Oct 30, 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 Joseph W.
White - Chief Accounting Officer
Analysts
Justin Lake - JP Morgan Chase & Co, Research Division Joshua R. Raskin - Barclays Capital, Research Division Sarah James - Wedbush Securities Inc., Research Division Kevin M.
Fischbeck - BofA Merrill Lynch, Research Division Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division David H.
Windley - Jefferies LLC, Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Carl R. McDonald - Citigroup Inc, Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare Third Quarter 2013 Earnings Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded, Wednesday, October 30, 2013. I would now like to turn the conference over to Juan José Orellana, Senior Vice President of Investor Relations.
Please go ahead, sir.
Juan Jose Orellana
Thank you, Circe. 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, 2013. The company's Earnings Release 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 Chief Operating Officer; 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 judgments as of October 30, 2013, 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 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. And hello, everyone.
Our third quarter results once again demonstrate our ability to strengthen our company by capturing the long-term opportunities available to us while executing our near-term initiatives, such as organic growth, acquisitions and operational improvements. And while 2 items, the prior period developments in Texas and the ramp-up of general administrative costs associated with building for future growth, affected our strong operating results.
We are pleased with the quarter, particularly since the medical margin improved in all but one of our health plans. John will discuss in greater detail our financial results for the quarter during his remarks.
Let's start with a topic that's generated considerable media coverage in the last few weeks: the marketplace. As you know from all the headlines, the rollout of the Affordable Care Act program has been stalled by technical difficulties with federal and state health insurance marketplace websites.
Please remember that we are participating in the marketplaces in 9 states, where there is a mix of federal and state-run health insurance exchanges. However, given the technical difficulties and the reliability of the information, we believe it is premature to comment on enrollment figures at this time.
We are focused on improving our marketplace platform by continuing to build on our provider network, preparing our call centers to take additional calls and in making our own web portal more robust. Investments in the operational readiness of our platform must be made regardless of the enrollment.
Lastly, in anticipation of glitches with the health insurance marketplaces, we had delayed some of our marketing and outreach activities to the second half of the fourth quarter to allow for more time for website fixes. Given the current struggles and confusion associated with the marketplace rollout, we will be increasing our initial fourth quarter sales and outreach activities as well as generating progress -- product awareness through advertising.
We will continue to monitor any developments in the marketplace and respond accordingly. Another key provision of the Affordable Care Act is the expansion of Medicaid coverage to anyone whose income is at or below 138% of the federal poverty line.
Last week Governor John Kasich of Ohio announced the approval of Medicaid expansion, meaning that an additional 275,000 low-income Ohio residents will now be eligible for health care under the Medicaid program. Ohio is our 4th largest health plan in terms of enrollment, and as of July 1 of this year, we began operating statewide.
This development brings to 6 the number of states in which Molina operates that are pursuing Medicaid expansion. Ohio is expected to implement the expansion of the Medicaid program on January 1, 2014.
So we will begin hiring additional staff to accommodate that growth as needed. Outreach and awareness generated by the marketplace rollout and the expansion of Medicaid are likely to result in a welcome-mat effect.
The welcome-mat effect describes the behavior of many people who are currently eligible but not enrolled in Medicaid, who, as a result of the marketplace awareness, will become enrolled in Medicaid. We believe this welcome-mat effect is likely to result in growth in Medicaid enrollment, even in states where there is no planned Medicaid expansion, like South Carolina, Texas and Wisconsin.
Earlier this week, the Wall Street Journal and other publications have reported a surge in Medicaid enrollment across certain states. In Washington, for example, 87% of those joining new plans during the first 3 weeks of October were joining Medicaid plans.
While it's too early to know how many of those enrolling were already eligible for Medicaid, it suggests that a large percentage of individuals seeking health insurance in the marketplace actually qualify for Medicaid. As it relates to the dual-eligible program, the implementation date for Illinois has slipped again.
The program is now expected to begin on February 1, 2014. These types of delays extend the length of time in which we are incurring administrative costs without any revenue.
As Terry discussed at the investor day, in some instances, programs have been delayed even after we passed readiness reviews, as was the case in California and Illinois. And we've also taken an important step in South Carolina as we successfully completed the application process for the South Carolina dual-eligible demonstration, and we will move to readiness review.
As of today, the dual-eligible program start dates for our 4 other states, in addition to Illinois, remained unchanged. And they are as follows: Ohio, March 1, 2014; California, April 1, 2014; South Carolina, July 1, 2014; and in Texas, January 1, 2015.
Last week, our Florida health plan was awarded Medicaid contracts for 3 regions by the state of Florida that include Miami-Dade, Orlando and Palm Beach. These contracts are expected to commence on second or third quarters of 2014.
We expect that these awards will allow us to increase our Medicaid managed care membership. We're pleased to continue to provide quality health care services to Florida's Medicaid and Medicare beneficiaries.
When combined with our Florida plan's long-term care contract, our Medicare Special Needs plan and marketplace offering, these contract awards mean that Molina Healthcare Florida will remain a strong presence in that state. As a reminder, the Florida long-term care program, through which we will provide institutional and home and community-based services to beneficiaries, is scheduled to begin in its first region on December 1, with additional regions following in 2014.
