MOLINA HEALTHCARE, INC. (MOH) FY 2022 MD&A

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

Management’s discussion and analysis of financial condition and results of operations as of and for the years ended December 31, 2022 and 2021, are presented in the sections that follow. Our MD&A as of and for the year ended December 31, 2020, may be found in our 2021 Annual Report on Form 10-K, which prior disclosure is incorporated by reference herein.

OVERVIEW

Molina Healthcare, Inc., a FORTUNE 500 company (currently ranked 125), provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). We served approximately 5.3 million members as of December 31, 2022, located across 19 states.

2022 HIGHLIGHTS

Highlights of our 2022 results included the following:

•Net income of $792 million, or $13.55 per diluted share, compared to $659 million, or $11.25 per diluted share, in 2021;

•Total revenue of $32.0 billion, which increased 15% compared to 2021;

•Premium revenue of $30.9 billion, which increased 15% compared to 2021;

•Consolidated medical care ratio (“MCR”) of 88.0%, compared to 88.3% in 2021;

•Membership increased 59,000 members year over year to 5.3 million at December 31, 2022;

•General and administrative expense ratio (“G&A ratio”) improved to 7.2%, compared to 7.4% in 2021; and

•After-tax margin of 2.5%, compared to 2.4% in 2021.

Net Effect Of COVID

The net effect of COVID decreased 2022 net income per diluted share by $2.50 and decreased 2021 net income per diluted share by $3.50. The net effect of COVID impacted all three lines of business and increased the 2022 consolidated MCR by approximately 60 basis points, compared to an increase of approximately 90 basis points to the consolidated MCR in 2021. The net effect of COVID reflects COVID-related inpatient costs and COVID-related risk corridors enacted by a number of our state customers beginning in the second quarter of 2020, partially offset by a decrease in medical costs due to COVID-related utilization curtailment.

Real Estate Impairment

In the fourth quarter of 2022, we recognized an impairment charge of $208 million, or $2.72 per diluted share, on right-of-use lease assets and related property and equipment in connection with the reduction in leased space used in our business operations, to accommodate the move to a permanent remote work environment.

Growth Initiatives

Our growth initiatives, including accretive acquisitions, state Medicaid procurement awards and other organic growth priorities, are driving increases in our current and expected future premium revenue base and operating income. The acquisitions of Affinity Health Plan, Inc.’s New York Medicaid business in October 2021, Cigna Corporation’s Texas Medicaid and Medicare-Medicaid Plan contracts in January 2022, and AgeWell New York’s Medicaid Long Term Care business in October 2022 are all contributing to our 2022 results of operations. The commencement of Nevada Medicaid operations in January 2022 also contributed to our 2022 results of operations. Our recent Medicaid procurement wins in California, Iowa and Nebraska demonstrate our ability to win new state contracts and, along with the acquisition of My Choice Wisconsin’s LTSS business that we expect to close in mid-2023, will contribute to our expected growth in premium revenues and results of operations in 2023 and 2024. We expect our future results of operations will also be impacted by organic membership growth in Medicare, partially offset by the impact of known pharmacy carve-outs in Medicaid, the resumption of Medicaid redeterminations beginning in April 2023, the impact of lower Marketplace membership, and 2022 Medicaid premium revenue for directed payments in Texas that we don’t expect to recur in 2023.

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FINANCIAL RESULTS SUMMARY

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(1)MCR represents medical care costs as a percentage of premium revenue.

(2)G&A ratio represents general and administrative expenses as a percentage of total revenue.

(3)After-tax margin represents net income as a percentage of total revenue.

CONSOLIDATED RESULTS

NET INCOME AND OPERATING INCOME

Net income amounted to $792 million, or $13.55 per diluted share in 2022, compared with net income of $659 million, or $11.25 per diluted share, in 2021. We estimate that the net effect of COVID decreased net income by approximately $2.50 per diluted share in 2022 and by approximately $3.50 per diluted share in 2021.

Operating income was $1,173 million in 2022, compared with $1,020 million in 2021. The improvement in operating income was mainly due to membership growth and higher premium revenues, and a year-over-year decrease in the

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MCR, partially offset by the impact of the $208 million impairment charge that we recognized in connection with the reduction in leased space.

