Yet Another Value Podcast - Firebird Management's Steve Gorelik's Molina Healthcare Bull Thesis $MOH

Episode Date: September 29, 2025

In this episode of Yet Another Value Podcast, host Andrew Walker welcomes back Steve Gorelik from Firebird Management for a deep dive into Molina Healthcare (ticker: MOH). Together, they explore the sharp drop in Molina's stock despite its long-standing compounder reputation. Steve outlines how Molina operates as a low-cost Medicaid-focused managed care organization, making it uniquely resilient amid rising medical costs and regulatory challenges. They discuss Molina’s competitive advantages, risks tied to healthcare policy, redetermination effects, and its strategic M&A playbook. Tune in to understand why Steve believes Molina remains undervalued and poised to outperform its peers—even as the broader Medicaid sector stumbles.___________________________________________________________[00:00:00] Intro and sponsor mention[00:02:25] What is Molina Healthcare?[00:05:31] Medicaid model and revenue growth[00:06:25] Molina stock chart and July crash[00:07:13] Industry-wide margin compression[00:11:28] Why Steve sees alpha in Molina[00:13:29] ROE vs. cost structure explained[00:15:04] Admin efficiency as competitive edge[00:17:04] Molina’s playbook and cost culture[00:20:16] Medicaid redetermination impact[00:24:07] Market share gains amid member losses[00:26:26] What's driving cost inflation now[00:28:44] Will premiums rise to match costs?[00:30:26] Regulatory risks in Medicaid[00:32:19] Medicaid vs. private cost efficiency[00:33:54] Denials, approvals, and outcomes[00:37:50] Molina’s denials as cost control[00:40:42] Tender process and doctor networks[00:41:43] What keeps Steve up at night[00:44:41] Acquisitions: model and pipeline[00:47:18] M&A parallels to John Malone[00:48:19] CEO incentives and share ownership[00:50:48] Share buybacks and capital returns[00:51:19] Could Molina be acquired?[00:52:57] Long-term compounding vs. exit[00:53:28] Scooby-Doo investing explained[00:54:23] Wrapping up the conversationLinks:Yet Another Value Blog - https://www.yetanothervalueblog.com See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimer

You're about to listen to the Another Value podcast with your host, me, Andrew Walker. Today's podcast, I have Steve Gorlick from Firebird back on the podcast. We talk about Molina Health, the ticker there is M-O-H, see the full disclaimer at the end of the podcast. It's a really fascinating conversation about a really interesting company. This is a long-time compounder. Go look at the stock chart. It's just up into the right, up and to the right, up into the right. And then, you know, starting in July of this year, they cut basically in half.

So you've got a company that's historically a compounder that is trading now. at 10x-ish price of earnings should have a long runway for growth. You know, do they return to the compound or status or this is a company that does a lot of Medicaid? Is there a lot of regulatory headwinds, a lot of tax headwinds, a lot of all sorts of headwinds? So really fascinating conversation. We touch on a bunch of different angles here. So I think you're going to enjoy it.

I certainly did. We're going to get there in one second. But first, word from our sponsor. This podcast is sponsored by portraitanalytics.aI. Portrait Analytics is a whole new way to use AI and investing. They've got a unique set of AI tools that will help you discover, research, and monitor new investment ideas with unprecedented depth, including allowing you to automatically screen and monitor your portfolio while creating summaries of trends and tailwinds that are

driving your stocks. But don't just take my word for it. I'd a listener email me and tell me, I've never thanked anyone for helping me to spend thousands of dollars before, but I never would have heard about portrait analytics without your podcast, and I'm just thrilled with how much time it's freed up for me to do high-level analysis and portfolio management. It's super accurate and reliable. it's been a complete game changer for me.

Like my listener said, portrait is simple to use, super fast, and really intuitive. Check out Portrait Analytics today and see how they can improve your research process. That's Portrait Analysts at Portraitanalytics. All right, hello. Welcome to yet another value podcast. I'm your host, Andrew Walker.

With me today, I'm excited to have on for the second time, Steve Gourlick from Firebird Management. Steve, how's it going? Hey, Andrew, thanks for having me again. I'm super excited for this podcast. It's a space near and dear to my heart. Before we get there, quick disclaimer, remind everyone, nothing on this podcast is investing device.

