With CEO ousted, speculation grows Molina may be open to a takeover

Industry analysts believe that Molina Healthcare could be ripe for a takeover now that it’s no longer being steered by a Molina family member.

The company made big news last week when it abruptly fired longtime CEO Dr. J. Mario Molina and his brother John Molina, who was the chief financial officer. The two took over the Long Beach, Calif.-based insurer from their father in 1996.

Mario Molina never saw it coming. “I was absolutely stunned,” he said. The day after the ambush, the board created an executive committee that includes all the independent directors, but specifically excludes the Molina brothers, according to Mario Molina. The Molinas both hold board positions and are among the largest shareholders of the company.

The new executive committee gives its members the power to call meetings without informing the Molina brothers and perform most of the same functions the entire board can, except selling the company, Mario Molina explained. Molina Healthcare representatives would not answer questions about his claims.

It is unclear to Molina (and many observers) just why he was pushed out. The board chalked it up to the company’s “disappointing financial performance.” Though it lost millions last year on the Affordable Care Act’s insurance marketplaces, the company was profitable in the first quarter of 2017, beating Wall Street’s expectations. Still, analysts say Molina’s profit margins have been well below those of other insurers. The company’s shares soared by 18% on May 2, the day the news was announced.

Some observers have questioned whether politics played a role in Mario Molina’s removal. Few, if any, other health insurance CEOs are as outspoken on healthcare policy as Molina, a known Trump administration critic. He suggested it’s possible that his politics were a factor.

Molina offers Medicaid plans in 12 states and insures 4.8 million members, most of whom are enrolled in Medicaid. The abrupt leadership change has some industry observers wondering if a full change of ownership is on the horizon.

“They are a very interesting asset for other companies that would like to build out a strong Medicaid footprint,” Leerink Partners analyst Ana Gupte said. “There’s no one permanent at the helm, so it opens the doors for any acquirer.”

Gupte said Molina’s net margin on its Medicaid business runs about 1%, while other managed-care insurers record margins of 2% to 3%.

Molina’s board is hoping to improve those results. It’s looking for fresh blood to do so. “It’s just all about execution—execution and paying attention to the day-to-day details of medical cost management and administrative expense control,” said Dale Wolf, Molina’s new chairman and a former board director. He added that Molina is a good franchise, but “we just need to improve the results.”

Molina has lost money on the plans it sells through the individual insurance exchanges, though leadership said that the business is already performing better this year.

Many insurers are interested in growing their Medicaid business. Medicaid expansion has pushed lots of new members and thus, revenue, to insurers in the space. Molina took in about $3 billion in Medicaid expansion premium revenue last year. Even with congressional Republicans’ attempt to cut Medicaid funding, the program will likely remain a growth market, Gupte said.

Medicaid insurer WellCare Health Plans and national insurer Aetna, which has a weak Medicaid presence, are the most likely potential buyers if Molina were to be sold, analysts agreed. Any deals would require some divestitures, however.

Analysts also mentioned that Anthem and Humana could make a go at Molina. Thomas Carroll, an analyst at Stifel Financial, said in a client note it’s unlikely any sale would occur in the near term because “immediate attention will be directed at improving operations.”

Molina’s Wolf also said finding a permanent CEO could take as long as six months, though the board is hoping to pinpoint one sooner. The board is looking for someone who has experience in Medicaid and Medicare, Wolf said.

Barclays analyst Joshua Raskin noted that the leadership change could put some of Molina’s Medicaid business at risk. The Molina brothers had close relationships with state Medicaid directors, Raskin said. Molina has about $3.5 billion of existing Medicaid contracts up for renewal. Potential customers could also be wary of the leadership change. “At a minimum, this will lead to an additional question from prospective customers.”

The Molina Healthcare board attributed CEO Dr. J. Mario Molina’s firing to the company’s “disappointing financial performance.”