John C. Molina
This is John, Matt. Again, we had -- we've had a good first quarter.
I think the last 2 quarters, what we're seeing is the operational improvements taking hold a bit faster than we anticipated. But the last thing we want to do is start to run ahead of ourselves.
And so you know how volatile this business is, so we tried to paint a nice middle path until we get another quarter to it under our belts.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Yes, yes. That makes sense.
And coming back to the additional provider payments in the back half with -- am I correct in sort of understanding that what you're taking a longer-term view here and you're saying you had these providers who were making up for a very low or, let's say, on the low side unit payments by making it up on volume, if you will. And you're bringing them into a program where they're doing volume in a more appropriate level and you want to pay them more per unit?
Is that correct, or partly correct?
Joseph Mario Molina
Well, if you recall last year, we made some cuts to the provider payments for the personal attendant services and the day healthcare services. And we also -- so we are restoring some of those cuts, but it's not an exact restoration because the increase in payments is going to more closely match the distribution of the utilization of services.
When we set up our payments last year, we made certain assumptions about the utilization of services, which turned out not to be correct. Now that we have a better picture of the pattern of utilization, we are increasing the payments to the providers to reflect the services they're providing.
So it is an increase in unit cost but it's also a change in the distribution of utilization in connection with that.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Got it. Got it.
Okay. That makes sense.
And I guess the last question. Anything to note on the longer-term growth pipeline that may have changed from the Investor Day view?
Joseph Mario Molina
No, I don't think so. We continue to think that there is a good opportunity for growth in these Medicare-Medicaid contracts.
We think there will be some expansion to Medicaid. It's become more complicated now with the politics that are involved, with governors proposing to increase enrollment and legislators pushing back with this concept of the Arkansas experiment, which we are not in Arkansas and we're not sure how widely that will be adopted.
But overall, we still feel confident about the opportunities and the numbers that we've quoted and we're feeling more comfortable about exchanges as well.
Operator
Our next question comes from the line of Chris Rigg with Susquehanna Financial Group.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
I just wanted to come back to the guidance for a second and the other revision here. And I apologize if I missed it.
But there is sort of 5 major items that you guys piped down. The AB 97 of the Texas performance base change, the Texas PPD, then the Texas provider payment in the performance-based comp.
Can you -- what was in the prior guidance and what's new?
John C. Molina
The California ABD increase was in guidance. We just didn't have a really good, specifically quarterly, we didn't have it specified in any particular quarter.
The increase in the equity comp was not in. The increase in the Texas provider rates was not in.
And the -- what was that?
Terry P. Bayer
I think the performance...
John C. Molina
I think the performance was not in.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Okay. So California was in and, basically, everything else was not?
John C. Molina
Correct.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Okay. And then, I guess, outside Texas, is there any notable development?
Was there any notable development in the quarter?
John C. Molina
Outside Texas?
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Yes.
Joseph Mario Molina
Prior to the development?
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Yes.
Joseph W. White
No, no, it was pretty consistent.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Okay. And then I guess last question, somewhat philosophical and then also quantitative in a way.
I guess, when we think about the California duals, I guess sort of philosophically, I mean, not being able to sort of mandate the Medicare side of the payment, does that at all change sort of the attractiveness of the market, meaning that you have less ability to sort of manage the overall costs? And then, two, if you exclude the Medicare portion, what do you think that does to rates on a relative basis?
I know you don't want to give a sort of specific numbers, but does it drop the rates? How much percentage-wise?
Joseph Mario Molina
I love this. So you're asking us to give you a philosophically quantitative answer.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Exactly.
Joseph Mario Molina
The duals' opportunity in the counties that we're in, in California, is roughly almost 400,000 beneficiaries. There's a huge opportunity.
Especially when you compare it to states like Ohio and Illinois where we're also participating. So you see that California really dwarfs most other states and roughly 11% of all the duals in the country reside in California.
We have participated in this program as a Special Needs Plan. We're the seventh largest Special Needs Plan in the country by enrollment.
And that has all been voluntary. So no, I don't think the fact that they're going to be able to opt out deters us in any way because enrollment in these plans, as far as we're concerned, has always been voluntary.
And so our goal is to try to convince the beneficiaries that there is a benefit to them to remain with us. But we've always assumed that, I think in our assumption, about 40% to 50% were going to opt out.
So no, I don't think it changes anything.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Okay. And then just on the latter part, any way you can directionally sort of guide us if you're expecting $1, if you're getting both portions, what that $1 would be if you're just getting the Caid component?
Joseph W. White
No, Chris. We're still looking at that stuff.
Operator
Our last question comes from Tom Carroll with Stifel.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
So I jumped on late as well. I apologize.
A question on Texas and the favorable development that you said related to the liability, the claims liability that was established at the end of last year. I guess just 2 questions on that.
Did all of that support first quarter earnings? And secondly, how much remains on that reserve that you established for future periods?
Joseph W. White
Okay. So Tom, you know how much we love to talk about reserves and roll-forwards.
$16 million was what we had accrued -- what we took in the income in Q1 based on the liability we established at 12/31. So that whole $16 million benefited Q1.
What we didn't talk about and we have no way to know just yet is how much of excess reserves have we built in as we put in the reserves for Q1. It's always a matter of taking excess out from the past periods and building up the current period.
So we don't know to what extent future periods will continue to have a prior-period development in Texas on a favorable basis.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
I guess I'm referring to this -- I'm referring to this [indiscernible] $5 million.
John C. Molina
He's talking about the premium sufficiency reserve we took, I think.
Joseph W. White
No, no, right. It's Joe speaking.
I know -- John, to confirm, he's talking about payable prior-period development primes. So Tom, I can't do anything other than reiterate what John said.
It was certainly more favorable prior-period development that we typically see in the health plan, hence we've called it out. We try to set the reserves as accurately as possible every quarter.
So all things being equal, there would be much less favorable development in future periods.
Operator
That was our last question. I'll return the call back to you, Mr.
Orellana, for your closing remarks.
Juan Jose Orellana
Well, thank you for joining us during today's call and we look forward to talking to you next quarter.
Operator
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.