Net income per share in 2022 was favorably impacted by the reduction in common shares outstanding as a result of our share repurchase programs in the second and fourth quarters of 2022. Net income per share in 2021 was favorably impacted by the reduction in common shares outstanding as a result of our share repurchase programs in 2020. See further discussion and information in “Liquidity and Financial Condition,” below.

PREMIUM REVENUE

Premium revenue increased $4.0 billion, or 15%, in 2022, when compared with 2021. The higher premium revenue reflects the impact of acquisitions, and increased organic membership in the Medicaid and Medicare segments, partially offset by a decline in the Marketplace segment.

MEDICAL CARE RATIO

The consolidated MCR decreased to 88.0% in 2022, compared with 88.3% in 2021. The improvement relates to improved operating performance in our Medicaid segment, partially offset by an increase in the Medicare and Marketplace segments. The results also reflect a favorable year-over-year change in the net effect of COVID, which impacted all of our segments and increased the consolidated MCR by approximately 60 basis points in 2022, compared to approximately 90 basis points in 2021. The year-over-year change in the net effect of COVID mainly reflects lower COVID-related risk corridors and COVID inpatient costs, partially offset by lower COVID-related utilization curtailment.

The prior year reserve development in 2022 was favorable, but its impact on earnings was partially absorbed by the COVID-related risk corridors.

PREMIUM TAX REVENUE AND EXPENSES

The premium tax ratio decreased to 2.7% in 2022, compared with 2.8% in 2021. The current year ratio decrease was mainly due to changes in business mix.

INVESTMENT INCOME

Investment income increased to $143 million in 2022, compared with $52 million in 2021. The improvement was driven by recent increases in market interest rates and higher invested assets. Additionally, investment income was lower in the first half of 2021 due to a temporary allocation in shorter-term invested assets due to the COVID-19 pandemic, which was ended in the second quarter of 2021.

OTHER REVENUE

Other revenue decreased slightly to $75 million in 2022, compared with $77 million in 2021. Other revenue mainly includes service revenue associated with long-term services and supports consultative services we provide in Wisconsin.

GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES

The G&A expense ratio decreased slightly to 7.2% in 2022 compared with 7.4% in 2021, which reflects the benefits of scale produced by our increase in revenue and disciplined cost management.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased to $176 million in 2022, compared with $131 million in 2021. The increase was due primarily to amortization associated with acquisitions completed in the fourth quarter of 2021 and the year ended December 31, 2022.

IMPAIRMENT

In the fourth quarter of 2022, we recognized an impairment of $208 million on right-of-use lease assets and related property and equipment in connection with the reduction in leased space to accommodate the move to a permanent remote work environment. Approximately $192 million of the impairment is directly associated with the reduction in leased space used in our business operations. We assessed ROU assets for impairment based on a valuation and recoverability analysis, which was determined with the assistance of a third-party real estate specialist. The remaining $16 million of the impairment relates to leasehold improvements and other property and equipment associated with the reduction in leased space.

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OTHER OPERATING EXPENSES

Other operating expenses decreased slightly to $58 million in 2022, compared with $61 million in 2021. Other operating expenses mainly include service costs associated with long-term services and supports consultative services we provide in Wisconsin, as noted above.

INTEREST EXPENSE

Interest expense decreased to $110 million in 2022, compared with $120 million in 2021. The decrease resulted from our early redemption of $700 million aggregate principal amount of our 5.375% senior notes due 2022 in the fourth quarter of 2021, partially offset by interest related to the private offering of $750 million aggregate principal amount of the 3.875% Notes due 2032 in the same period.

OTHER EXPENSES, NET

In 2021, we recognized a loss on debt repayment of $25 million in connection with early redemption of our 5.375% Notes.

INCOME TAXES

Income tax expense amounted to $271 million in 2022, or 25.5% of pretax income, compared with income tax expense of $216 million in 2021, or 24.7% of the pretax income. The difference in the effective tax rate is primarily due to an increase in nondeductible expenses and state and local income taxes, and differences in discrete tax benefits recognized in the respective periods.

REPORTABLE SEGMENTS

As of December 31, 2022, we served approximately 5.3 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies.

We currently have reportable segments consisting of: 1) Medicaid; 2) Medicare; 3) Marketplace; and 4) Other.

The Medicaid, Medicare, and Marketplace segments represent the government-funded or sponsored programs under which we offer managed healthcare services. The Other segment, which is insignificant to our consolidated results of operations, includes long-term services and supports consultative services in Wisconsin.