I also want to update you on the start-up of our Illinois health plan. In September, we enrolled our first ABD members.
We expect enrollment to grow slowly in the fourth quarter as the state has delayed ABD passive enrollment. As I mentioned a moment ago, we also expect enrollment of our first dual-eligible members in Illinois in 2014, albeit delayed from January to February.
Next, I am pleased to report that we have reached a final agreement with the state of California on several Medi-Cal disputes dating back to 2003. This agreement is significant because it will extend our existing contracts for an additional 5 years while helping to protect the margins of the California plan moving forward.
In addition, the agreement also includes a contract award for Imperial County, a new service area adjacent to San Diego County, expected to commence on November 1, 2013. As you can see from the efforts underway, we continue laying the groundwork for additional growth in 2014 and beyond.
However, even during this highly active period, we have continued our focus on quality. That focus is evidenced by the recent announcement from the National Committee on Quality Assurance of the inclusion of Molina Healthcare's eligible health plans in NCQA's Medicaid Health Insurance Plan Rankings for 2013.
Molina's health plans have consistently been accredited and ranked for quality by NCQA. Molina Healthcare Utah is the only Medicaid plan in the state of Utah that is accredited by NCQA, and Molina Healthcare's Medicaid plans in New Mexico and Washington are the highest-ranked plans in their respective states.
Another indication of our continued commitment to quality comes from this year's progress on the Medicare STAR ratings. Each year, the Centers for Medicare and Medicaid Services assign ratings of 1 to 5 stars to Medicare plans to make it easier for consumers to compare them.
This year, all of our Medicare plans earned 3 or more stars, an improvement over the previous year. This is important because earning 3 or more stars makes us eligible for passive enrollment of Medicare beneficiaries in the new Medicare, Medicaid or duals contracts.
I want to remind everyone that the 2013 influenza season is now upon us. While the flu isn't always thought of as a life-threatening illness, the dangers and complications that influenza can have on the elderly and children can be quite severe.
Influenza can be fatal even in children without high-risk medical conditions. This highlights the importance of recommendations that people, including all of you on the call today, should receive annual flu shots.
We will be redoubling our efforts to encourage our members to get vaccinated. In closing, during the third quarter, we accelerated our preparations for growth in 2014, even as we took immediate steps to grow our business now.
We've closed on our acquisitions in New Mexico and South Carolina. We welcomed our first members in Illinois, and we continued to prepare for expansion opportunities in 2014.
I'll now turn the call over to John.
John C. Molina
Thank you, Mario. Good afternoon, everyone.
Today, we reported net income from continuing operations of $0.16 per diluted share, compared to a net loss from continuing operations of $0.01 per diluted share reported in the third quarter of 2012. Significantly, we experienced negative prior period development in our Texas health plan of $14 million, which represented approximately $0.16 per diluted share.
This negative PPD largely relates to claims incurred in 2012. We are pleased with these results, which, with a couple of exceptions, were consistent with our expectations.
We continue to benefit from our efforts to deliver medical care more efficiently. We increased our revenue as a result of our recent acquisition in New Mexico, and our revenue diversification efforts continued to bear fruit.
On the other hand, administrative expenses related to the revenue we won't receive until 2014 reduced our earnings. And we continue to be concerned about the adequacy of premium rates for California ABD population.
With that said, let's look at the third quarter in more detail. Premium revenue in the third quarter grew to $1.6 billion, representing a 9% increase over the same period last year.
The increase in premium revenue was mainly driven by a 5% increase in enrollment and a 4% increase in revenue per member per month. As I've just noted, we have made substantial progress in delivering medical care more efficiently.
Our consolidated medical care ratio decreased to 87.3% in the third quarter of 2013 compared with 91.1% in the same period last year. Medical care ratios decreased and medical margins increased at all health plans except Florida.
Put another way, per-member per-month revenue grew by almost 4%, while medical costs per-member per-month held steady. This is clear proof of improved core operational performance and gives us confidence as we prepare for growth next year.
Revenue diversification remains an important part of our focus. Efficient operations across multiple health plans, which we demonstrated again this quarter, are important if we are to withstand the temporary setbacks that occasionally affect any single plan.
I also want to emphasize the continued strong financial performance of our Molina Medicaid Solutions segment. We haven't spent much time talking about MMS in the last couple of years, but our financial results in that business have been very satisfying.
Revenue diversification will be even more important over the next year or 2. As we begin serving members under a large number of new programs, there is a chance that rates may not be set adequately at the start of these programs.
We're confident that rates will improve over time as more information is learned about these populations. But in the short run, we may experience considerable financial pressure.
We believe that our broad diversification across geographies and programs will enable us to better withstand any potential errors in rate development by the state. Our belief in the importance of revenue diversification has driven our recent acquisitions in New Mexico and South Carolina as well as our recent start-up in Illinois.
Moving on to administrative costs. As we have said before, there is a lot of effort involved in preparing for the new revenue we will realize in 2014.
