Basis of Presentation

Organization and Operations

Molina Healthcare, Inc. provides quality managed healthcare to people receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program. We have three reportable segments. These segments consist of our Health Plans segment, which comprises the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment, which includes our behavioral health and social services subsidiary, Pathways.

The Health Plans segment consists of health plans in 12 states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of December 31, 2016, these health plans served over 4.2 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. This membership includes Affordable Care Act Marketplace (Marketplace) members, most of whom receive government premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO). Our direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate.

Our health plans’ state Medicaid contracts generally have terms of three to four years. These contracts typically contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. Our health plan subsidiaries have generally been successful in retaining their contracts, but such contracts are subject to risk of loss when a state issues a new request for proposal (RFP) open to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may be subject to non-renewal.

In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled (ABD); and regions or service areas.

The Molina Medicaid Solutions segment provides support to state government agencies in the administration of their Medicaid programs including business processing, information technology development, and administrative services. Molina Medicaid Solutions is under contract with Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and provides drug rebate administration services in Florida.

The Other segment includes primarily our Pathways behavioral health and social services provider, and corporate amounts not allocated to other reportable segments.

Recent Developments – Health Plans Segment

Proposed Medicare Acquisition. In August 2016, we entered into substantially identical agreements with each of Aetna Inc. and Humana Inc. to acquire certain of their Medicare Advantage membership and other assets related to such Medicare Advantage business (the Proposed Medicare Acquisition), for cash. The Proposed Medicare Acquisition was subject to closing conditions including, but not limited to, the completion of the proposed acquisition of Humana by Aetna (the Aetna-Humana Merger). In January 2017, the U.S. District Court for the District of Columbia granted the request made by the U.S. Department of Justice in its civil antitrust lawsuit against Aetna and Humana, to prohibit the Aetna-Humana Merger (the District Court Order). In February 2017, the Proposed Medicare Acquisition was terminated by the parties pursuant to the terms of the transaction. Under the termination agreement, we are entitled to receive from Aetna and Humana an aggregate termination fee of $75 million (the breakup fee). In addition, we are entitled to reimbursement of reasonable and documented out-of-pocket expenses incurred by us and our affiliates in connection with the Proposed Medicare Acquisition. We will record the breakup fee as other income in the first quarter of 2017.

Completed acquisitions. See Note 4, “Business Combinations,” for further information regarding Health Plans segment acquisitions completed during 2016.

Consolidation and Presentation

The consolidated financial statements include the accounts of Molina Healthcare, Inc., its subsidiaries, and variable interest entities in which Molina Healthcare, Inc. is considered to be the primary beneficiary. See Note 18, “Variable Interest Entities (VIEs),” for more information regarding these variable interest entities. All significant inter-company balances and transactions have been eliminated in consolidation. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition.

In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the periods presented have been included; such adjustments consist of normal recurring adjustments.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include:


•	The determination of medical claims and benefits payable of our Health Plans segment;


•	Health plan contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;


•	Health plan quality incentives that allow us to recognize incremental revenue if certain quality standards are met;


•	Molina Medicaid Solutions segment revenue and cost recognition;


•	Settlements under risk or savings sharing programs;


•	The assessment of deferred contract costs, deferred revenue, long-lived and intangible assets, and goodwill for impairment;


•	The determination of reserves for potential absorption of claims unpaid by insolvent providers;


•	The determination of reserves for the outcome of litigation;


•	The determination of valuation allowances for deferred tax assets; and


•	The determination of unrecognized tax benefits.