You can go listen to the full disclaimer at the end of the podcast. But Steve, the reason we're talking today is 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 M-O-H. I think it's a super interesting space. You graciously decided to ask if you come on the podcast, so I'm super excited, but I'll just pause there and say,

what is Molina Healthcare, and why are they so interesting? Well, Andrew, thanks for that introduction. And once again, thank you for having me come back to the podcast. Molina Healthcare is a managed care organization. So it's kind of, you can think of it as a health insurer. But they specialize in running the government-run plants, and specifically Medicaid plans. And so they are, while there's obviously different kinds of insurance, there's commercial insurance, there's Medicaid, there's Medicare.

Molina specializes in managing Medicaid plans. The way that it usually works is that a, so Medicaid is actually by the state. So the state decides who is covered, what portion of the, who is eligible for Medicaid coverage. They will put out a tender, a request for proposal to all of the companies in the space. will be asking to who is willing to cover the people and at a particular cost. And then the managed care, and once the companies that do win the tender, and usually it's the population split between four or five different winners, the companies that do win the tender then actually provide the health insurance service.

So it's their job to find that contract, the hospitals, the doctors, et cetera, in order to provide the health services. the population that is covered by this plan. Molina has a market capital about $10 billion. It covers roughly 5 million people, which is... For this, much in the YouTube... Matt just made a little dash for it. Yes, she does up every time.

She just feels when I'm on a podcast. So it covers about five million... covers about 5 million people, which actually is about 6% of the U.S. population that is on Medicaid, so their market share is relatively small. And I think they're either the third or the fourth largest provider, the biggest ones, are the people like Senti and the United Healthcare, so other public listed companies. So, as I already said, about 10 billion market cap and annual revenues are about $40 billion. It's actually a little more.

The revenues have been grown by about 10 to 15. percent per year. They grow through the combination of gaining share. So Molina is pretty effective at winning more than their fair share of vendors. And I can get into later for why that is. And also through, in part through the acquisitions that they're making where they're buying underperforming other providers in the space, not providers, but other insurers in space. then they're buying the underperforming ones at a price that is usually quite attractive and then able to improve the profitability and deliver value to shareholders over time. That's a great overview.

I've got tons of questions. Obviously, health care is a really interesting space just overall, but let's just start with Delapin in the room. I'm sure the first thing most people do, you know, the hundreds of thousands of people listening to this podcast, I'm sure the first thing they do when they see stock is they pop this in, they start listening, and then they pull up the stock chart, right? And if you look at Molina's stock chart, again, the ticker's M-O-H, you're going to see a stock chart that for the past, you know, 20 years has generally been up into the right. And then this year, you know, they start the year at 300. They continue kind of up into the right.

The stock peaks around 350. And then in July, I mean, the stock just gets hammered, right? 300 to 150 inside of a month, starting July to the end of August. As you and I are talking, the stock's kind of out 185. But the first thing on anyone's mind is going to be, hey, what's? drives a 50% decrease in a month in this kind of compounder up into the right stock. Absolutely. And that's a great question. And I think you should also look not just at the stock chart of Malina, but also at the other companies in the space. So if you look at Santine, if you look

at UNH, which is slightly different animal elephants, well point health care. So all of the insurers, the stock chart will look more or less similar. And there's two reasons for why we've seen this type of reaction. One and the main one, I think, is the significant increase in medical costs. So the way, if we step back for a second in terms of how the profitability of these companies work for each $100 that they would receive from the state to help, to manage the expense of some. They're counting, right? If they take 100 patients on, the state may say, hey, hey, great. Here's $1,000 per patient for all 100 patients. You guys go manage it. If it costs you

$5,000, well, you're really in the hole. If it costs you $500, you guys are going to make a ton of profit. Well, so yes and no. And that's actually where a difference. So let's say let's use the number of $1,000. It's actually a little different, but let's use the number of $1,000. The expectation is that out of $1,000 that the state pays to 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. And then the remaining 10% is the potential profit for the company, but more often than

not, that is eaten up by the administrative expenses. And we can get into it. And if the number is below 85%, and specifically with Medicaid, if a number is below 85%, then the insurers owe a refund to the state, they're saying, well, you didn't spend enough. And this is actually what happened during COVID is because they have not enough money was being spent on medical procedures, because people were staying home for various reasons. So at that point, the medical costs for the industry fell below 85%. Insurers owe the refund to the state.

