Molina Medicaid Solutions - DHHR

e10vk$29.17 - $30.05 9,350 5.9 $ 29.86 9,350 $ 29.86$31.32 - $44.29 303,475 6.7 $ 35.03 197,141 $ 36.66650,739 5.8 $ 30.25 542,905 $ 29.92The Black-Scholes valuation model was used to estimate the fair value of stock options at grant date (for options awarded in 2008 and 2007; no options were awarded in2009) based on the assumptions noted in the following table. The risk-free interest rate is based on the implied yield on U.S. treasury zero coupon issues for the expected optionterm. The expected volatility is based on historical volatility levels of our common stock. Beginning in the first quarter of 2008, we used an expected term for each option awardbased on historical experience of employee post-vesting exercise and termination behavior. Prior to 2008, the expected option term of each award granted was calculated usingthe “simplified method” in accordance with Staff Accounting Bulletin No. 107. This change did not produce materially different valuation results for the stock options awardedin 2008. The assumptions disclosed below represent a weighted-average of the assumptions used for all of our stock option grants throughout each of the years presented.Year Ended December 31,2008 2007Risk-free interest rate 2.5% 4.5%Expected volatility 45.3% 47.1%Expected option life (in years) 4 6Expected dividend yield 0% 0%Grant date weighted-average fair value $12.80 $16.3717. Related Party TransactionsWe have an equity investment in a medical service provider that provides certain vision services to our members. We account for this investment under the equitymethod of accounting because we have an ownership interest in the investee that confers significant influence over operating and financial policies of the investee. As ofDecember 31, 2009 and 2008, our carrying amount for this investment totaled $4.1 million and $3.6 million, respectively. During 2008, we advanced this provider $1.3 million,all of which was collected during 2009. For the years ended December 31, 2009, 2008, and 2007, we paid $21.8 million, $15.4 million, and $10.9 million, respectively, formedical service fees to this provider.We are a party to a fee-for-service agreement with Pacific Hospital of Long Beach (“Pacific Hospital”). Pacific Hospital is owned by Abrazos Healthcare, Inc., theshares of which are held as community property by the husband of Dr. Martha Bernadett, the sister of Dr. J. Mario Molina, our Chief Executive Officer, and John Molina, ourChief Financial Officer. Amounts paid to Pacific Hospital under the terms of this fee-for-service agreement were $745,000, $242,000, and $157,000 for the years endedDecember 31, 2009, 2008, and 2007, respectively. We also had a capitation arrangement with Pacific Hospital, where we paid Pacific Hospital a fixed monthly fee per member.This contract was terminated by the parties effective August 31, 2009. Amounts paid to Pacific Hospital for capitated services totaled approximately $1.1 million, $3.8 million,and $4.8 million for the years ended97Table of ContentsMOLINA HEALTHCARE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)December 31, 2009, 2008, and 2007, respectively. We believe that both arrangements with Pacific Hospital are based on prevailing market rates for similar services.18. Commitments and ContingenciesLeasesWe lease office space, clinics, equipment, and automobiles under agreements that expire at various dates through 2018. Future minimum lease payments by year and inthe aggregate under all non-cancelable operating leases consist of the following approximate amounts:Year ending December 31,(In thousands)2010 $ 21,3342011 20,7612012 18,6042013 15,1832014 13,522Thereafter 39,576Total minimum lease payments $ 128,980Rental expense related to these leases totaled $20.8 million, $17.5 million, and $18.1 million for the years ended December 31, 2009, 2008, and 2007, respectively.Employment AgreementsDuring 2001 and 2002, we entered into employment agreements with three current executives with initial terms of one to three years, subject to automatic one-yearextensions thereafter. In most cases, should the executive be terminated without cause or resign for good reason before a change of control, as defined, we will pay one year’sbase salary and termination bonus, as defined, in addition to full vesting of 401(k) employer contributions and stock-based awards, and a cash sum equal in value to health andwelfare benefits provided for 18 months. If any of the executives are terminated for cause, no further payments are due under the contracts.In most cases, if termination occurs within two years following a change of control, the employee will receive two times their base salary and termination bonus, inaddition to full vesting of 401(k) employer contributions and stock-based awards, and a cash sum equal in value to health and welfare benefits provided for three years.Executives who receive severance benefits, whether or not in connection with a change of control, will also receive all accrued benefits for prior service including atermination bonus.Legal ProceedingsThe health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations can be subjectto government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and regulationsinclude significant fines and penalties, exclusion from participating in publicly funded programs, and the repayment of previously billed and collected revenues.We are involved in legal actions in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are notcovered by insurance. The outcome of such legal actions is inherently uncertain. Nevertheless, we believe that these actions, when finally concluded and determined, are notlikely to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.98Table of ContentsMOLINA HEALTHCARE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Professional Liability InsuranceWe carry medical malpractice insurance for health care services rendered through our clinics in California. Claims-made coverage under this policy is $1.0 million peroccurrence with an annual aggregate limit of $3.0 million for each of the years ended December 31, 2009, 2008, and 2007. We also carry claims-made managed care errors andomissions professional liability insurance for our health plan operations. This insurance is subject to a coverage limit of $15.0 million per occurrence and $15.0 million in theaggregate for each policy year.Provider ClaimsMany of our medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Suchdiffering interpretations may lead medical providers to pursue us for additional compensation. The claims made by providers in such circumstances often involve issues ofcontract compliance, interpretation, payment methodology, and intent. These claims often extend to services provided by the providers over a number of years.Various providers have contacted us seeking additional compensation for claims that we believe to have been settled. These matters, when finally concluded anddetermined, will not, in our opinion, have a material adverse effect on our consolidated financial position, results of operations, or cash flows.Regulatory Capital and Dividend RestrictionsOur principal operations are conducted through our health plan subsidiaries operating in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, andWashington. Our health plans are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state,and restrict the timing, payment and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must comply withhttp://sec.gov/Archives/edgar/data/1179929/000095012310025132/a55407e10vk.htm[1/6/2012 11:12:35 AM]