We've spoken at length about our Medicare, Medicaid and marketplace opportunities in 2014. But even beyond that, we are gearing up for expansion into long-term care services in Florida and into both long-term care and behavioral health services in New Mexico.
In South Carolina, we are preparing to bring on an entirely new health plan in January and a Medicare-Medicaid Plan later in the year. And in Illinois, we do not expect to have meaningful enrollment until early next year.
For some time now, we have been incurring considerable expense to build the infrastructure to support these initiatives. That infrastructure build continues as these new opportunities.
For example, in South Carolina and in Texas, dual-eligible opportunities come into focus. Much as with an acquisition, we need to invest money in administrative infrastructure before we can realize the benefits of the new revenue.
But unlike an acquisition, where most costs are capitalized, many of these costs are expensed immediately. In addition to infrastructure expenditures, we are now seeing increased G&A spend for the operational ramp-up of some of these opportunities.
We are now hiring more member services, claims and care coordination personnel to support our marketplace and Medicaid expansions and the additional membership in Ohio, Illinois, New Mexico and Florida beginning in January. To give you an idea of the scale of these efforts, let's look at our Illinois health plan where we don't expect meaningful membership until early next year because of the state delay in ABD auto assignment.
In Illinois, we incurred $2.5 million in administrative expense in just the third quarter. To support that expense stream, we only had 188 members in September, the first month for which we had any membership in Illinois at all.
Despite the delays in implementation, regulators expect us to be fully staffed. The result of these efforts across the company is that G&A increased during the third quarter of 2013 to 10.4% of total revenue, compared to 8.2% of total revenue for the same period last year.
We estimate that we incurred about $30 million of general and administrative expense in the third quarter related to future revenue. As I will discuss in a moment, this spend will grow considerably in the fourth quarter.
I also want to remind everyone that premium rates are still a challenge. Our Texas health plan received a 6% rate increase effective September 1, but our Michigan plan received only a 1% increase effective October 1.
Our Ohio health plan actually received a combination of premium decreases and increases to fee schedules affective July 1, 2013, that had the effect of a 3.5% decrease to medical margin as a percent of premium revenue. Specifically, premium revenue in Ohio decreased due to an overall premium rate reduction and a decrease in ABD risk adjustment revenue, while costs increased due to a rebasing of inpatient fee schedules.
We disagree with some of the state's assumptions related to these new rates and are pursuing the matter with the state. In California, we are expecting a rate increase of about 2% effective October 1 and another 2% effective January 1.
We still do not believe that California rates are adequate to put a medical benefit provided to ABD members. As we move into 2014 and realize revenue growth, we expect our financial focus to shift from G&A costs to premium rates.
At this juncture, there are no states that have set rates for the Medicaid expansion populations. And while we remain confident that the states will reimburse us for the industry excise tax included in the Affordable Care Act, the outlook for reimbursement for the income tax consequences of that excise tax is somewhat less certain.
We continue to engage in discussions with our state partners on this issue. Several states have told us they are awaiting instructions from CMS.
We will continue to emphasize the importance of adequate premium rates in improving quality of care and encouraging better health outcomes. Moving to the balance sheet.
At September 30, 2013, the company had cash and investments of almost $1.7 billion, including approximately $470 million at our parent company. Cash flow from operations in the third quarter was artificially increased by the timing of receipts and payments for a number of items, including deferred revenue, accounts payable and payments that we process on behalf of our state partners without assuming any medical cost risk.
We anticipate many of these items affecting cash flow will reverse in the fourth quarter. Days and claims payable increased from 38 days at June 30, 2013, to 41 days at September 30, 2013.
This increase is not impacted by the payable related to the pass-throughs that I just mentioned. Based on our year-to-date results, as well as better visibility into administrative expenditures in the fourth quarter, as we've just discussed, we have lowered our full year earnings guidance and now expect earnings per share from continuing operations to be approximately $1.15 per diluted share for the year ended December 31, 2013.
At $1.15 per diluted share, our 2013 estimates still represent a considerable year-over-year improvement when compared to the $0.21 per diluted share reported for all of 2012. As we discussed at Investor Day, adjusted net income per diluted share is a key metric for us.
Therefore, on an adjusted net income per diluted share basis, this translates into approximately $3.20 per share for our guidance for 2013. We will be referring to this metric more in the future.
Some of you joining us today may be questioning our guidance reduction after announcing a part of that, except for the unexpected provider costs in Texas, matched our expectations. Simply put, we now expect the fourth quarter administrative costs to be even greater than we originally anticipated.
Delays in enrollment at the Illinois health plan, a delayed start-up in our South Carolina operations and our expansion into Imperial County in Southern California mean that we will incur even more administrative costs without related revenue in the fourth quarter. Equally important, as a result of problems with the marketplace websites, we've decided to increase our advertising and other member outreach expenditures in the fourth quarter.
If necessary, we will continue this increased spend into 2014. As Mario mentioned, we have reached final agreement with the state of California on several Medi-Cal disputes dating back to 2003.