What we're seeing right now is actually that, but the upside. So from a point of view of what is the highest number for it, usually it doesn't reach 90%, doesn't go about 90%. But right now it is. And that is kind of the risk for your point. This is the risk that the insurer takes on. And we went from that typical range of 85 to 90%. And currently for the industry, we stand at about 92, which is a big problem, because the

other part, the administrative cost for the industry as a whole is usually around 9, 10%, meaning the industry is unprofitable. Malina, and one reason is why I really like Malina, especially the sound of the other names in the space, they are the most cost-effective player. in the space on the administrative side. You can think about it. I'm a generalist. I'm trying to put frameworks that work in other industries.

You can think of Molina as a company that because they are operating just with Medicaid, just with these type of customers, and they're super low cost. They're the Walmart. They're the low-cost carrier like Ryan Ayer. If we think of commodities, they're the bottom quartile producer of a commodity from point to be of costs. So when the whole, the rest of the industry is unprofitable, which is what is the case now, Malina is actually still making money, not as much money as it used to. So normally it operates at about a 4% margin. Right now we're at about two. So their profitability

has half just like the stock did, stock price did. But they're still profitable while the rest of the industry is not. And that's a very important part. To grip, the main reason for why we saw the stock chart react as it has is because. because the medical costs are going up faster than the market has expected, and we can get into reasons for why that is. And what the insurers are saying is that we'll fix that through the higher rates because there is a mechanism to ask for higher rates from the states. And they're saying that we will fix that through the higher rates that we're going to be coming

up that are going to be repricing COVID next year. but market is understandably skeptical because they're thinking, well, maybe the cost may continue to go out for it. So that's the summary. Great overview. There's tons of stuff I want to dive in there. But let me just step back. Before we start diving in specific points of the business and the best model, I just want to ask you, like, the market's competitive place. These are big health insurers, right? Even when Alina, one of the smaller, these are big companies, well-followed, well-traffic. compounders for years. What are you seeing here that the market is missing that makes this kind of an alpha opportunity? That's a great question. I think what I see in there is that what we have

is we have the whole industry is actually suffering from the same problems. Is that medical costs are going up faster than both the insurers and the analysts have been expected. What I see from a point of view, Malina, and I already mentioned, is that because they have lower administrative expenses ratio compared to everyone else, they are able to persevere and survive through this difficult period, a lot more so than everyone else. And the other thing is that these insurers are operating at an extremely, like, if you look at the whole healthcare sector, they have the lowest margin. So when we look at the providers, the hospitals, et cetera,

they will be operating somewhere between 6% and 10% operating margin, the best players in the space like I see, I think, around 15. When we look at the drug companies, they're usually, I think, the operating margins are around 20, 25%. So normal margin for insurer is 3, 2% to 3%. for. And from that point of view, they are, and also 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 their own, they will have to do the same thing that what these insurers do, which is building up the

networks of providers, figuring out how billing, et cetera, and they do all of this for 2% margin. So from that point of view, I'm not sure whether I'm missing something or not, but I think I'm fairly confident that the states are going to, the insurers are going to be able to make a credible case for why they cannot continue to be losing money. So let me dive into a few points there because those are great points, and they bring up some of the questions I've had when I've looked at these.

And I guess the first question is, you made the case, hey, these are low-margin businesses, right? They're not taking much of it, which is good. But that brings me to two different points. So I guess I'll start with the more financial point. I do hear you, right? All in, like their profit margin, whatever it is, their administrative sense are small in the grand scheme of things.

But if I just looked, you know, even this year, after all the cuts, Molina is going to earn over a billion in net income. They're doing that on $4 billion of equity, with $2 billion of that being tangible equity, right? So there are a we is somewhere between 25% to 50%, depending if you're return or return to that. Now, a lot of this is administrative costs. It's a low, it's a low capital intensity business.

But I would just say, like, these guys are like insurer slash insurer adjacent. And if I look at that type of ROE, that type of return on tangible equity, I'd say, hey, that's really, 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 marginally gets too high, Medicare will just take reimbursement cuts to you. Why shouldn't the states be looking at this guy and say, hey, you're making 25%, 50% returns on tingeable 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. So that would be question one. And then I have a more healthcare-focused question.

Okay. So I think the first question is actually the answer to it is relatively simple. And it goes with the administrative expenses point, which I made a couple. a couple of times by now. The way that usually these procurements work is that, and let's go back to a number of $1,000, $1,000 per patient. There is a procurement that state puts out an RFP, and it selects four insurers, called four or five 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, some of them a little worse, but they will spend about the same.