See Part I, Item 1. Business for further description of our segments.

HOW WE ASSESS PERFORMANCE

We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid agencies and the federal government.

The key metrics used to assess the performance of our Medicaid, Medicare, and Marketplace segments are premium revenue, medical margin and MCR. MCR represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying medical margin, or the amount earned by the Medicaid, Medicare, and Marketplace segments after medical costs are deducted from premium revenue, represents the most important measure of earnings reviewed by management, and is used by our chief executive officer to review results, assess performance, and allocate resources. The key metric used to assess the performance of our Other segment is service margin. The service margin is equal to service revenue minus cost of service revenue.

Management’s discussion and analysis of the change in medical margin is discussed below under “Segment Financial Performance.” For more information, see Notes to Consolidated Financial Statements, Note 16, “Segments.”

TRENDS AND UNCERTAINTIES

For a discussion of the trends, uncertainties and other developments that affected our reportable segments during the year, refer to “Item 1. Business—Our Business,” “—COVID-19 Pandemic,” “—Legislative and Political Environment,” “—Operations—Medical Management,” and “—Regulation.”

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SEGMENT FINANCIAL PERFORMANCE

The following table summarizes our membership by segment as of the dates indicated:

The tables below summarize premium revenue, medical margin, and MCR by segment for the periods indicated (dollars in millions):

Medicaid

Key factors affecting results for this segment include:

•Membership growth of 425,000 during the year, driven by our growth initiatives, including our acquisitions and expansion into new states;

•The status of the PHE and the associated suspension of membership redeterminations;

•Improved operating performance, including medical cost management; and

•The net effect of COVID, which increased the 2022 MCR by approximately 10 basis points, compared to an increase of 20 basis points in the 2021 MCR.

Medicaid premium revenue increased $4.4 billion, or 21% in 2022, when compared with 2021. The increase was mainly due to the impact from the Affinity, Cigna and AgeWell acquisitions, and state directed payments in our Texas health plan, as well as organic membership growth, including our entry into Nevada. We also benefited from organic membership growth across several other states, driven mainly by the extension of the PHE period and the associated suspension of membership redeterminations due to COVID-19.

As described in “Item 1. Business—COVID-19 Pandemic,” we recognized approximately $197 million in 2022 for the impact of COVID-related risk corridors, enacted by several states in 2020 in response to the lower utilization of medical services resulting from COVID-19. We recognized approximately $323 million in 2021, for the impact of these risk corridors in 2021. The decrease was due to the elimination of most of the COVID-19 risk corridors.

The medical margin of our Medicaid program increased $659 million in 2022, or 28%, when compared with 2021. The increase in margin was driven by the growth in membership and premium revenues discussed above and the MCR decrease discussed below.

The Medicaid MCR decreased 70 basis points to 88.0% in 2022, from 88.7% in 2021. The improvement is mainly attributable to improved operating performance, including medical cost management, and the year-over-year change in the net effect of COVID, partially offset by the impact of state directed payments in our Texas health plan. The year-over-year change in the net effect of COVID for 2022 mainly reflects lower COVID-related risk corridors, partially offset by lower COVID-related utilization curtailment. The 2022 MCR of 88% is at the low end of our long-term target range of 88% to 89% and is consistent with pre-pandemic levels.

Medicare

Key factors affecting results for this segment include:

•Our expansion in MAPD and D-SNP membership;

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•Achievement of member risk scores and associated risk-adjusted premium that are commensurate with the health status, or acuity, of our Medicare members; and

•The net effect of COVID, which increased the 2022 MCR by approximately 300 basis points, compared to an increase of 220 basis points in the 2021 MCR.

Medicare premium revenue increased $434 million, or 13%, in 2022 compared to 2021. The increase was primarily due to the impact of MAPD and D-SNP membership expansion, including organic membership growth in existing states, partially offset by lower premium revenue PMPM from the change in business mix.

The medical margin for Medicare increased $7 million in 2022 compared to 2021. The year-over-year increase is mainly due to the increase in premium revenue, partially offset by the increase in the MCR discussed below.