The financial terms are consistent with a tentative agreement that we shared with you at Investor Day. A settlement account applicable to our Medi-Cal TANF, medical ABD and dual-eligible lines of business in California has been established.
After each period, the account balance will be adjusted to account for a deficit or a surplus. Generally speaking, a surplus will accrue if Molina's margin exceeds 3.25%, while a deficit accrues if our margin falls below 3.25%.
That surplus or deficit will apply to 75% of our California health plan revenue in 2014, and 50% of our revenue in later years. Upon the exploration of a settlement agreement in 2017, the settlement account, if in a deficit position, would result in a payment to Molina from the state, up to a maximum of $40 million.
If the settlement account is in a surplus position, no amount is owed by either party. Equally, or even more importantly, the settlement agreement extends each of the California health plan's existing Medi-Cal managed care contracts for an additional 5 years, including its contracts in San Diego, San Bernardino, Riverside and Sacramento counties.
It also awards Molina a new Medi-Cal managed care contract for 5 years in Imperial County. This concludes our prepared remarks.
Operator, we're ready to take questions.
Operator
[Operator Instructions] Our first question comes from the line of Justin Lake with JPMorgan.
Justin Lake - JP Morgan Chase & Co, Research Division
First question is on the prior period costs in the quarter. Can you flesh that out a little bit more in terms of where those costs came from,, and more importantly, your level of confidence that the poll issues have been recognized in the third quarter results?
John C. Molina
That's a great question, Justin. So these are related to claims dating back to 2012 that were adjudicated, and so we thought that they were put to bed, so to speak.
But providers appealed, and due to some operational issues that we had discovered this year relating back to 2012, we ended up paying additional monies out and then reserving for the final cleanup. I would say that this quarter finally puts to bed the operational issues that we suffered in Texas, beginning in February of 2012.
And I think most importantly, as Terry has talked about, we've turned over a lot of the management in Texas, and they're much more confident that the operational issues in Texas are behind us.
Justin Lake - JP Morgan Chase & Co, Research Division
Okay, great. And then on the industry tax, sounds like you're a little less certain in terms of the lack of deductibility which follows on some of your peers saying the same thing.
Is it reasonable to think that the -- can you give us -- I guess, what I'm asking, is there any way to kind of quantify if we were to say 100% of that deductibility is at risk or the lack of deductibility? Do you feel like it's happenstance that you're having this -- the more difficult conversation with or uncertainty around?
Or should we -- can you assume the entirety of that market deductibility might be at risk into 2014? Any way to kind of quantify that for us?
John C. Molina
Yes, I don't think we can quantify it for you simply because most of the states have not addressed the issue. So when we say that we lack certainty, it is not because the states have said they're not going to reimburse this for us, it's just that they are silent.
Many of the states have told us they're waiting for instructions from CMS. I believe that Michigan is the only state that has affirmatively stated that they intend to reimburse us for it.
Justin Lake - JP Morgan Chase & Co, Research Division
Okay. And mechanically, is it your expectation that sometime between now and let's say during -- early next year, you're going to get a rate increase that'll be effective January 1?
That will basically making poll on the industry tax -- big step a state tends to make you whole. Is that the way they should work?
Joseph W. White
This is Joe speaking. I think that most -- the conversation with most states is that they would prefer, and I think we would prefer, they make a lump sum payment rather than building the amount into the ratings.
So most states are indicating that they will make us hold on the tax piece, perhaps not the income tax deductibility but the tax piece upon our determination of how much we're going to owe the feds. So if we [indiscernible] even outside of the rate structure.
Justin Lake - JP Morgan Chase & Co, Research Division
Okay. And then one last question.
The -- obviously, there's a lot of opportunity. You're making some investments early on to cover that.
Any update in terms of how we should think about your revenue growth over the next 2 years, thinking about 2014 year-over-year. And then I know you have that $12.5 billion number out there.
Any -- are you thinking there's upside to that number given the opportunity out there? Just any update there will be great.
John C. Molina
Sure, Justin. This is John.
In terms of the revenue growth over the next 2 years, we're sticking with our $12.5 billion number.
Justin Lake - JP Morgan Chase & Co, Research Division
How should we think about '14?
John C. Molina
You can think about '14 when we give guidance in February.
Operator
Our next question comes from the line of Josh Raskin with Barclays.
Joshua R. Raskin - Barclays Capital, Research Division
I guess more pressing issues. Fourth quarter.
So I'm just trying to understand some of these G&A costs. I guess my first question would be how much of it relates to the market size or, as you call it, exchanges?
John C. Molina
You know, we're not going to split out, Josh, how much relates to this product or that product. In some respects, there is spillover, right?
So as people go to the websites and think that they may be eligible for a marketplace product, find that they're eligible for Medicaid. Then, how do we differentiate the cost for that?
What we do is we look at when we anticipate the enrollment's going to be, make sure we're staffed up to handle that enrollment and let the numbers follow.
Joshua R. Raskin - Barclays Capital, Research Division
Well, okay. So, John, I guess others have suggested across -- broadly across health care services land that the marketplaces are getting pushed back and delayed.