And let's pick a number. Let's pick a number that's at the bottom of range, but let's say 90%. So meaning there's 10% left. The rest of it, so that 10% for most other players in the space, including the big guys like UNH, United Healthcare, is eaten up by administrative expenses. And the only reason why Molina is profitable is because for them that number is not 10%, but seven. Well, let's pause there then. This jump to the point, but to your point, they cannot say everyone else gets $1,000 and you Malina gets $980.

It doesn't work that way. This is a little bit ahead of my questioning, but I think since you raised it, raised a good question. They've got a slide in their investor debt from 2024 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 student expenses?

Like, if you told me, hey, United Healthcare, which is the largest company, has better administrative expenses because of economies of scale, better tech, whatever, I can start believing. This is about the seventh largest, I believe, insurer. Why should the seventh largest insurer be so much better than everyone else on administrative expenses? Well, I would bring up an example from another industry. Why is Ryan, well, Ryanair is maybe a bad example because they're quite large, quite large, but why are some of the low cost like Southwest Airlines, so the Ryanair, why their costs so much lower

than it is for the American Airlines or Continental, et cetera, and when we're talking about costs mean administrative costs, is because, so Molina has something called, and this is some, this actually, it's interesting to look at the history of Malina because you could see their profitability changed from 2017, when the current leadership, has come in. This guy, Joe Zabretzky, has been brought in from the outside. This guy was initially, I believe, at Aetna, and he came in, and he started installing what they call is Malina Playbook, which is, and to me, it's kind of similar to the data, her system, and there's a number of examples of these from other industries where this focus on costs and

efficiency, and because they're only doing one thing, is in their DNA. UNH, which is arguably a great company, and I don't want to spend too much time on it, but because they're doing different things, and because they're operating, most of the coverage that they provide is for the commercial plans, where the medical costs are usually lower, they don't need to be as efficient on administrative expenses. So this is where the specialization, I think, makes a huge difference. And this is, and because Malina, and if you look at before 2000, This was a public company before 2017. It was being run as a glorified nonprofit.

And it was because it was being run by the, I think it was by the two sons of the founder, who was one of the CEO or one of the CFO. It was correct. It was a different company. It had higher expenses. They had both administrative expenses and a medical cost. It was just not being run for profit. It was being run, arguably, you can call it public good or whatever it is,

but it wasn't being run for profit. It was growing very fast, but it wasn't being wrong for profit. Since then, since Joe Zubretzky has come in and has installed Malina Playbook, they have continued to deliver growth and continue to gain share, but they're doing it from the position of the low-cost provider. And this is kind, once again, going back to the example of the airlines, there's a reason for why the low-cost carriers are gaining share against the full service providers.

It's because they're providing what people need, the basic part and not some of the other things. It's great. So it is, it's both one of the toughest and it's one of the toughest things, but when you get to write the best things for investors to bed on it, it is literally culture installed systems, like the stuff that I kind of hate because they don't, they don't appear anywhere in the spreadsheets except for in the kind of profit margins and ROEs,

you can't really read it 10K 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 anything else on what I just said or anything you were talking about that you want to hit on? So I think the other thing that we didn't really touch on for why these companies are cheap,

and that's the other question. I don't know to what extent you want to get into it, is because if we look at the budget that was just past, 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, and there's different estimates, but most of the estimates say that it should reduce the number

of people covered by Medicaid by about 10 million people. The current number in the country is about 80 million. So we're talking about, and that number usually grows over time. But let's call it between 10 and 12 percent of the people will lose coverage. And there's a big question of what does it mean. One of those, so we kind of, we started talking about the reasons for why medical costs have been blown out. One of the reasons for why they have been higher than what people expected is because about two years ago after the COVID medical emergency, COVID emergency has been removed. There was a process called redetermination. So if we step back for a second, what happened is that during COVID, because we had a medical emergency, anybody who had gained coverage for

