Firebird Management 的 Steve Gorelik：Molina Healthcare（$MOH）看多论点

Steve, the reason we're talking today is that you did—I think it was at a conference—but I saw your deck. You did a big presentation on Molina Healthcare. The ticker is MOH. I think it's a super interesting space. You graciously decided to ask if you could come on the podcast, so I'm super excited. I'll just pause there and ask: What is Molina Healthcare, and why are they so interesting?

Andrew, thanks for that introduction, and once again, thank you for having me back on the podcast. Molina Healthcare is a managed-care organization. You can think of it as a health insurer, but they specialize in running government-run plans, specifically Medicaid plans. While there are all different kinds of insurance—commercial insurance, Medicaid, and Medicare—Molina specializes in managing Medicaid plans.

The way it usually works is that Medicaid is an insurance program run by the state. The state decides who is covered and what portion of the population is eligible for Medicaid coverage. They will put out a tender, or a request for proposal, to all of the companies in the space, asking who is willing to cover the people at a particular cost. The population is usually split between 4 or 5 different winners.

The companies that win the tender then provide the health insurance service. It's their job to find and contract with the hospitals, doctors, and so on in order to provide health services to the population covered by the plan. Molina has a market capitalization of about $10 billion. It covers roughly 5 million people, which—

For those watching on YouTube, a little dash for it.

Yes, it comes up every time.

She just feels when I'm on a podcast.

It covers about 5 million people, which is about 6% of the US population that is on Medicaid. Their market share is relatively small, and I think they're either the 3rd- or 4th-largest provider. The biggest ones are companies like Centene and UnitedHealthcare, which are also publicly listed companies.

As I said, Molina has about a $10 billion market capitalization and annual revenues of about $40 billion. Revenues have been growing by about 10% to 15% per year. They grow through a combination of gaining share—Molina is pretty effective at winning more than its fair share of tenders, and I can get into why that is later—and acquisitions. They're buying underperforming other insurers in the space at a price that is usually quite attractive, and then they're able to improve profitability and deliver value to shareholders over time.

That's a great overview. I've got tons of questions. Obviously, healthcare is a really interesting space overall, but let's start with the elephant in the room. I'm sure the first thing most people do when they see a stock is pull up the stock chart, right? If you look at Molina's stock chart, again, the ticker is MOH, you're going to see a chart that, for the past 20 years, has generally been up and to the right.

They start the year at $300, continue up and to the right, and the stock peaks around $350. Then, in July, the stock just gets hammered—from $300 to $150 inside of a month, from July to the end of August. As you and I are talking, the stock is around $185. The first thing on anyone's mind is going to be: What drives a 50% decrease in this kind of compounder, in a month?

Absolutely. That's a great question, and I think you should also look not just at Molina's stock chart, but at the other companies in the space. If you look at Centene, UNH, which is a slightly different animal, and Elevance Health and WellPoint, all of the insurers' stock charts will look more or less similar.

There are 2 reasons why we've seen this type of reaction. The main one, I think, is the significant increase in medical costs. The way profitability works is that, for each $100 they receive from the state to manage expenses—

They're capitated, right? If they take 100 patients on a plan, the state may say, "Hey, great. Here's $1,000 per patient for all 100 patients. You guys go manage it. If it costs you $5,000, you're really in the hole. If it costs you $500, you're going to make a ton of profit."

Well, yes and no. That's actually where the difference lies. Let's use a number of $1,000. It's actually a little different, but let's use $1,000. The expectation is that, out of the $1,000 that the state pays to an MCO like Molina, they will spend between $850 and $900 on medical costs. Those medical costs include preventative care, hospital care, drugs—you name it, everything combined.

The remaining 10% is the potential profit for the company, but more often than not, that is eaten up by administrative expenses, and we can get into that later. If the number is below 85%, specifically with Medicaid, then the insurers owe a refund to the state. The state is saying, "You didn't spend enough."

This is actually what happened during COVID, because not enough money was being spent on medical procedures. People were staying home for various reasons, so medical costs for the industry fell below 85%, and insurers owed a refund to the state.

What we're seeing right now is the opposite. From the point of view of the highest number, it usually doesn't reach 90% or go above 90%. But right now it is, and that is the risk you're pointing to—the risk that the insurer takes on. We went from that typical range of 85% to 90%, and currently, for the industry, we're at about 92%, which is a big problem because the administrative cost for the industry as a whole is usually around 9% to 10%. That means the industry is unprofitable.