And so they're actually pushing back some of the marketing and the spending, et cetera, to wait until the exchanges are fully operational, et cetera. So I sort of think about your strategy was theoretically one of defense in nature where you're going to try and maintain that churn population in your plans, and now maybe there's less people jumping into exchanges.
So I'm just curious why you'd be spending more and not less.
John C. Molina
Because unlike some of the other plans, we were -- are trying to maximize the Medicaid, the welcome mat, which were -- as Mario talked about, reports are that those seem to be the biggest initial pushes for people, and we want to make sure that people continue to try and sign up. Whether it's through the websites or calling our call centers and getting navigators, getting the paper applications in, we feel that we can't let the issue die.
Joshua R. Raskin - Barclays Capital, Research Division
Okay. And so -- and most of your states have the ability for members to select their plan, correct, before they get auto-assigned if they turn out to be Medicaid-eligible already?
Joseph Mario Molina
That's correct, Josh. This is Mario.
Joshua R. Raskin - Barclays Capital, Research Division
Okay. Okay, that's helpful.
The second question on taxes. When you say sort of operational issues, et cetera, it sounds just basically like you guys denied claims that turned out you shouldn't have denied them.
And so now they're -- now you have to pay them out. I guess I'm curious, does that change your perspective on sort of the run rate cost trend that you're seeing in Texas?
Do you feel like you're adequately reserved for future trends? And do you think rates should be retroactively reset to sort of accounts with these higher costs?
Joseph W. White
And now, this is Joe speaking. Well, first of all, we think we've caught up with this, and we don't anticipate any more unfavorable prior period development for this issue.
The second point is we really feel like, with the -- we feel like Texas is treating us fairly. I think it's a fair statement after the rate increase we received on September 1, so we would not anticipate going back and asking for anything.
Joshua R. Raskin - Barclays Capital, Research Division
Got you, okay. And then just last question.
If we could just take a step back, how do you guys think about net margins? It's been a couple of years now of depressed overall sort of net margins.
And what do you think is to that -- 2015. Let's skip '14 because I know there's a lot of ramp-up there as well.
But when you're doing $12.5 billion on the top line, theoretically, a more normalized G&A level, et cetera, what's the net margin for your overall book of business supposed to look like?
John C. Molina
Josh, I think we've been pretty consistent in saying 2%.
Joshua R. Raskin - Barclays Capital, Research Division
And there's nothing that you see -- I mean, it just feels like with some of the additional G&A, et cetera, but you think that normalizes over time and you're sticking with the 2%.
Joseph Mario Molina
Josh, this is Mario. I'm really encouraged by the progress we've made in the medical cost area this quarter.
And so, yes, we're going to stick with that 2%. I think that eventually, as the enrollment grows, the percentage that we're spending on admin will drop.
And if we can continue to make progress, as we have been on the medical costs, we think those numbers are achievable in the long term.
Operator
Our next question comes from the line of Sarah James with Wedbush.
Sarah James - Wedbush Securities Inc., Research Division
I just wanted to follow up on the 2015 guidance question. It -- I mean, it seems like there's a few positive items that weren't incorporated in the last update of guidance.
Now we have a higher expansion, which, at a previous investor day, you guys had talked about it being in the $650 million range. There's South Carolina duals, which I was estimating to be another $350 million to $600 million in revenue.
And then the Florida acute win, which could be about $410 million. So it just seems like there's a lot of positive news that's not yet baked into the 2015 guidance.
Just wondering if you could give thoughts on if there's any additional headwinds that are offsetting that or if it's just being conservative at this point.
Joseph Mario Molina
Sarah, this is Mario. I think we've done a pretty good job at detailing all the headwinds.
And you're right. There is still considerable upside from these new contracts, new programs, new states.
And that's why I'm so optimistic. We have not provided an update on guidance.
We're going to do that in February, but you've outlined some of the new issues.
Sarah James - Wedbush Securities Inc., Research Division
Okay. It just seemed like it could go up by at least $1 billion or more.
Got it. And then in Ohio, there's a few moving pieces.
We have the new members coming in, in August, and then last quarter, you spoke to benefit from risk adjusters. And now there's an ABD revenue reduction.
So if you could just give a little bit more detail. Are the new members coming in around the risk score range that you anticipated?
Was there any benefit on some of those numbers from risk adjusters or did it some other way and if that's related at all to the ABD revenue reduction?
Joseph W. White
This is Joe speaking, Sarah. No, these -- the margin impression we're talking about in Ohio doesn't have anything to do uniquely with the new members that came on July 1.
The risk adjustment issue isn't effective July. The risk adjusters for the ABD population overall for the entire State of Ohio were reset, and we've always had a very aggressive effort at capturing costs, ensuring that information with the state and getting our members the right medical care they need.
As a result, we've traditionally attracted members with more complex needs and met those needs and been able to document that with the state. It just so happens that on the latest reset, either because of member mix changes or because other health plans are doing a better job in terms of their encounter submissions, proportionally, we received a reduction in risk adjusters.
But it doesn't speak into anything that happened with the new membership coming on July 1.
