Though shares of Molina Healthcare (NYSE:MOH) have remained relatively flat this year, the managed-care provider's Q2 earnings should reassure shareholders that the company's revenue growth and cost-cutting efforts are on the right track.
Molina reported flat earnings year over year, but after adjusting for non-recurring items, the company announced that EPS increased 25% compared to the prior-year quarter. Shares climbed 4% as the market digested the news.
Molina reported some positive trends in its earnings release, but also highlighted areas of improvement. The provider reported a 26.5% increase in premium revenue, thanks to membership gains in its Ohio and Texas start-up health plans. Molina also noted dramatic improvement in the medical-care ratio for the organization's California health plan.
The California plan, Molina's largest in total membership, accounts for 27% of the company's total enrollment. It reported a troubling medical-care ratio of 89.4% in the prior-year quarter, but renegotiating provider contracts helped Molina improve this figure to 82.2% in the most recent quarter.
With California improving, Molina can now turn its attention to the medical cost ratios in its Ohio and Texas start-up health plans. As relatively new additions to the company's operations, these plans were expected to initially incur higher medical cost ratios than Molina's other plans, eventually improving over time. In Q2 2007, the Ohio and Texas plans reported ratios of 91.1% and 91.3%, respectively. These ratios improved on Q1 results, but remain significantly higher than the company's overall medical cost ratio of 85.1%.
Company management reconfirmed its full-year earnings guidance, and it remains optimistic for the second half of 2007. Investors in the managed-care industry have fared reasonably well; shares of Amerigroup (NYSE:AGP), Centene (NYSE:CNC), and WellCare Health Plans (NYSE:WCG) each got a pop out of their most recent quarters. As some investors seek more defensive plays amid the market's recent woes, the managed-care industry might be an area worth considering.
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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Motley Fool has a healthy disclosure policy.