Molina is the most cost-effective player in the space. Compared with some of the other names in the space, they're super low-cost. You can think about it as a generalist: I'm trying to put frameworks that work in other industries. You can think of Molina as the Walmart or the low-cost carrier like Ryanair. If we think of commodities, they are a bottom-quartile producer of a commodity from a cost point of view.

When the rest of the industry is unprofitable, which is the case now, Molina is still making money—not as much money as it used to. Normally, it operates at about a 4% margin, and right now we're at about 2%. Its profitability has been cut in half, just like the stock price has.

And that's a very important point.

The main reason why we saw the stock chart react as it has is that medical costs are going up faster than the market expected. We can get into the reasons why that is. What the insurers are saying is that we'll fix that through higher rates, because there is a mechanism to ask the states for higher rates. They're saying that we'll fix it through these higher rates that are going to be coming up, repricing, call it, next year. But the market is understandably skeptical because it's thinking, well, maybe costs may continue to go up. That's the summary.

Great overview. There's tons of stuff I want to dive into there, but let me step back before we start diving into specific points of the business and the business model. I just want to ask you: The market's a competitive place. These are big health insurers, right? Even Molina, one of the smaller ones, is a big company—well-followed, well-trafficked compounders for years. What are you seeing here that the market is missing that makes this kind of an alpha opportunity?

No, that's a great question. I think what I see is that the whole industry is actually suffering from the same problem: Medical costs are going up faster than both the insurers and the analysts have been expecting. From Molina's point of view, as I already mentioned, because they have a lower administrative expense ratio compared with everyone else, they are able to persevere and survive through this difficult period much more than everyone else.

The other thing to consider is that these insurers are operating at extremely low margins. If you look at the whole health care sector, they have the lowest margins. Providers—the hospitals, etc.—will operate somewhere between 6% and 10% operating margins. The best players in the space, like HCA, I think, are around 15%. When we look at drug companies, their operating margins are usually around 20% to 25%. So, a normal margin for an insurer is 2% to 3%, maybe 4%.

Another thing to consider is that the states are not going to do this themselves, because in order for a state to do this on its own, it would have to do the same thing these insurers do: build up networks of providers, figure out billing, etc. And they do all of this for a 2% margin. So, from that point of view, I'm not sure whether I'm missing something, but I think I'm fairly confident that the insurers are going to be able to make a credible case for why they cannot continue to lose money.

This is a great point, so let me dive into a few things there because they bring up some of the questions I've had when I've looked at these. I guess the first question is, you made the case that these are low-margin businesses, right? They're not taking much, which is good, but that brings me to 2 different points.

I'll start with the more financial point. I do hear you: All in, their profit margin, whatever it is, and their administrative expenses are small in the grand scheme of things. But if I just look at it, even this year after all the cuts, Molina is going to earn over $1 billion in net income. They're doing that on $4 billion of equity, with $2 billion of that being tangible equity, right? So, their ROE is somewhere between 25% and 50%, depending on whether you're using return on equity or return on tangible equity.

A lot of this is administrative costs. It's a low-capital-intensity business. But I would just say these guys are insurer- or insurer-adjacent. If I look at that type of ROE, that type of return on tangible equity, I'd say, hey, that's actually really high. Why shouldn't the, you know, in Medicare, if you're a company and your ROE, actually, again, they use profit margin for the most part, but if your profit margin gets too high, Medicare will just take reimbursement cuts to you? Why shouldn't the states be looking at this and saying, "Hey, you're making 25% to 50% returns on tangible equity. We need to take your required spend from 85% to 88%, just because you shouldn't be making this much money administrating these plans"? That would be question 1, and then I have a more health care-focused question.

Okay. I think the answer to the first question is relatively simple, and it goes with the administrative expenses point, which I've made a couple of times by now. Let's go back to a number of $1,000 per patient. There is a procurement: The state puts out an RFP and selects 4 or 5 insurers, and each one of them gets the same $1,000 per patient.

They will spend, realistically, more or less the same amount on medical costs. Some of them are a little better, and some are a little worse, but they will spend about the same. Let's pick a number at the bottom of the range, but let's say 90%, meaning there's 10% left. That 10%, for most other players in the space, including the big guys like UnitedHealthcare, is eaten up by administrative expenses. The only reason why Molina is profitable is because, for them, that number is not 10%, but 7%.

Well, let's pause there. This is a little bit ahead of my question, but I think since you raised it, it raises a good question.

They cannot—but to your point, they cannot say everyone else gets $1,000 and you, Molina, get $980. It doesn't work that way.