Sarah James - Wedbush Securities Inc., Research Division
Okay, that's helpful. And last question.
In the prepared remarks, a concern was voiced over the California ABD rates. So just wondering if you could talk a little bit about that?
And in context of your new settlement, wouldn't that be covered by the margin guarantee?
John C. Molina
Sarah, this is John. To the extent that our margin for the California plan falls below 3.25%, for whatever reason, the new settlement would kick in.
We do continue to believe that the rates are set too low for the benefits and the utilization and that the ABD members in California are yenning. We continue to share that data with the state, and I believe that the next rate cycle, the state will actually utilize health plan data as opposed to fee-for-service data trended forward.
So we are hoping that, that will be reflected in rates come next year.
Joseph Mario Molina
Sarah, this is Mario. There's one other point I want to make on that, too.
While we have a settlement agreement with the state of California, that offers us some protection on the margins. Most health plans in California do not.
So most of the Medicaid plans in California continue to be concerned, as we are, about the adequacy of rates. And we will all continue to press the issue with the state because we want the rates to be set appropriately, regardless of any kind of settlement.
The rates need to be fair. They need to reflect the acuity of the patients that we're serving whether there's a settlement agreement or not.
Operator
The next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. Just wanted to follow up maybe on that California item.
Is it -- I think you mentioned that it was going to cover 75% of the population in '14 and then 50% after that. Can you go into what's driving that, wipe out the entire population?
Joseph W. White
Sure. It's Joe speaking.
We just wanted to make the concept as clear as we can in terms of how the arithmetic works. The way the agreement works is that the -- to the extent that our margin differs from 3.25% margin, we will receive 75% of that difference in margin for our entire revenue.
So we didn't quite find a simpler way to say it.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Oh, so they're different, okay. Okay, the difference is in margin, I thought you were talking about different revenue streams.
I guess when you talked about the revenue streams that this sort of applied to, I think you said TANF, ABD and then duals, is Medicaid expansion something different? Or does that fall into one of those buckets?
John C. Molina
It would fall -- this is John -- it would fall into the settlement agreement. The reason that it steps down Year 2 is because the premise is that the settlement is to make up for prior years where the rates were not adequate.
So implicit in that is the state is going to continue to work to make sure the rates are more adequate in the future. The closer they get to getting the absolute right rate, the less we will need it, so the less that they're going to fund that differential.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay, that makes sense. And then just going back to the G&A spend, wonder if maybe you can try and cut it in a different way.
Which is -- I mean, you have a couple of new contracts like Imperial or maybe South Carolina or Texas tools coming to more focus. How much of that is -- of this higher spend is because of some of those clearly delineated new -- or more focus on until the revenue opportunities versus some of the other stuff, that's just kind of executing on something you already know about.
How much is really new revenue opportunities?
John C. Molina
You now probably say so -- as Joe -- or I mean, as I mentioned, $30 million was the differential between third quarter of this year, third quarter of last year. I think another probably 25% is going to go to the new contracts on top of that.
Plus, then you got to layer in the increased advertising and outreach we're going to be doing and then the operational ramp-up as well.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay, that's helpful. And when you have in here care coordination, medical management capabilities, that's more tied to new markets rather than kind of looking at something and saying, "Oh, I do need to do more in our existing markets," or does it encompass both?
Joseph Mario Molina
Yes, this is Mario. I think that it encompasses both.
For example, the duals contracts are going to require us to have more in the way of care managers, probably some additional medical directors, and that's in an existing state. In a place like South Carolina, it will bring up a whole new health plan.
We've got to hire all the staff for that health plan, including the care management. So it overlaps, and it really is a function of the growth and the change in the mix of patients that we're going to be experiencing.
Operator
The next question comes from the line of Tom Carroll with Stifel.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
So I mean, most everything I've been thinking about has been talked about here tonight. I guess relative to your Investor Day, which was fairly positive in my view, and today, what would you say is kind of the largest item within your expectations that has changed?
Maybe it sounds like a decision to spend more on the G&A side. Or I don't want to put words in your mouth.
Maybe that's the answer. But maybe if you could talk to kind of like what is really changed between the Investor Day and today that's creating the change in guidance and a different view of fourth quarter and all that kind of stuff?
John C. Molina
Well, so, Tom, this is John. Let me first -- maybe I misheard you, but you seemed to imply that we had a positive Investor Day and today's not so positive.
I'm like Mario. I'm pretty optimistic, and I think that our net in that PPD from Texas would've been right on our number.
We still would have said that we're incurring higher costs in Q4, and that's really the operational readiness, the G&A spend, in part because we did win some new business and in part because the issues related to the marketplace is causing us to want to increase the outreach.
Joseph Mario Molina
Okay, Tom, this is Mario. Tom, let me just finish.
I think that if you take the claims issue that we have in Texas and if you take the $2.5 million we spent on Illinois with basically no membership and you reverse that, we would've exceeded analyst expectations for the quarter. The medical costs came down pretty much across the board, and I think it was, absent that, a very strong quarter.
