Among the more promising aspects of the Q3 results released yesterday by managed-care provider Molina Healthcare (NYSE:MOH) were improvements in medical-care ratio, which measures health-care costs as a percentage of premiums and fees. The overall ratio improved and there were significant ratio improvements in some of the company's key regions.
Overall, this ratio decreased 40 basis points from the year-ago quarter. This improvement can be attributed to the company's termination of its operations in Indiana -- which sustained an out-of-control medical-care ratio of 103.1% in the year-ago quarter -- as well as major improvements from the company's Ohio and Texas contracts, which are among the company's more recent additions. New contracts typically bring relatively high medical-care ratios in the early stages. Fortunately for Molina, the company sees both its Ohio and Texas operations on track and successfully integrating into the company.
Ohio reported a medical-care ratio of 88.8% in Q3, while Texas checked in at 76.2%. These compare favorably to the 97.6% and 91.3% ratios, respectively, reported in Q3 of 2006.
Molina reported a 41% increase in EPS on a 23% increase in premium revenue compared to the prior year's Q3. Increased premiums and higher membership enrollment joined the improving medical-care ratio trend in helping the company achieve the earnings and revenue gains.
Aside from the debacle at WellCare Health Plans (NYSE:WCG), the managed-care industry continues to signal a favorable outlook going forward. Amerigroup (NYSE:AGP) recently reported a 26% surge in its Q3 EPS, while Centene (NYSE:CNC) has been a consistent performer, noting a 19% year-over-year spike in its Q3 revenue.
As the management at Molina continues to focus on the profitability of its existing operations -- as opposed to a focus geared solely toward adding new members -- I believe that its stock should continue its rise.
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