Medicaid during that period, couldn't lose it. And usually the way that Medicaid works, it's a needs-based assistance. So if your life circumstances have improved, you found a job or whatever it is, then you could lose your, or quite often it's because people have forgot to file paperwork the right way, but that's a different story. You have, what could happen is that people would normally lose coverage. They didn't lose that coverage for a couple of years. And then when the medical emergency status has been removed,

all of these people over a period of year lost eligibility, and that was about 8% of the population. That was unmedicated at the time, ended up losing the coverage. What happened during that time is that it just so happened that the people that lost coverage coverage were more often than not the healthier budget. because these are the people that did get a job or are younger. So as a result of that, what happened is that because the healthier people got removed from the coverage, the people who were left were less healthy and they needed more

medical expenses. So that's one of the reasons for what, and this is something that ensures, I don't think, including Molina, I don't think they have correctly estimated that when they were talking about the potential impact of redetermination. they didn't correctly estimate of what that could need on medical costs. And that's for one reason for why we see the cost go up today. And there's fear that with the kind of if the same thing will happen as far as why people are losing coverage for Medicaid as a result of the new budget.

No, that's great. I feel that that could happen again. And once again, we'll see another jumping cost. You know, I just, when I'm looking at the financials, right, I've got the note from the 10-Q, June 30, June 30th, 2012, 4.9 million Medicaid members, and they've got 5.6 million overall. So as they've said, their flagship is the Medicaid, right? That's their flagship. June 30th, 2024, they're down to under 4.8 million.

So they shed, you know, a million, or sorry, over 150,000 of their 5 million. So that's 3%. It's not nothing. It's not an insane number, but it's not nothing in your flagship franchise. And I think people are looking at, as you said, the one big beautiful. beautiful bill, cuts to Medicaid spending, cuts to Medicaid spending, all this sort of stuff and saying, hey, are you looking at, are we going to be talking about 4.6 million members if we're fast forwarding 18 months? So keep in mind, so they lost three, so yes, they lost about 2 to 3% of the members, but the industry lost 8. So they gained share. And as I was saying earlier, they are gaining share as a result of winning tenders. So they win about 80% of the tenders that they choose to participate in. And as a result of buying, underperforming insurers. So over this time, and their market share, I was looking like,

the market share grows by about 0.2% per year. And if we're talking to 80 million people, that's like 160,000, if I'm doing the math right, per year. So from that point of view, and they have, and they actually do pretty good job. So you already mentioned of their 2024 investor day, they do a pretty good job of explaining where the growth is going to be coming from. And they're showing that because they're estimated the revenues will continue to grow at about mid-scene IRAs between now and then. And they're saying that between now and then, between now and 2027, about two-thirds of that growth has already been secured through the tenders that they want but they didn't get put

in place yet and the acquisitions that they have made. Let me ask a separate question. So we've talked a little bit about how, well, let's start with. one other. You said a few times, hey, and when I was reading their 2004 investor day, which these psychopaths, they had it two days after the presidential election. And how can you do that with, this is a policy-driven business, which I'll come back to in a second. But, you know, when I reread that, they talked about rising costs. And this was November 2024. The stock is 300. They talk about rising costs. They talk about all this sort of stuff.

and they talk about how it's a one-time thing, right? How they're getting it sorted out. And then you fast forward it to July, Q2 earnings, all that sort of stuff. The costs have really continued to rise. I guess I just want to know what the cost. Like, healthcare inflation is not new to anyone, right? It's been off the point for the past 30 years. You know, it's one of the first things I can remember from foreign markets,

health care inflation is right. What is it particularly about health care inflation right now that is hitting these guys and everyone so hard and is going like, so unexpectedly against their models. So one thing is this redetermination process that I mentioned, where it's Medicaid-specific, where you had people roll off that were healthy. The other thing is,

and that's something that Malina has mentioned in our quarterly calls, is they have underestimated to what extent people will be using things like the behavioral health services, which it seems like it has become more pronounced that people are using behavioral health. more so than they have done in the past. Maybe it's because the stigma about using this is going away, et cetera. But that is one of the things that they have addressed.

One of the things that they have mentioned. And then also you have the usual culprits like the drug prices going up. You have the salaries going up for doctors and for nurses. So you absolutely are the absolute right. The health care costs are going up. And part of where the revenue growth formally has been coming from in a past is from average premium per person that they're earning, usually goes up about four or five percent per year.