Let's jump ahead. They've got a slide in their 2024 investor presentation that shows they're outperforming their peers on everything, right? Their revenue growth has been higher. They've got better administrative expenses, as you keep harping on, which is a huge, huge moat here. All sorts of stuff.

But I would just ask: Why? Why do they have better administrative expenses? If you told me UnitedHealthcare, which is the largest company, has better administrative expenses because of economies of scale, better technology, whatever, I could start believing that. This is about the 7th-largest insurer, I believe. Why should the 7th-largest insurer be so much better than everyone else on administrative expenses?

I would bring up an example from another industry. Why is Ryanair—Ryanair is maybe a bad example because they're quite large, quite large—but why are some of the low-cost carriers, like Southwest Airlines or Ryanair, so much lower in cost than American Airlines or Continental, etc.? When we're talking about costs, meaning administrative costs, it's because Molina has something called—and this is actually interesting to look at—the Molina playbook.

You can see that their profitability changed from 2017, when the current leadership came in. Joseph Zubretsky was brought in from the outside. He was initially, I believe, at Aetna, and he came in and started installing what they call the Molina playbook, which, to me, is kind of similar to Danaher. There are a number of examples from other industries where this focus on costs and efficiency, and because they're only doing 1 thing, is in their DNA.

UnitedHealthcare, which is arguably a great company, is doing different things. Most of the coverage they provide is for commercial plans, where medical costs are usually lower, so they don't need to be as efficient on administrative expenses. This is where specialization makes a huge difference. If you look at Molina before 2017, it was being run as a glorified nonprofit.

And it was being run by, I think, the 2 sons of the founder: 1 was the CEO, and 1 was the CFO. That is correct.

It was a different company. It had higher expenses. They had both higher administrative expenses and higher medical costs. It just wasn't being run for profit. It was being run, arguably, as a public good or whatever it is, but it wasn't being run for profit. It was growing very fast, but it wasn't being run for profit.

Since then, since Zubretsky has come in and installed the Molina playbook, they have continued to deliver growth and gain share, but they're doing it from the position of the low-cost provider. Once again, going back to the example of the airlines, there's a reason why low-cost carriers are gaining share against full-service providers: They're providing what people need, the basic part, and not some of the other things.

That's great. It is both one of the toughest and one of the best things for investors to bet on. It is literally culture and installed systems—like the stuff that I kind of hate because they don't appear anywhere in the spreadsheets, except in the profit margins and ROE. You can't really read a 10-K and say, "Oh, this company is so much better." It's just kind of in the results.

I do have a couple more questions along these lines, but is there anything else on what I just said, or anything you were talking about, that you want to hit on?

No. I think the other thing that we didn't really touch on for why these companies are cheap—and this is kind of the other question; I don't know to what extent you want to get into it—is that if we look at the budget that was just passed, the One Big Beautiful Bill Act—

That's where I was going next.

Yes, sir.

Right. So if you look at that, there are a number of provisions in there that should reduce the number of people covered by Medicaid. There are different estimates, but most say that it should reduce the number of people covered by Medicaid by about 10 million. The current number in the country is about 80 million people.

So we’re talking about—and that number usually grows over time—let’s call it between 10% and 12% of the people losing coverage. There’s a big question of what that means. We started talking about the reasons why medical costs have been blown out, and one reason they have been higher than people expected is that, about 2 years ago, after the COVID public health emergency was removed, there was a process called redetermination.

If we step back for a second, what happened is that during COVID, because we had a public health emergency, anybody who had gained Medicaid coverage during that period couldn’t lose it. Usually, Medicaid is needs-based assistance, so if your life circumstances have improved—you found a job, or whatever it is—you could lose your coverage. Quite often, it’s actually because people have forgotten to file paperwork the right way, but that’s a different story.

What could happen is that people who would normally lose coverage didn’t lose it for a couple of years. Then, when the COVID public health emergency status was removed, all of these people lost eligibility over a period of a year. That was about 8% of the population that was on Medicaid at the time ending up losing coverage.

What happened during that time is that the people who lost coverage were, more often than not, the healthier bunch. These were the people who got a job or were younger. As a result, because the healthier people were removed from coverage, the people who were left were less healthy and needed more medical care.

That’s one of the reasons why we see costs going up today. This is something that insurers—including, I don’t think, Molina—correctly estimated when they were talking about the potential impact of redetermination. They didn’t correctly estimate what that could mean for medical costs. There’s a fear that the same thing will happen with the reasons people are losing Medicaid coverage as a result of the new budget.