The Medicare MCR increased to 88.5% in 2022, from 87.2% in 2021, or 130 basis points. The MCR increase was primarily driven by the year-over-year change in the net effect of COVID. COVID-related utilization curtailment and corridor adjustments drove a lower MCR for 2021, and COVID inpatient costs increased in 2022. Additionally, the increase in MCR was driven by higher non-COVID utilization and the impact of lower risk-adjusted premiums associated with first year MAPD members, partially offset by higher risk scores on renewing members that more closely reflect the acuity of our membership, and strong medical cost management. The 2022 MCR of 88.5% was modestly above our long-term target range of 87% to 88% due to the net effect of COVID.

Marketplace

Key factors affecting results for this segment include:

•Our product and pricing strategy, which resulted in an overall reduction in membership and repositioning in the metallic tier membership mix;

•Achievement of member risk scores and associated risk-adjusted premium that are commensurate with the health status, or acuity, of our Marketplace members; and

•The net effect of COVID, which increased the 2022 MCR by approximately 120 basis points, compared to an increase of 430 basis points in the 2021 MCR.

Marketplace premium revenue decreased $772 million in 2022 compared to 2021. The decrease was mainly due to an expected decrease in membership in line with our product and pricing strategy, partially offset by an increase in premium revenue PMPM. Our Marketplace membership as of December 31, 2022, amounted to 348,000 members, representing a decrease of 380,000 members compared to December 31, 2021. The increase in premium revenue PMPM is consistent with the change in metallic tier mix, which reflects an increase of members in the sliver metal tier and a decrease of members in the bronze metal tier, partially offset by an increase in the 2021 risk adjustment payment that was finalized in June 2022.

The Marketplace medical margin decreased $109 million in 2022, primarily due to the net decrease in membership and premiums, and the increase in the MCR described below.

The Marketplace MCR increased to 87.2% in 2022, compared to 86.9% in 2021, or 30 basis points. The increase in 2022 reflects changes in membership mix that includes higher acuity members, the unfavorable change in the 2021 risk adjustment payable recognized in the second quarter of 2022, and the unfavorable impact of settling prior year provider balances, partially offset by the year-over-year change in the net effect of COVID. The 2022 MCR of 87.2% is higher than our long-term target range of 78% to 80% due to these factors. We expect MCR performance in 2023 to be within our target range, as we continue to execute on our product and pricing strategy.

Other

The Other segment includes service revenues and costs associated with the long-term services and supports consultative services we provide in Wisconsin, and also includes certain corporate amounts not allocated to the Medicaid, Medicare, or Marketplace segments. Such amounts were immaterial to our consolidated results of operations for 2022 and 2021.

LIQUIDITY AND FINANCIAL CONDITION

LIQUIDITY

We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.

We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company.

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Our regulated health plan subsidiaries’ primary liquidity requirements include payment of medical claims and other health care services; payment of certain settlements with our state and federal customers, such as minimum medical loss ratio and risk corridors and Marketplace risk transfers on behalf of CMS; general and administrative costs directly incurred or paid through an administrative services agreement to the parent company; and federal tax payments to the parent company under an intercompany tax sharing agreement. Our regulated health plan subsidiaries meet their liquidity needs by generating cash flows from operating activities, primarily from premium revenue; cash flows from investing activities, including investment income and sales of investments; and capital contributions received from our parent company.

Our regulated health plan subsidiaries generally receive premiums in advance of payments of claims for medical and other health care services; however, cash and cash equivalents in regulated health plan subsidiaries can fluctuate significantly in a particular period depending on the timing of receipts for premiums from our government partners. Any decline or delay in receipt of premium revenue could have a negative impact on our liquidity. We did not experience noticeable delays to, or changes in, the timing or level of premium receipts in 2022 or 2021 as a result of the COVID-19 pandemic, but there can be no assurance that we will not experience such delays in the future. See further discussion below in “Future Sources and Uses of Liquidity—Future Uses—Potential Impact of COVID-19 Pandemic.”

Our regulated health plan subsidiaries are each subject to applicable state regulations that, among other things, require the maintenance of minimum levels of capital and surplus. We continue to maintain appropriate levels of aggregate excess statutory capital and surplus in our regulated health plan subsidiaries. See further discussion under “Regulatory Capital and Dividend Restrictions” below. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general corporate purposes. The regulated health plan subsidiaries paid dividends to the parent company amounting to $668 million in 2022 and $564 million in 2021.