And the key question is, are they going to, are the premium is going to be going up in line with medical costs, faster or slower? And if we look at the history, once again, so when we're talking about medical costs, they usually fluctuate between 86 and 90%. And if medical costs go up faster, then you will get the premium of free price. Like if you look at the commentary from people like Sensing, so Sensing, which is they're the only other public company I saw that is breaking out medical costs for Medicaid specifically because it's a big part of their business as well. For them, medical costs of 94% has been lost. For Malini, it was about 90.5 or 19.8, but for Sensing, it's around 94.

they are losing money. And they're saying that we will get rates that will be going up 10% plus. And that's going to restore our profit bills. So medical costs will go up. To answer your question, medical costs are going up. But the question is what happens to the premium? And I have to go back to the point is that

if medical costs continue to go up faster than the premium, the rest of the industry will be losing money. Well, Malina will still be profit. Let me ask a higher level question. You know, these guys, I'm with you, the medical costs, but these are policy-dependent people, right? Like, if I just said, hey, Steve, next year, Medicaid's going away, right? This company would be in a lot of trouble, right? Medicaid is relying on the government.

And I do think about the kind of tail regulatory risk, and I'm not seeing Medicaid's going away, though I do think part of the worry is the big beautiful bill or whatever it is. does slash a lot of Medicaid funding stuff, and I think people are worried about that, all that sort of stuff. There's been debates over states opt in on Medicaid free year. But if I just said to you, hey, you've got Molina right now trading at, let's just call it 10 times price earnings, historical compound or all these great sort of stuff you have.

But then I said over the next 10 years, right? I use 10 because 10 times price earnings, 10 years. Over the next 10 years, you're going to have two presidential elections. We're going to be gearing up for a third. and who knows what happens to Congress, the House, whatever, Medicaid is relying on federal regulations, right? And it is in the cross stairs. How do you get comfortable with kind of the tail risk that Medicaid either, you know, on one form doesn't get slashed by the federal government and these guys are kind of picking up scraps or on the other side, massive expansion

of Medicaid to the point where maybe there's, I think massive expansion would be great for them, but maybe massive expansion brings in huge competition or you could imagine five different other lines where a massive expansion could change thinking. So how do you just think about that regulatory tail risk in a regulatory-driven business? So massive expansion, honestly, I haven't thought about it, but I think to your point,

I think it would be positive for them because it increases addressable market size for them. And they are, as you said yourself earlier, there's plenty of competition in the field to start with. There'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 undercover right now, I think it's what 25% of U.S. population, Medicare is another

60 million people. Some of it is double-counted, but that's not so on about 20% of U.S. population. All these people vote. And I don't think that any politician would take steps to completely remove this coverage, because then you have to come up with a way to cover these people, provide health care in other way. Medicaid and Medicare, and we can step back for a second and talk about great of effectiveness of U.S. health care and the amount of money that we're spending in U.S., which is, I think, $17,000 per person or how effective that is, but that is double what everyone else spends in the world, are the OECD countries spent in the world.

on health care. Medicaid and Medicare is actually more cost-efficient way to provide health care than it is for industry in the whole. So if you're talking about a way to, and right now we're spending 17% of GDP on health care costs, which is double of what other countries spend. So if there is a solution, I'm not advocating government health care in any way, but if there is a solution anywhere, it's more likely than the, to the problem of health care costs rising,

it looks more like what Molina is doing than what private insurers are there. Let me ask you a question on, there's been a lot of, I think rage is the right term at health insurers, health insurers' stock, you know, obviously UNH, one of their top brass got really murdered in the streets of New York City a few months ago. But, you know, I think a lot of it has centered around denials, right?

And we've talked a lot about, hey, these guys, they have to pay out 85 to 90% of what's given. But I think a lot of skeptics say, hey, what they do is they go in price, let's use our $1,000 per head, right? And they 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 they say, hey, these guys just bid, and then they just deny down to the numbers. So even if something's medically necessary, and you'll see lots of physicians say this, right? Like, hey, we're getting denied medically necessary treatment by these guys, and they're doing this because they want to fit us into their cap rate, right? Like, when you're bidding, your incentive is just to deny, deny, deny, deny down.

So I want to ask you, it's hard to capture if, you know, if you and I were running a health insurance company and we were denying 100% of claims or 99% of it, we could say, hey, we cover people way cheaper than Alina Health is. Now, we're providing terrible service. I just say, how do you think about that denial issue? Because I know that it is out there, and I'm not saying it's more specific, but I know that it's out there. I know it's something that the healthcare companies, especially the insurance, are addressing. I know it's part of the rage at them. So how do you kind of think about that in the long run and just as you think about these

companies? So I think there should be a distinction between denying claims and denying procedures. So denial of- Yes, please. And please make that distinction. Right. So when you denying claims is when a procedure has already happened and you have a hospital, is putting through the code for the insurance to cover this. And then they say, no, we're not going to cover it.