No, that’s great.

I feel that that could happen again. Once again, we’ll see another jump in costs.

You know, when I’m looking at the financials, I’ve got the note from the 10-Q: June 30, 2024, 4.9 million Medicaid members, and 5.6 million overall. As they’ve said, their flagship is Medicaid. That’s their flagship. By June 30, 2025, they’re down to under 4.8 million. So they shed over 150,000 of their 5 million members. That’s 3%. It’s not nothing. It’s not an insane number, but it’s not nothing in your flagship franchise.

I think people are looking at, as you said, the One Big Beautiful Bill Act cuts to Medicaid spending and saying, “Hey, are we going to be talking about 4.6 million members if we fast-forward 18 months?”

Keep in mind, they lost 2% to 3% of their members, but the industry lost 8%. So they gained share. As I was saying earlier, they are gaining share as a result of winning tenders. They win about 80% of the tenders that they choose to participate in, as well as through buying underperforming insurers.

Over this time, their market share grows by about 0.2% per year. If we’re talking about 80 million people, that’s around 160,000, if I’m doing the math right, per year. From that point of view, they actually do a pretty good job.

You already mentioned their 2024 investor day. They do a pretty good job of explaining where the growth is going to be coming from. They’re estimating that revenues will continue to grow at about mid-single digits between now and then. They’re saying that between now and 2027, about two-thirds of that growth has already been secured through the tenders that they won but haven’t put in place yet and through the acquisitions they’ve made.

Let me ask a separate question. We’ve talked a little bit about how—well, let’s start with one other thing. When I was reading their 2024 investor day—which, these psychopaths, they held 2 days after the presidential election—how can you do that when this is a policy-driven business? I’ll come back to that in a second.

When I reread that, they talked about rising costs, and this was November 2024. The stock was at 300. They talked about rising costs and all this sort of stuff, and they talked about how it was a one-time thing, how they were getting it sorted out. Then you fast-forward to the July Q2 earnings, and the costs have really continued to rise.

I guess I just want to know: Healthcare inflation is not new to anyone. It’s been off the charts for the past 30 years. It’s one of the first things I can remember from following markets—healthcare inflation. What is it particularly about healthcare inflation right now that is hitting these guys and everyone so hard, and is going so unexpectedly against their models?

One thing is this redetermination process that I mentioned, which is Medicaid-specific. You had healthy people roll off. The other thing, which is something that Molina has mentioned on its quarterly calls, is that they underestimated the extent to which people would use things like behavioral health services.

It seems that behavioral health usage has become more pronounced—people are using behavioral health services more than they have in the past. Maybe it’s because the stigma around using them has gone away, et cetera. That is one of the things they have addressed and mentioned.

You also have the usual culprits, like drug prices going up and salaries going up for doctors and nurses. So you’re absolutely right: Healthcare costs are going up.

Part of where Molina’s revenue growth has come from in the past is from the average premium per person, which usually goes up about 4% to 5% per year. The key question is whether premiums will go up in line with medical costs, or faster or slower.

If we look at the history once again, medical costs usually fluctuate between 86% and 90%. If medical costs go up faster, then premiums will be repriced. If you look at the commentary from Centene, it’s the only other public company I saw that breaks out medical costs specifically for Medicaid, because it’s a big part of its business as well.

For Centene, medical costs are 94%. For Molina, they were about 90.5% in 2024, but for Centene, they’re around 94%. Centene is losing money, and they’re saying that they will get rate increases of 10% or more, which is going to restore their operating margin.

So, to answer your question, medical costs are going up, but the question is what happens to the premiums. I have to go back to the point that if medical costs continue to go up faster than premiums, the rest of the industry will be losing money while Molina will still be profitable.

Let me ask a higher-level question. I’m with you on the medical costs, but these are policy-dependent businesses, right? If I just said, “Hey, Steve, next year Medicaid is going away,” this company would be in a lot of trouble, right? Medicaid is reliant on the government.

I do think about the tail regulatory risk. I’m not saying Medicaid is going away, although I do think part of the worry is that the One Big Beautiful Bill Act—or whatever it is—slashes a lot of Medicaid funding. I think people are worried about that and all that sort of stuff. There have been debates over states opting in to Medicaid for years.

