News Column

Strong Medicine

June 2005, HISPANIC BUSINESS Magazine

Felix Sanchez


An ounce of prevention is worth a pound of cure and for Molina Healthcare Inc., it's worth even more. The healthcare provider is the first California company on the Hispanic Business 500 to reach $1 billion in revenues and this year holds the number 4 spot on the directory. Its core business is delivering health care services to low-income families and individuals through government-sponsored programs such as Medicaid and the U.S. State Children's Health Insurance Program. While these programs are anathema to most HMOs, for Molina they've been the key to impressive success.

Molina focuses on keeping people healthy through a strong emphasis on primary care and prevention, which forestalls more expensive specialty care, says Kathleen O'Connor, a healthcare industry analyst and CEO of the advocacy group CodeBlueNow. "It shows advocacy," she says, "but for the bottom line, it's pretty good, too."

The numbers bear that out. Molina's 2004 performance and revenue numbers have doubled since its initial public offering in 2003. With aggressive growth in 2004, the company saw its health plan membership rise from 564,000 at 2003's end to 788,000 at the end of 2004, double what it had four years ago. Total operating revenues for 2004 totaled $1.175 billion, up from $793 million in 2003.

During the year, Molina accessed capital markets through a secondary offering of stock and immediately put that money to work. It began with a $69 million acquisition in New Mexico, and an $18 million program purchase in Washington that added 66,000 Medicaid and Basic Health Plan members, making Molina the state's Medicaid market leader. Molina also secured the rights to a Michigan wellness plan that doubled its presence in that state. Earlier this year, Molina signed a two-year pact with Indiana to provide Medicaid services in 13 counties where managed care is mandatory.

Ms. O'Connor says Molina's robust 2004 performance is the result of an approach that many rival companies simply don't understand. "They're very targeted and very focused on their mission," she says. She also notes that Molina knows how to pick the right contracts, doing major risk assessments on potential members before signing. According to Ms. O'Connor, other companies that specialize in traditional commercial contracts don't understand how to administer state programs. "They [government program patients] are not your typical healthy, working clients and so [traditional healthcare providers] don't know how to deal with it," she says. "You can't treat government clients like you do commercial clients."

With so many new patients added to its membership rolls, one of Molina's challenges is to keep organizational costs down. The company achieves that by keeping records, billing, and patient maintenance duties at one central location. This administrative center is located at Molina's corporate headquarters in Long Beach, California, where more than 330 employees work in a cluster of campus buildings along the downtown bayfront. The infrastructure also houses executives for Molina Healthcare Inc. and its largest subsidiary, Molina Healthcare of California.

To deal with its growth from a small regional care provider to an HMO giant, Molina has beefed up its workforce to 1,300 employees and increased its data and server storage capacity. A shared computer system allows templates to be created for everyday patient and administrative functions, keeping such tasks simple and easy for staff, says Joann Zarza-Garrido, president and CEO of Molina Healthcare of California.

Claims are processed in Long Beach, even if the provider is in Michigan. Molina's hardware improvements are now designed to serve more than 2 million members. Salary and administrative expenses for the company totaled $94.1 million in 2004, up from $61.5 million the previous year. However, the expense ratio dropped from 6.6 percent of total operating revenues to 5.9 percent last year.

Companies often struggle when they bring on regional offices, Ms. Zarza-Garrido says, especially as the managed care providers expand into other regions. "It's very difficult to control medical costs," she explains. "Hospital costs continue to rise. We do have control over our administrative costs and having the talent in house allows us not to have to continue to duplicate it elsewhere."

Like its parent company, Molina Healthcare of California is surging in growth: In December it reached an agreement with Universal Care Inc. and Sharp Health Plan to take over their Medi-Cal and Healthy Families Program contracts in San Diego County. The move will give Molina 87,000 new members.

"A lot of our competitors are commercial plans that have some government programs," says Greg L. Hamblin, Molina Healthcare of California's new chief financial officer. "We're just the opposite. That's our core business. The fact that we can go into a state program and have our only experience be with state programs, that's always looked on favorably by a state."

A company with a pie chart of medical, commercial, Medicare, and other healthcare plans and programs can find itself with competing priorities, Mr. Hamblin says. "We are really focused here. Medicare, Medi-Cal, and Healthy Families. It's a clear focus."

Mr. Hamblin's task will be to forecast any storms that might be brewing in the industry's future. Molina is currently eyeing a proposal by California's Gov. Arnold Schwarzenegger that would expand the number of counties that provide managed care and to migrate some of the aged, blind, and disabled patients into those programs. Currently California has 22 counties where managed care is available. That number would jump to 35 if Mr. Schwarzenegger's Medi-Cal redesign plan is adopted.

Vast healthcare changes on the horizon portend an interesting future for Molina. Funding for Medicaid is being cut back in several states as governments look to balance their budgets, says Ms. O'Connor, citing a Tennessee plan that would end coverage for more than 320,000 adults. In Missouri, legislation is pending that would eliminate Medicaid in three years. And at least 12 states are trying to find ways to slice into the numbers of people covered by Medicaid.

"It will either be a real challenge or a wonderful opportunity for Molina to rush in and negotiate new [managed care] contracts," she says.


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