Medicaid and Medicare are the cornerstones of the U.S. healthcare system, providing critical support to millions of Americans.

Spending on healthcare has outpaced the economy for decades, with total healthcare expenditures projected to reach 31% of GDP by 2035, according to the Congressional Budget Office.

The growing aging population will drive up costs, particularly for Medicare, as baby boomers retire and life expectancy increases.

Medicaid will also face higher demand for long-term care services. These challenges make efficiency and smart management more important than ever.

Molina Healthcare (MOH) specializes in providing health insurance services through government programs like Medicaid and Medicare.

The company’s stock dropped 17% after peers like Elevance Health (ELV) and UnitedHealth (UNH) reported worse-than-expected medical cost ratios (MCRs).

Elevance, for example, saw its MCR climb 300 basis points year-over-year, due to higher healthcare usage and slower Medicaid reimbursements.

Despite achieving a 24% Uniform ROA and 20% asset growth last year, the market believes Molina will have the same troubles as its peers, reflected by its 14x Uniform P/E ratio.

However, Molina’s long-term strategy sets it apart. It has successfully pursued a roll-up strategy, acquiring smaller insurers to expand its reach.

Over the past five years, the company has doubled its premium revenue and nearly doubled its EPS.

This growth is driven by strategic acquisitions like Magellan Complete Care, which brought in 155,000 members and expanded Molina’s presence in key states.

Unlike larger competitors, the company can target smaller acquisitions that don’t significantly move the needle for companies like UnitedHealth.

This gives Molina a unique edge in growing its business while maintaining manageable costs.

Additionally, in contrast to peers, which faced margin compression from reimbursement delays, the company’s meticulous planning and state-level collaborations help it stay ahead of such challenges.

Furthermore, its operating expenses have remained stable, demonstrating tight cost control even during periods of volatility.

Despite industry challenges, the company remains an attractive opportunity for investors. Its focus on Medicaid and Medicare, combined with disciplined cost management and strategic acquisitions, positions it well for future growth.

While short-term earnings could be volatile, Molina’s ability to adapt and expand makes it a solid choice for long-term investors.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

This analysis of Molina Healthcare (MOH)’s credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.