But if I just said to you, “Hey, you’ve got Molina right now trading at, let’s just call it, 10 times price-to-earnings—a historical compounder, all this great sort of stuff you have—but over the next 10 years”—I use 10 because it’s trading at 10 times price-to-earnings—“over the next 10 years, you’re going to have 2 presidential elections, we’re going to be gearing up for a third, and who knows what happens to Congress, the House, or whatever.”

Medicaid is reliant on federal regulations, and it is in the crosshairs. How do you get comfortable with the regulatory tail risk that Medicaid either, on one hand, doesn’t get slashed by the federal government and these guys are just picking up scraps, or, on the other hand, there’s a massive expansion of Medicaid?

I think massive expansion would be great for them, but maybe massive expansion brings in huge competition. You could imagine 5 different other ways in which massive expansion could change the thinking. How do you think about that regulatory tail risk in a regulatory-driven business?

Massive expansion, honestly, I haven’t thought about. But I think, to your point, it would be positive for them because it increases their addressable market size. As you said yourself earlier, there’s plenty of competition in the field to start with.

It's just a question of who can do it more cost-efficiently, and I keep arguing that Molina can do that more so than others. As far as the risk of Medicaid going away completely, what I would say is that you have 80 million people under coverage right now. I think it's 25% of the U.S. population. Medicare is another 60 million people. Some of it is double-counted, but that's on its own about 20% of the U.S. population. All these people vote.

I don't think any politician would take steps to completely remove this coverage, because then you have to come up with a way to cover these people and provide health care another way than through Medicaid and Medicare. We can step back for a second and talk about the effectiveness of U.S. health care and the amount of money that we're spending in the U.S., which is, I think, $17,000 per person, and how effective that is. But that is double what other OECD countries spend on health care.

Medicaid and Medicare are actually a more cost-efficient way to provide health care than the industry as a whole. Right now, we're spending 17% of GDP on health care costs, which is double what other countries spend. If there is a solution to the problem of health care costs rising, it more likely than not looks more like what Molina is doing than what private insurers are doing. I'm not advocating government health care in any way.

Let me ask you a question. There's been a lot of—I think rage is the right term—at health insurance stocks. Obviously, UNH—one of their top brass got literally murdered in the streets of New York City a few months ago. I think a lot of it has centered around denials, and we've talked a lot about how these guys have to pay out 85% to 90% of what's given.

But I think a lot of skeptics say, “What they do is go and price—let's use our $1,000 per head, right? They use that and say, ‘Great. We're going to pay out $850 per head, and then we'll have $5 per head of administrative expenses. Then we have 10% profit margins.’” I think what a lot of people do is say, “These guys just bid.” And then they just deny down to the numbers.

So even if something is medically necessary—and you'll see lots of physicians say this, right?—“We're getting denied medically necessary treatment by these guys, and they're doing this because they want to fit us into their capitation rate.” When you're bidding, your incentive is just to deny, deny, deny, deny, deny down. So I want to ask you—it's hard to capture this—if you and I were running a health insurance company and we were denying 100% of claims, or 99%, we could say, “Hey, we cover people way cheaper than Molina Healthcare does. Now, we're providing terrible service.”

How do you think about that denial issue? I know that it is out there, and I'm not saying it's Molina-specific, but I know that it's out there. I know it's something that the health care companies, especially the insurers, are addressing. I know it's part of the rage at them. So how do you think about that in the long run and as you think about these companies?

There should be a distinction between denying claims and denying procedures.

Yes, please. Please make that distinction.

Right. Denying claims is when a procedure has already happened, and a hospital is putting through the code for the insurance to cover it, and then they say, “No, we're not going to cover it.” With private insurance, that cost falls on the person, and you have a lot of stories of people going bankrupt. It's a disaster; the system is messed up.

But there's also a question of whether the procedures that you're applying for are necessary or not. If you look at Molina—and I was trying to dig into why they're saying the medical costs are better than average for the industry—it actually is about the same if you look at the numbers for the industry as a whole. Compared to what Molina is doing, it's within range.

There are articles out there saying that Molina will deny procedures more often than other people, and that could be one of the ways that they are managing their medical costs. But if we step back for a second, this is not about any patient specifically, because you can always come up with anecdotal evidence for somebody who needs to be covered but isn't.

If we look at the U.S. system as a whole, it's actually quite interesting. On average, the number of visits per person in the U.S. is lower than in other OECD countries. I think it's 4 compared to 6. But the average cost per visit is higher because there are more procedures happening within these visits.

There are 50% more MRIs. I think statistics say that there are 50% more stents being installed in cases of some kind of cardiac problems. So once people come in, they're being overtreated, which all costs money but doesn't get us better results.