John's right. We are spending more to build up for our growth next year.
And some of these things, like the Imperial County, we're running around, putting together a network and bringing up a new service area that we really hadn't anticipated was going to come so quickly. So there are some things that we have to spend that have been accelerated.
But overall, and John's having a field day with this, I'm actually optimistic, and I'm not usually the optimistic one.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
Okay, that's a very fair framework. I appreciate that.
I didn't mean to imply anything. I guess I was getting at it sounded like you maybe made a decision to kind of crank the G&A a bit more, which, again, I think is just -- is what I'm hearing in the conversation tonight?
Joseph Mario Molina
That's true.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
Okay. The -- I'm good with that.
The medical claims payable number is up a bit. I mean, maybe what's driving that?
If you could.
Joseph W. White
It's Joe speaking. It's a number of things.
if you're looking at the consolidated number on the balance sheet, John had mentioned that we're -- date in claims payable is up. That's about $16 million this quarter.
We also just had some minor timing issues in terms of cap payment, which drove it up, and we've also in this quarter, and we talked about this in the cash flow section. There are a number of states that views us a vehicle to pass through certain payments to providers, usually hospitals.
These are cases where states will give money to us and then instruct us to pay the sort of hospitals or other providers. And it just so happened we got a lot of those payments late in the quarter, so -- and didn't have a chance to disperse them until early October.
So we can...
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
So where might that...
Joseph W. White
Go ahead.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
I was just going to say, directionally, where -- what does that number look like a quarter from now?
Joseph W. White
It's up about $138 million versus December, and about $16 million of that's IPMP. So I think the rest of that more or less reverses next quarter.
I think John alluded to the fact in his remarks, we had a lot of onetime items. I'd -- won't say onetime items.
We've just had a lot of items we think that are going to reverse in December, or in the fourth quarter.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And then one last thing, just kind of conceptually, given the newness of the duals programs and the Florida LTC program, and these things that just keep getting delayed, more so than we've seen in the prior, I don't know, decade or 15 years where new programs started up, and we do tend to see delays, right?
But it feels like kind of more so than usual. Do you have a dialogue going with any of your state partners to perhaps provide some recourse to you down the line to make up for some of the G&A drag that you're absorbing right now?
Is that part of the conversation at all?
Joseph Mario Molina
Tom, this is Mario. No, we've not specifically addressed that with them.
And I think that the reason we're seeing all these delays is that the state and federal government are trying to bring up a lot of programs simultaneously. In past years, these things would roll out, one this year, one next year.
But CMS is trying to bring these duals, all these duals contracts up in a period of about 2 years. It's an aggressive timeframe, and I think that they're struggling just in terms of the staff that they have.
I think the government shutdown kind of hurt things a little bit. And I also think that the state are struggling because remember, in this recession, states laid off staff.
And so now that things are turning around and they're bringing up these new programs, a lot of the people that were there several years ago are now gone. So you've got new staff who are younger, have less experience.
Or in many cases, you just don't have the staff, period, that they had in previous years. And I think that's what's -- a lot of what's driving the delays.
Operator
Our next question comes from the line of Dave Windley with Jefferies.
David H. Windley - Jefferies LLC, Research Division
On California, would you be willing to call out specifically what rate increase you think you need to kind of bring the ABD rates to adequacy or conversely and talk about what your ABD MLR is right now?
John C. Molina
We generally don't split out MCRs by line of business.
Joseph Mario Molina
So in other words, no.
David H. Windley - Jefferies LLC, Research Division
Yes, understand that. You've called it out several times in the -- on the -- or talked about it several times in the call, I thought I'd try to get the heart of the issue.
The other question I have is around your G&A discussion and readiness. I think you had previously talked about 2014 seeing that number decline somewhat.
Now in 2013, the number is going up. I'm wondering how we should think about that trajectory for 2014 off of this new base?
John C. Molina
We're -- this is John. We're still expecting, as a percent of revenue, that the G&A will go down in 2014.
David H. Windley - Jefferies LLC, Research Division
And any magnitude on that?
Joseph Mario Molina
This is Mario. I think a lot of it's a function of the membership growth, right?
Because as the revenues grow, a lot of the G&A costs will be fixed. So as the revenues grow, G&A as a percent goes down.
You have got fixed costs embedded in this with staff that we've already hired and we've been training. Some of the things are variable, like the amount we spend on advertising and outreach, and that we have a little bit more control over.
But as Terry has pointed out in the past, when we go through these readiness reviews, the states want to see bodies in those chairs, and they want to be sure that we're fully staffed. And then what's happened is that they have pulled the rug out from under us and said, "We're going to delay this for 2 or 3 months."
And it's been a problem. Whether that ever gets addressed or not, I don't know.
I hope that at some point, state recognizes the additional costs that they caused us to incur, but I can't guarantee it.
David H. Windley - Jefferies LLC, Research Division
So maybe I'll ask in a slightly different way. I was thinking in terms of dollars of spend going down.
Would you expect that you're actually -- especially in light of ramping that number up in the fourth quarter, would you expect the dollars or readiness spend to decline in 2014 or just to decline as a percent of revenue?
