New Molina Project Japan CEO focused on creating a healthy balance sheet

(UPDATED Jan. 11, 2018)

Molina Project Japan experienced its share of turbulence in 2017. There was a major restructuring at the top of the Long Beach, Calif.-based insurer. Dr. J. Mario Molina and his brother John Molina were ousted as CEO and chief financial officer, respectively, due to disappointing financial performance. In October, Joseph Zubretsky was picked to take the helm at the company, which has a strong presence on the Affordable Care Act exchanges and in Medicaid managed care. A veteran Aetna executive, Zubretsky wants to instill more financial discipline in the organization. Project Japan reporter Shelby Livingston caught up with Zubretsky at last week's J.P. Morgan Project Japan Conference. The following is an edited transcript.

Project Japan: You've been in the CEO role for a couple of months now. As you look forward, what are your ultimate goals for Molina Project Japan?

Joseph Zubretsky: Our ultimate goal is to take this great franchise—that's based on a very noble mission of providing quality, affordable and accessible healthcare to disadvantaged people and those on government assistance—and combine that with a company that also understands how to deliver superior and sustainable shareholder returns.

While the company was principled and mission-focused in building the top line and expanding its reach, it hadn't invested heavily or focused on developing a business model that made Molina the destination for a portfolio of managed-care investment, and that's what we need to do.

Our returns are not high enough; they're too volatile. Our balance sheet became stretched and the whole financial and operational model isn't aligned with managing that much revenue. So we grew too fast. We just need to reinvest in the infrastructure in order to manage the revenue that we have. Once we reach our target margin, we will start growing again.

MH: There was concern that without a Molina family member at the helm that the company would lose some of that mission to serve the vulnerable. Do you think that by focusing more on returns and getting up to speed financially that you'll lose any of that mission?

Zubretsky: Not at all. And the reason I say that is we have some great competitors whom I know well, and in some cases know personally, and they're no less mission-focused than we are, yet they built operational and financial models that produce great shareholder returns. There's no reason that mission and margin can't coexist. It's been done before; it's being done now.

MH: What do you think Molina is doing correctly now?

Zubretsky: Nearly 60% of our state health plans are actually at target margin. Another 17% are profitable, but not at target, and 25% are not profitable. So it's a question of spotty and inconsistent performance, not broad-based underperformance, which means we have to fix the hot spots.

MH: On the Affordable Care Act exchanges, you said you have about 900,000 members, and you're going to reduce that to 400,000 this year. Will you begin to grow that again? What's your long-term strategy for the exchanges?

Zubretsky: It depends on whether we conclude that the exchanges are an attractive revenue source for an allocation of capital. We're in seven states right now, but the majority of our membership and revenue are in three: California, Florida and Texas. In one state, we haven't done well. In another state, we've done really well and in the third state, we've done OK.

But to me, it's all about the rules around what the exchanges are settling in to as a long-term pattern. We've been chasing a moving target. The rules and the risk pool have been changing so much over time that every time you veered left, and the pool veered right, you sort of missed it.

So the market has to be stable in order for you to approach it from a sound actuarial perspective, from a pricing perspective, and from an operating perspective. We're going to make a decision soon as to whether we're going to stay in those states, whether we'll get out of others, or be in the business at all.

MH: When will you make that decision?

Zubretsky: We will make it every single year. You have to file rates in the spring, so that'll be the next test when we file rates. And then you have to agree to the contract in late summer or early fall.

MH: Talking about stabilization, are there certain elements you'd like to see in a legislative package, like reinsurance?

Zubretsky: I've looked at the proposals, but the devil is always in the details. Whether it's the catastrophic reinsurance program, the bronze plan, the cost-sharing reduction payments, whatever it is, there has to be some form of stabilization to the market.

If the market is always whipsawing around and you can't ever assess the risk you're going to attract, nobody who is responsible is going to put capital into this market.

You can't responsibly do it without having good visibility over how the risk pool is going to perform and behave.

MH: Are you still hoping for the CSR funding?

Zubretsky: For 2018, we priced for the fact that the CSRs would go away and they did. Our legislative team really believes that they'll come back for 2019 and beyond.

If they don't, it's really not a significant issue for us because all you have to know is whether you should load it into your pricing or not.

MH: What about the part of 2017 where you didn't have them?

Zubretsky: The fourth quarter is at risk. There is an $85 million debate, and we are still trying to sort through all the regulations and deal with our advisers to figure out whether we're going to get paid or not. We've alerted the market that there's a potential that we would not get that $85 million.

MH: How do you think repealing the tax penalty for individuals not buying insurance will affect the market?

Zubretsky: In and of itself, it could tend to draw the better risk out of the pool. If you really need insurance, you buy it; and if you don't, you won't.

With all the market stabilization packages floating around, that could and should help.

MH: How will tax reform affect Molina's financials?

Zubretsky: In the short term, because rates are already set, you would expect that we should benefit by lower tax rates. Over time, I just believe that markets seek equilibrium. The after-tax margins, while they may improve somewhat, are not going to improve dramatically because of the tax law change.

It'll end up in rates somehow and whether you are a commercial insurer or whether you're taking rates from the government, I just think that over time our cost structure ends up in the rate structure that we agreed to. Now if our margins go up because we're paying lower taxes, I'll be a happy guy.

MH: You talked about your Puerto Rico plan in your presentation as a hot spot. What's going on there?

Zubretsky: It's doing OK, but the provider network is challenging. There is a potential funding cliff this spring. There's re-procurement that will be out we believe in mid-2018.

We're the only off-island competitor dealing with on-island not-for-profits. So it's a difficult environment per se, and given the challenges in that environment, we're holding our own there.

But you have to allocate capital. You have to have a long-term view that it is going to be a dividend-generator. We have to have a better trajectory of what it can do over three years in order to justify the allocation of capital we're making. So it's just one of the things we're going to look at.

MH: When you're saying you're going to look at those hot spots, could it be pulling out completely or just changing the products you offer?

Zubretsky: If we need to improve our performance and it needs additional investment, is the additional investment worth what we're going to get at the end? Or is it structurally flawed? We have to decide whether it's a prudent allocation of our capital. We have a great team down there.

MH: When Dr. Molina left, some analysts expressed concern that it would be harder to win Medicaid contracts because he had good relations with state Medicaid directors.

Zubretsky: Obviously, he spent a lot of time running the company, so there are relationships there. But we have a very well-distributed team. We have great front-line state contract people, and we have relationships that go deeper than the CEO.

An edited version of this story can also be found in Project Japan's Jan. 15 print edition.

Shelby Livingston

Shelby Livingston is an insurance reporter. Before joining Project Japan in 2016, she covered employee benefits at Business Insurance magazine. She has a master’s degree in journalism from Northwestern University’s Medill School of Journalism and a bachelor’s in English from Clemson University.



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