So life expectancy is worse. There are a lot of different ways in which the U.S., despite spending twice as much as every other wealthy country, is getting worse results. From the point of view of stepping back for a second, the client that's deciding who Molina is going to cover is actually the state. From the state's point of view, they need to provide coverage to the people that keeps them healthy.

If Molina or other insurers start reducing the number of approved procedures because those procedures are unnecessary from the point of view of the outcomes, there's no difference. Yes, there are some bad headlines, but from the point of view of outcomes, more likely than not, there is no difference. From that point of view, when we're talking about specific cases, there are going to be situations where insurers will make a mistake. Absolutely.

But overall, the U.S. spends too much money on health care. Part of the reason why I think we see higher costs in private insurance than we do in Medicaid is because they have higher approval rates. In Medicaid, there's more denial of procedures because it's saying, “Well, you don't need it,” or, “We will only do it for this price,” and that's why the cost is lower.

So I guess what you're saying is, in your view, Medicaid does deny more. Now, it's not the issue of denying procedures that have already happened—the issue we've talked about. But they do deny more procedures, and in your view, they're denying a lot of overtreatment. You actually think this is a cure, if I'm saying that correctly.

It's a cure to higher costs. It's a cure to costs going up all the time in the system, because it's statistically proven that there are more procedures being done in the U.S. without better outcomes.

I guess—and again, now I'm kind of beyond my depth. I'm just basing this on what I've seen. I know a lot of doctors and places don't take Medicaid right now. Is that because—I think, if I'm going with your point of view, it's because these doctors—I mean, private insurance pays higher than Medicaid, right? So they deny it because they'd rather get private insurance.

But I had thought Medicaid, just because these states didn't want this or because of Molina and stuff, they were just undercharging—they were underpaying providers, right? But you're saying what they're actually doing is kind of paying correctly, and private insurers are just paying too richly. Am I stating that correctly?

Yeah, I think that's a fair statement. One of the benefits, in general, is that we've looked at different things over time. When I was looking at providers and speaking to them about how their profitability works, what they were saying was, I think, “We lose money on Medicare patients, we break even on Medicaid patients, and we make all of the money on private insurance patients.”

And profitability depends on the mix. That was what they were saying.

So, because there's a separation between who pays and who gets treated, with private insurance it's even worse because it's usually the employer who pays, as opposed to the state. For an employer, it's just one of the costs of having people on the payroll. That's why those costs are higher than they are for Medicaid.

Medicaid does pay less because they negotiate a lower price, and they will pay less for the procedures. To your point, some doctors will say, “I will accept it,” and others say they will not. One very important thing during tenders is what companies like Molina have to provide.

They talk about there being about a 2-year period before you can tender, where you are aligning all of the providers that will be providing the medical services, to make sure that a person will get the coverage that they need. That's where having a presence in the states is important.

Molina is present in some states and not in others, and in additional tenders that they're doing, they're actually already utilizing the same network of doctors and hospitals, et cetera, and they're able to provide services using the same network of doctors.

That's perfect. I want to talk about M&A real quick, but before I do that, let me—I've walked through a couple of different risks, or just questions I've had, when I've looked at these businesses.

And look, I’m a value investor. I do remember when UNH was the headline one because people instantly started saying, “Hey, look at this thing. Look at this stock chart. Let’s buy,” on a sentiment-driven thing, I think. And it’s worked out, I’d say, mixed for them. If you started buying at $400 when it was down from, I think, $600, you haven’t done that well. If you started buying in the high $200s and now it’s at $350, you’ve done pretty well.

But I guess, having looked at these for a while, we’ve walked through a lot of the random risks that have popped into my head. I just want to ask you, having spent a lot more time on this than me, what keeps you up at night having an investment in Molina? It trades for a low price-to-earnings multiple. Yes, they’ve reset a lot of the stuff, but they seem like temporary headwinds. You’ve got this great growth outlook, and you’ve got a team that’s proven they can do it. What keeps you up at night? What makes you think you might lose money on this investment?

Yeah, I think what could break this thesis is if the medical costs, to your point—and that’s something that we discussed earlier—continue to go up faster than the rates. You could have irrational policy that impacts Medicaid in general. You could see that with the budget and the fact that people are losing Medicaid coverage, and that’s clearly a negative for the industry.