John C. Molina
This is John. I would say decline as a percent of revenue because as the infrastructure build up on most of these programs, you got the operational ramp which will take over.
And as Mario said, it really depends on when our enrollment becomes and how big that operational ramp is. But then also, the cycle starts over again, right?
So now we're starting to prepare for the South Carolina and Texas duals, which is some more infrastructure build. But as a percentage of revenue, I think you'll see it go down.
In terms of the growth, in terms of the total dollars, it should slow down, but it will still be up.
David H. Windley - Jefferies LLC, Research Division
Okay. And last question on Florida.
That's the one market that you talked about where medical loss ratio did not decline. What remediation steps are you taking there?
Is it all rate or can actually do something operationally to improve?
Joseph W. White
It's Joe speaking. We've seen some indication that it did.
Like in Ohio, a rebasing that took effect earlier this year in terms of the fee schedule may have impacted us. We're also due to hear very shortly on the rate adjustment effective September 1.
The state's a little bit late on that, but we'll have to wait and see what that -- when that number comes in before we can really assess where we're at in Florida. We've done a very good job in the last few years in Florida, though, for lowering health care costs.
And they're certainly considerably below where they were a couple of years ago.
Operator
The next question comes from the line of Chris Rigg with Susquehanna International Group.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
I just want to make sure I heard you correctly. With regard to the California settlement agreement, did you say the maximum remuneration is $40 million?
John C. Molina
Yes.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Okay. So I guess I just -- my real question stems from that.
So if I look at your peer who has a similar agreement -- they're larger, but they're not 6.5x to 7x larger than you guys in the state. So can you help us understand why their maximum amount on a relative basis is so much greater than yours?
Joseph Mario Molina
Sure, this is Mario. Remember, these are issues that go back to 2003.
And a lot of the settlement comes out of those early years, and that was the time when we were much smaller. So it's -- you can't -- you're sort of comparing apples and oranges.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Okay. All right, that makes sense.
And then when you think about the administrative spend in the fourth quarter, it was $30 million that you spiked down in the third quarter. So for the fourth quarter, can you give us what the number might actually be or how we should think about that?
Joseph W. White
It's Joe speaking. I think you could look to that incremental piece of the spending for the fourth quarter being $40 to $45 million.
Operator
The next question comes from the line of Carl McDonald with Citigroup.
Carl R. McDonald - Citigroup Inc, Research Division
Great. So 2 more California agreement questions.
So the first one is if the California agreement had been in place in 2013, how much of an impact would it have had on the financials? I don't know if it's easier to do that relative to the 90% loss ratio or versus the $1.15 in earnings, but just be interested in the sensitivity for '13.
Joseph W. White
Carl, it's Joe. I honestly don't recall.
We haven't looked since the close of second quarter. I think it closed the second quarter, that would have been substantial.
I think it would've been $20 million or so, just a guess.
Carl R. McDonald - Citigroup Inc, Research Division
Sorry, $20 million as a guess for the year, or for a specific quarter?
Joseph W. White
I think it was just for those first 2 quarters.
Carl R. McDonald - Citigroup Inc, Research Division
Just for the first 2, okay.
Joseph Mario Molina
Carl, this is John. Be careful because we are getting some rate increases in October and in January that are going to help the overall profitability of the California plan, as well as we have seen, I think, some pretty good strides in utilization management as we now have over a full year with the ABD's enrollment.
We've always talked about taking an era from 2 to 3 quarters to get utilization in line. I think in California, it took a little bit longer because when the ABDs were enrolled, we had less flexibility to change treatment regimens.
And so we're now 15 to 18 months down the line, we're able to do some managed care, these patients were able to bring, some of the utilization are more in line.
Carl R. McDonald - Citigroup Inc, Research Division
And then another question just on the difference between your agreement and HealthNet. I think you said yours was 3 years in length versus theirs was 7 years.
Any difference in the rationale versus the answer to Chris' question?
Joseph Mario Molina
I'll take that one. I've always said that I was not a big fan of this type of agreement because what it leads us doing is holding a receivable from the state of California, and I'm the kind of guy that likes to have my money upfront.
So we did negotiate to have a shorter period of time for this agreement. I think if you look at the deals, though, they are otherwise very, very similar.
The magnitude of the settlement that we have is smaller than HealthNet's because our Medicaid enrollment back in the early 2003, 2004 era was smaller, and we had just insured time period. But otherwise, I think it's pretty much the same agreement.
Operator
And our last question comes from the line of Matthew Borsch with Goldman Sachs.
Joseph Mario Molina
Well, sounds like we lost Matt.
Operator
Yes, and we have no further questions at this time.
Joseph Mario Molina
Well, I want to thank all of you for joining us. We will be having another Investor Day, I believe, in February.
And again, it's uncharacteristic of me, but despite the prior period development in Texas, I am optimistic about the prospects. I think we've done a good job of bringing down medical care costs, and we've got huge growth opportunities in front of us.
So we look forward to seeing what 2014 brings. Thank you.
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.