Parent company liquidity requirements generally consist of payment of administrative costs not directly incurred by our regulated operations, including, but not limited to, staffing costs, lease payments, branding and certain information technology services; capital contributions paid to our regulated health plan subsidiaries, including funding for newer health plans; capital expenditures; debt service; funding for common stock purchases, acquisitions and other growth-related activities; and federal tax payments. The parent company contributed capital of $159 million and $440 million in 2022 and 2021, respectively, to our regulated health plan subsidiaries to satisfy statutory capital and surplus requirements. The higher contributions in 2021 were mainly attributed to fund growth in our New York and Kentucky health plans. Our parent company normally meets its liquidity requirements from administrative services fees earned under administrative services agreements; dividends received from our regulated subsidiaries; federal tax payments collected from the regulated subsidiaries; proceeds received from the issuance of debt and equity securities; and cash flows from investing activities, including investment income and sales of investments.

Cash, cash equivalents and investments at the parent company amounted to $375 million and $348 million as of December 31, 2022, and 2021, respectively. The increase in 2022 was primarily due to the dividends received from our regulated health plan subsidiaries, partially offset by the share repurchase program and the timing of corporate payments and capital contributions to regulated health plan subsidiaries.

Investments

After considering expected cash flows from operating activities, we generally invest cash of regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to board-approved investment policies which conform to applicable state laws and regulations.

Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of less than 15 years, or less than 15 years average life for structured securities. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels.

We believe that the risks of the COVID-19 pandemic, as they relate to our investments, are minimal. The overall rating of our portfolio is A+. Our investment policy has directives in conjunction with state guidelines to minimize risks and exposures in volatile markets. Additionally, our portfolio managers assist us in navigating the current volatility in the capital markets. Our restricted investments are invested principally in cash, cash equivalents, U.S.

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Treasury securities, and corporate debt securities; we have the ability to hold such restricted investments until maturity. All of our unrestricted investments are classified as current assets.

Cash Flow Activities

Our cash flows are summarized as follows:

Operating Activities

We typically receive capitation payments monthly, in advance of payments for medical claims; however, government payors may adjust their payment schedules, positively or negatively impacting our reported cash flows from operating activities in any given period. For example, government payors may delay our premium payments, or they may prepay the following month’s premium payment.

Net cash provided by operations was $773 million in 2022, compared with $2,119 million in 2021. The $1,346 million decrease in 2022 cash flow was mainly due to the net impact of timing differences in government receivables and payables, including larger risk adjustment payments made in 2022 for the Marketplace 2021 plan year and payment for Medicaid minimum MLR and risk corridor settlements related to prior plan years.

Investing Activities

Net cash used in investing activities was $790 million in 2022, compared with $1,653 million in 2021, an increase in year-over-year cash flow of $863 million. This change in cash flow was primarily due to the net impact of proceeds and purchases of investments. In 2022 and 2021, we funded acquisitions in the amounts of $134 million and $129 million, respectively.

Financing Activities

Net cash used in financing activities was $441 million in 2022, compared with $183 million in 2021, a decrease in year-over-year cash flow of $258 million. In 2022, cash outflows included common stock purchases of $400 million and $54 million for common stock withheld to settle employee tax obligations. In 2021, cash inflows included $740 million from the issuance of the 3.875% Notes due 2032, and cash outflows included $723 million in repayment of the 5.375% Notes due 2022, common stock purchases of $128 million and $53 million for common stock withheld to settle employee tax obligations. Additionally, we paid $20 million in each of 2022 and 2021 to settle contingent consideration liabilities relating to our Kentucky Passport acquisition that closed in 2020.

FINANCIAL CONDITION

We believe that our cash resources, borrowing capacity available under our Credit Agreement as discussed further below in “Future Sources and Uses of Liquidity—Future Sources,” and internally generated funds will be sufficient to support our operations, regulatory requirements, debt repayment obligations and capital expenditures for at least the next 12 months.

On a consolidated basis, as of December 31, 2022, our working capital was $3.2 billion compared with $3.0 billion as of December 31, 2021. At December 31, 2022, our cash and investments amounted to $7.7 billion, compared with $7.9 billion of cash and investments at December 31, 2021. A significant portion of our portfolio is held in cash and cash equivalents and we do not anticipate the fluctuations in the aggregate fair value of our financial assets to have a material impact on our liquidity or capital position since we intend to hold our securities to maturity. Net unrealized losses on our investments classified as current and available for sale increased to $210 million at December 31, 2022 compared to $6 million at December 31, 2021. We have determined that the unrealized losses primarily resulted from fluctuating interest rates, rather than a deterioration of the creditworthiness of the issuers.