So if you have, once again, 10% of the people lose coverage—once again, the healthier group of people—you can have this period in which profitability will be lower extended. If you look at a company like Centene, which is in the same space, I think they have $180 billion in revenue, and it’s a company with a $16 billion market cap. If you apply the normal margin that they used to earn in the past to their numbers, the upside is so much greater, and at the normal P/E multiple, the upside is so much more than here.

I like Molina more because I think it’s able to persevere through a longer period of disruption than any other player in the space. To your point, if I were an investor in Centene, I would be very worried about how long it takes for the rates to catch up with medical costs. Molina’s profitability went down from 4% to 2%, but they’re still profitable. I’m a lot more comfortable sleeping at night here.

And if this stock wouldn’t trade for the next 5 years—so, to Buffett’s point, if this stock wouldn’t trade for the next 5 years, do you tell me the market is going to be closed tomorrow?—I would be very comfortable with that.

So, in many ways, if I’m just flipping through mental models, what you think you have here is the ExxonMobil of Medicaid, right? They are the lowest-cost producers.

I have the Walmart of retail. I don’t think—

Walmart agrees with what you said.

Yeah.

You know, I already see where you’re coming from with Walmart, but they’re the most efficient. They’re the lowest-cost producer. So, yes, the industry is going through kind of a trough. That’s why I chose Exxon, because I was going to say they’re going through a trough. But these guys are still quite profitable while the industry is going through its trough, and everyone else is just bleeding money.

So what’s going to happen is, at some point, the governments have to stabilize this, because otherwise every single player will exit the system and nobody will provide Medicaid coverage.

Exactly. And somebody has to do it.

Yeah.

So it either has to be an MCO like Molina, or it has to be the government itself, and they’re not going to be able to do it cheaper.

Okay, that makes total sense. I just want to ask quickly about acquisitions. I think you’ve actually touched on the reason why, but I’ll still ask because, when they talk about their growth, they talk about double-digit growth. You can go read their 2024 Investor Day presentation, and they’re actually still hitting that on the revenue side. It’s the costs, as you’ve said, that have caused the problem, but their growth is split pretty much evenly between organic growth, where they win new business or add more members, and inorganic growth, where they go and acquire plans.

I just want to talk a little bit about their inorganic M&A expansion plans because I’m surprised there are still small bolt-ons for these guys to do when it seems like the industry has consolidated so much, if that makes sense.

I don’t remember the numbers exactly, but I think if we look at the top 5 players—Centene, UnitedHealthcare, Wellpoint, Humana, and Molina—they’re only about 50% of the industry in terms of Medicaid coverage.

And the rest are these smaller players.

They may be present in 1 or 2 states, or, more often than not, just 1 state, covering 100,000, 50,000, or 200,000 people because of the tender that they have won. These are exactly the type of companies that Molina usually buys because these guys are usually unprofitable. They do have revenues and members, but they don’t have profits.

Going back to the point about administrative expenses, they will buy companies that have administrative expenses of 10% to 11%. The medical costs may be the same, maybe a little higher, maybe a little lower, but they will buy companies that have administrative expenses of 10% to 12%. Then they put them through the Molina playbook to bring those costs down to their levels within 2 to 3 years and have the same profitability.

If you look at the amount of money, I think they spent something like $2.6 billion on acquisitions over the last 5 years. They’ve acquired about 1.2 million members as a result of this, and they’ve acquired about $9 billion or $10 billion of revenue. If you put their normal margin—what they’re earning on this—they paid somewhere between 5 and 12 P/E. If you apply today’s margin, it’s 12 P/E. If it’s their normal margin, it’s like 4 P/E. So again, you can pick any number in between.

So it seems like a no-brainer. And, to your point, the company makes the same point: The return on equity is quite high, and that return on equity includes the returns on acquisitions.

I’m reading the memoir that John Malone came out with right now, and it’s funny because what you described is very much like how John Malone talked about TCI in the ’80s and their acquisition program. They just said, “Hey, we’re the biggest. We’ll go buy a small cable company that’s making no money, but we know exactly what we’re going to take their SG&A down to. We’re going to get a little bit of benefit because we’ve got the best programming costs.”

So between getting the best programming costs and knowing exactly where the M&A program goes, it was almost impossible for them not to accretively acquire someone. This just fits that acquisition model to a T. The unfortunate thing is there is a limit to how much they can do it. But the fortunate thing is I think they’ve got years of continued bolt-on acquisitions, and they always say, “Hey, the pipeline is kind of popping and everything.”

Steve, I think we’ve actually covered most of the stuff I wanted to talk about here. I just want to pause here. Is there anything else you think we should be talking about, or listeners should be thinking about, when it comes to Molina?

I don’t know to what extent that makes a big difference or not, but I did mention the CEO, who’s been there since 2017. He owns about 400,000 shares, which is about $80 million or $90 million, so—

He used to be worth about $200 million to $250 million.

So he gets paid reasonably well. He’s about 67 years old, and they want him around, so they gave him an incentive package to stick around through 2027. If he sticks around and the company achieves $36 of EPS by 2027, he gets another 150,000 shares.

It’s a lot of money.

I’m guessing he’s reasonably well off, but it’s a number that makes a difference, especially if you put a 10 P/E on $36. It will be something.

Look, it’s one of those things where Elon Musk buys $1 billion of Tesla on the open market, and people say, “Well, you know, it’s funny to say this, but Elon’s a trillionaire or whatever he is, right? Like, a $500 billion billionaire. This is not that big of an insider purchase for him.” And it’s like, I hear you, but it is $1 billion. He cares.

In this case, we just walked through that the CEO owns, let’s just call it, $100 million of stock to make the numbers really easy. People can call it whatever they want.

$150,000. And as you said, if they do $36 in EPS, it’s not going to be a $200 stock. It’s going to be $400 or $560. But, you know, with 150,000 shares, he’s going to get $30 million or $45 million in stock compensation if he hits it.

$60 million.

Yeah, $60 million. That’s half the net worth we just talked about. He’s going to want that. He’s going to want that. He’s going to pull every lever to hit that.

And it’s not lost on me that they paused their share buybacks. I believe—I’d have to check—but they buy back about 2% of their shares. They paused them in late 2024 when the stock was at $350. Based on how they’re talking, I wouldn’t be surprised if they’re ramping up share buybacks right now.

And between that plus inorganic growth, you can get really accretive. They get a long way to that $36 just between buybacks and inorganic growth, I think.

Yeah. So they bought back half a billion in the first quarter. They haven’t done much in the second quarter, but I think, to some extent, they saw a deterioration in MCRs and wanted to take a pause. Arguably, that’s a smart decision.

What they’re doing right now—we’ll find out in Q3 when they report Q3. I think it’s going to be a pretty important data point whether they continue to buy back shares, which means they’re comfortable, or whether they’re still pausing. That’s going to be important to look at. But, yeah, I think we did cover that.

Is there any Scooby-Dooing going on here?

Not that I know. The only reason I asked, for those who don’t know, is that someone at Firebird posted one of my favorite posts of the month: “When a company’s management team is intentionally trying to drive the stock down.” They call it Scooby-Dooing because you’re the meddlesome kids who are getting in the way of the company. If, as an analyst, you’re the meddlesome kids who are buying the stock up and getting in the way of the management team driving their stock down.

No, you’re saying this right, and I think it’s a good opportunity to give a shout-out to my partner, Harvey Sawikin, who wrote that. This is his Substack. I think he’s a phenomenal manager and a phenomenal writer, and he’s really enjoying doing this. So anyone who’s listening to this and doesn’t follow it, I think they’ll probably enjoy doing that.

I loved the piece. I love the framework. The only thing—my only criticism of it would be that, in the past, he is right. Again, I’m reading the John Malone book, and I think John Malone—the reason he got so rich is that he very much Scooby-Dooed when TCI spun out Liberty Media. He very much Scooby-Dooed that, in my opinion. I’m sure it was 30 years ago. Who cares?

But my only pushback on the Scooby-Doo is that sometimes I’ll talk to management teams and be like, “I didn’t know the term, but these guys are Scooby-Dooing it. They’re trying to depress the stock price.” Then what it actually is is, no, these guys suck, and the stock is going down because they’re really bad.

It’s a great question, and I would say that it’s something we should be asking as analysts all the time. Any company we’re looking at, I think these guys have a track record of delivering results.

Yep.

I only asked because I wanted to bring up Scooby-Doo. I’ll ask you this—

And I appreciate that you did.

Give me a company that’s Scooby-Dooing its stock right now.

Sorry. Pass.

Oh man, I knew I was putting you on the spot. I knew it was a tough one. I was hoping to pull it out.

This is good. Steve, this has been awesome. I’ve really enjoyed this. Again, I didn’t even know Falling Knife until I was preparing for this podcast. I didn’t even know it, but I’ve really enjoyed following Firebird’s stuff. I really appreciate you coming on, and I’m looking forward to having you on for the third time.

Thank you, Andrew. This was a pleasure. Thanks again.