Because of the statutory restrictions that inhibit the ability of our health plan subsidiaries to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash,

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cash equivalents and investments held by our unregulated parent. For more information, see the “Liquidity” discussion presented above.

Regulatory Capital and Dividend Restrictions

Each of our regulated, wholly owned subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus requirement for these subsidiaries was estimated to be approximately $2.3 billion at December 31, 2022, compared with $2.1 billion at December 31, 2021. The aggregate capital and surplus of our wholly owned subsidiaries was in excess of these minimum capital requirements as of both dates.

Under applicable regulatory requirements, the amount of dividends that may be paid by our wholly owned subsidiaries without prior approval by regulatory authorities as of December 31, 2022, was approximately $210 million in the aggregate. The subsidiaries may pay dividends over this amount, but only after approval is granted by the regulatory authorities.

Based on our cash and investments balances as of December 31, 2022, management believes that our regulated wholly owned subsidiaries remain well capitalized and exceed their regulatory minimum requirements. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with statutory capital and surplus requirements.

Capital Structure

In November 2022, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This new program supersedes the stock purchase program previously approved by our board of directors in September 2021. This new program will be funded with cash on hand and extends through December 31, 2023. During the fourth quarter of 2022, we used $200 million to repurchase 590,000 shares under this program.

As debt held by the parent company comes due, we typically engage in a new private offering of debt to retire and replace the prior issuance. For several years we saw a continued decline in interest rates, which benefited our overall cost of capital during that time. However, interest rates have increased since we issued our 3.875% Notes due 2032 in 2021. Accordingly, future refinancing may occur at a higher rate than those we have achieved historically. This would increase our cost of capital in the future or may cause us to pursue alternative financing sources, should the need arise.

We are not a party to any off-balance sheet financing arrangements.

Debt Ratings

Each of our senior notes is rated “BB-” by Standard & Poor’s, and “Ba3” by Moody’s Investor Service, Inc. A downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs.

Financial Covenants

The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. Such ratios are computed as defined by the terms of the Credit Agreement.

In addition, the indentures governing each of our outstanding senior notes contain cross-default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture. As of December 31, 2022, we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt.

FUTURE SOURCES AND USES OF LIQUIDITY

Future Sources

Our regulated subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, could have a negative impact on our liquidity.

Potential Impact of COVID-19 Pandemic. Excluding acquisitions and our exit from Puerto Rico, we added approximately 750,000 new Medicaid members since March 31, 2020, when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations for

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Medicaid eligibility. The recently passed Consolidated Appropriations Act of 2023 authorizes states to resume redeterminations and terminate coverage for ineligible enrollees starting on April 1, 2023, irrespective of the status of the PHE. Consequently, we expect Medicaid enrollment to continue to benefit from the current pause on membership redeterminations through March 31, 2023, and then decline thereafter as states resume normal enrollment and renewal operations on April 1, 2023.

Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent company to be used for general corporate purposes. As a result of the COVID-19 pandemic, state regulators could restrict the ability of our regulated health plan subsidiaries to pay dividends to the parent company, which could reduce the liquidity of the parent company. For more information on our regulatory capital requirements and dividend restrictions, refer to Notes to Consolidated Financial Statements, Note 15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions,” and Note 17, “Condensed Financial Information of Registrant—Note C - Dividends and Capital Contributions.”

Credit Agreement Borrowing Capacity. As of December 31, 2022, we had available borrowing capacity of $1 billion under the revolving credit facility of our Credit Agreement. In addition, the Credit Agreement provides for a $15 million swingline sub-facility and a $100 million letter of credit sub-facility, as well as incremental term loans available to finance certain acquisitions up to $500 million, plus an unlimited amount of such term loans as long as we maintain a minimum consolidated net leverage ratio. See further discussion in the Notes to Consolidated Financial Statements, Note 11, “Debt.”

Future Uses

Common Stock Purchases. In November 2022, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This new program supersedes the stock purchase program previously approved by our board of directors in September 2021. This new program will be funded with cash on hand and extends through December 31, 2023. The exact timing and amount of any repurchase is determined by management based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. As of February 13, 2023, $300 million remained available to purchase our common stock under this program through December 31, 2023. See further information in the Notes to Consolidated Financial Statements, Note 13, “Stockholders' Equity.”

Acquisitions. We have a disciplined and steady approach to growth. Organic growth, which includes leveraging our existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will consider targeted acquisitions that are a strategic fit that we believe will leverage operational synergies, and lead to incremental earnings accretion. For further information on our acquisitions, refer to the Notes to Consolidated Financial Statements, Note 4, “Business Combinations.”

On July 13, 2022, we announced a definitive agreement to acquire substantially all the assets of My Choice Wisconsin (“MCW”). The purchase price for the transaction is approximately $150 million, net of expected tax benefits and required regulatory capital, which we intend to fund with cash on hand. The transaction is subject to receipt of applicable federal and state regulatory approvals, and the satisfaction of other customary closing conditions. We currently expect the transaction to close in mid-2023.

Potential Impact of COVID-19 Pandemic. As described in “Item 1. Business—COVID-19 Pandemic,” we have been subject to Medicaid risk corridors as a result of the pandemic. Beginning in 2020, various states enacted temporary risk corridors in response to the reduced demand for medical services stemming from COVID-19, which have resulted in a reduction of our medical margin. In some cases, these risk corridors were retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal years in 2019. We have recognized risk corridors that we believe to be probable, and where the ultimate premium amount is reasonably estimable. For the year ended December 31, 2022, we recognized approximately $197 million, in the aggregate, related to such risk corridors, in 2022, and approximately $323 million, in the aggregate, was recognized in 2021.

It is possible that certain states could change the structure of existing risk corridors, implement new risk corridors in the future or discontinue existing risk corridors. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.

Regulatory Capital Requirements and Dividend Restrictions. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with minimum statutory capital requirements.

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The Molina Healthcare Charitable Foundation. In 2020, we announced our commitment of $150 million to fund The Molina Healthcare Charitable Foundation (the “Foundation”), an independent not-for-profit charitable foundation. We have contributed $20 million to the Foundation on a cumulative basis as of December 31, 2022.

Contractual Obligations. We are party to various contractual obligations that we will be required to satisfy over the short and long term. The majority are discussed in the Notes to Consolidated Financial Statements and primarily include the following: medical claims and benefits payable, amounts due to government agencies, principal and interest on our debt and leases. Some items are based on management’s estimates and assumptions about obligations, including duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future periods may vary. Additionally, we have a variety of other contractual agreements related to acquiring services used in our operations. However, we believe these other agreements do not contain material non-cancelable commitments.

CRITICAL ACCOUNTING ESTIMATES

When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Actual results could differ from these estimates, and some differences could be material. Our most significant accounting estimates, which include a higher degree of judgment and/or complexity, include the following:

•Medical claims and benefits payable. See discussion below, and refer to the Notes to Consolidated Financial Statements, Notes 2, “Significant Accounting Policies,” and 10, “Medical Claims and Benefits Payable” for more information.

•Contractual provisions that may adjust or limit revenue or profit. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”

•Quality incentives. For a discussion of this topic, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”

•Business Combinations, and Goodwill and intangible assets, net. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” Note 4, “Business Combinations,” and Note 9, “Goodwill and Intangible Assets, Net.”

MEDICAL CARE COSTS, MEDICAL CLAIMS AND BENEFITS PAYABLE

Medical care costs are recognized in the period in which services are provided and include fee-for-service claims, pharmacy benefits, capitation payments to providers, and various other medically-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of hospital and physician services. Such medical care costs include amounts paid by us as well as estimated medical claims and benefits payable for costs that were incurred but not paid as of the reporting date (“IBNP”). Pharmacy benefits represent payments for members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates based on historical and current utilization of prescription drugs and contractual provisions. Capitation payments represent monthly contractual fees paid to providers, who are responsible for providing medical care to members, which could include medical or ancillary costs like dental, vision and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered and are not subject to significant accounting estimates. Other medical care costs include all medically-related administrative costs, amounts due to providers pursuant to risk-sharing or other incentive arrangements, provider claims, and other healthcare expenses. Examples of medically-related administrative costs include expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Additionally, we include an estimate for the cost of settling claims incurred through the reporting date in our medical claims and benefits payable liability.

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The following table illustrates consolidated medical care costs by type for the periods indicated:

Medical claims and benefits payable consist mainly of fee-for-service IBNP, unpaid pharmacy claims, capitation costs, other medical costs, including amounts payable to providers pursuant to risk-sharing or other incentive arrangements and amounts payable to providers on behalf of certain state agencies for certain state assessments in which we assume no financial risk. IBNP includes the costs of claims incurred as of the balance sheet date which have been reported to us, and our best estimate of the cost of claims incurred but not yet reported to us. We also include an additional reserve to ensure that our overall IBNP liability is sufficient under moderately adverse conditions. We reflect changes in these estimates in the consolidated results of operations in the period in which they are determined.

The estimation of the IBNP liability requires a significant degree of judgment in applying actuarial methods, determining the appropriate assumptions and considering numerous factors. Of those factors, we consider estimated completion factors (measures the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical payment patterns) and the assumed healthcare cost trend (the year-over-year change in per-member per-month medical care costs) to be the most critical assumptions. Other relevant factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels, changes in membership, product mix, seasonality, benefit changes or changes in fee schedules, provider contract changes, prior authorizations and the incidence of catastrophic or pandemic cases.

For claims incurred more than three months before the financial statement date, we mainly use estimated completion factors to estimate the ultimate cost of those claims. Completion factors measure the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical claims payment patterns. We analyze historical claims payment patterns by comparing claim incurred dates to claim payment dates to estimate completion factors. The estimated completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claims cost for a given month’s incurred claim activity. The difference between the estimated ultimate claims cost and the claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our IBNP liability.

For claims incurred within three months before the financial statement date, actual claims paid are a less reliable measure of our ultimate cost since a large portion of medical claims are not submitted to us until several months after services have been submitted. Accordingly, we estimate our IBNP liability for claims incurred during these months based on a blend of estimated completion factors and assumed medical care cost trend. The assumed medical care cost trend represents the year-over-year change in per-member per-month medical care costs, which can be affected by many factors including, but not limited to, our ability and practices to manage medical and pharmaceutical costs, changes in level and mix of services utilized, mix of benefits offered, including the impact of co-pays and deductibles, changes in medical practices, changes in member demographics, catastrophes and epidemics, and other relevant factors.

Actuarial standards of practice generally require a level of confidence such that our overall best estimate of the IBNP liability has a greater probability of being adequate versus being insufficient, where the liability is sufficient to account for moderately adverse conditions. Adverse conditions are situations that may cause actual claims to be higher than the otherwise estimated value of such claims at the time of the estimate, such as changes in the magnitude or severity of claims, uncertainties related to our entry into new geographical markets or provision of services to new populations, changes in state-controlled fee schedules, and modifications or upgrades to our claims processing systems and practices. Therefore, in many situations, the claim amounts ultimately settled will be less than the estimate that satisfies the actuarial standards of practice.

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When subsequent actual claims payments are less than we estimated, we recognize a benefit for favorable prior period development that is reported as part of “Components of medical care costs related to: Prior years” in the table presented in Note 10, “Medical Claims and Benefits Payable.” Our reserving practice is to consistently recognize the actuarial best estimate including a provision for moderately adverse conditions for each current period. This provision is reported as part of “Components of medical care costs related to: Current year” in the table presented in Note 10. Assuming stability in the size of our membership, the use of this consistent methodology, during any given period, usually results in the replenishment of reserves at a level that generally offsets the benefit of favorable prior period development in that period. In the case of material growth or decline of membership, replenishment can exceed or fall short of the favorable development, assuming all other factors remain unchanged.

Because of the significant degree of judgment involved in estimation of our IBNP liability, there is considerable variability and uncertainty inherent in such estimates. The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2022 that would result if we change our completion factors for the fourth through the twelfth months preceding December 31, 2022, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. Dollar amounts are in millions.

The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2022 that would result if we alter our assumed medical care cost trend factors by the percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in millions.

There are many related factors working in conjunction with one another that determine the accuracy of our estimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to quantify the impact that any single factor has on a change in estimate. Given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.

RECENTLY ISSUED ACCOUNTING STANDARDS

Refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” for a discussion of recent accounting pronouncements that affect us.