And then with private insurance, that costs falls on the person. And that ends up, you have a lot of the stories of people going bankrupt and the system is messed up. But there's also a question of whether the procedures that you're applying for, whether they're necessary enough. And then so Malina, if you look at that. kind of, and I was trying to dig into, well, why are they, you know, 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 and compared to what Malina is right, it's about, it's within, kind of within range. But there are articles out there that saying that Malina will deny procedures more often than other people, and that could be one of the ways that they are managing claims. But if we step managing their medical costs, but if we step back for a second, and so once again, if we look at the, so this is not any patient specific because you can always come up with an anecdotal evidence for somebody that needs to be covered, but they're not. But if we look at the U.S. system as a whole, it's actually quite interesting because what you have is on average the number of visits per person in U.S. is lower than for other OECD countries. I think it's four compared to six-party people.

But the average cost per visit is higher because there's more procedures happening within these visits. So there's 50% more MRIs. There's, I think, statistics say that there's 50% more stands being installed in cases of some kind of card debt problems. So once the people come in, they're being overtreated, which all costs money. but doesn't get us better results. So the life expectancy is worse. There's a lot of different ways where US, despite spending twice as much as every other, any other wealthy country, the US is getting worse results.

So from the point of view, if we step back for a second, the client that is deciding whether who is Malina 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. And if they did not, and 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's some bad headlines, but from the point of view of outcomes, more likely than not, there is no difference. So from that point of view, when we're talking about in specific cases, there's going to be

where the insurers will make a mistake. Absolutely. But overall, U.S. spends too much money on health care. And part of the reason for why I think we see higher costs in private insurance than we do in Medicaid is because they have higher approval rates. Right. So in Medicaid, there's more denials of procedures because they're saying, well, you don't need it. Or we will only do it for this price. And that's why the cost alone. I guess what you're saying is, in your view, Medicaid is, they do deny more. No, it's not the denial of procedures that's already happened issue that we've talked about. That's it.

But they do deny more procedures. But in your view, it's actually kind of, they're denying a lot of over-treatment. 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 cost going up in the system all the time. because it's statistically proven that there's more procedures being done in the U.S. without better outcomes.

I guess, you know, and again, now I'm kind of beyond my death. I'm just knowing what I've seen. I know a lot of doctors and places don't take Medicaid, right? Now, is that because, like, 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're denied 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 under-charred. They were underpaying places, right? But you're saying what they're actually doing is they're 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. So one of the benefits of being in general is because we're not.

looked at different things over time. So when I, when I spoke to when I was looking at the providers and was speaking to them about, well, kind of how does your profitability work? What they, what they were saying is that I think it was we lose money on Medicare patients, we break even on Medicaid patients, and we make all the money on private insurance patients. Yes. And the profitability depends on the mix. That was, that was, that's what they were saying. So because there's, because there's separation of who pays or who gets treated, and with private insurance, it's even worse because, like, it's usually. It's usually the employer for pays, as opposed to the state.

An employer for employer is just one of the costs of having the people on the payroll. That's why those costs are higher than they are for Medicaid. And Medicaid does pay less because they negotiate a lower price, and they will pay less for the procedures. And to your point, some doctors will say, I will accept it. And others say they will not. But one of the things that, a very important thing, during tenders, what companies like Polina have to provide, and they talk about that there's about a two-year kind of before you can tender, there's about two-year period where you are aligning all of the providers that will

be providing the medical services to make sure, the state wants to make sure that a person will get the coverage that you need, right? And that's where, actually, presence in the states or sometimes, and Somalina is present in some states and not in others, and the additional offenders that they're doing, it's actually they're already utilizing the same network of doctors and hospitals, et cetera, and being able to provide using the same network of doctors. That's perfect. I want to talk about M&A real quick, but before I do there, let me just say, I've looked

through a couple different risks or just questions I've had when I've looked at. at these businesses and look, I'm a value investor. You know, I do remember people when UNH, UNH was the headline one because, you know, people instantly started saying, hey, look at this thing, look at this stock chart, let's buy, you know, on a sentiment-driven thing, I think. And it's worked out, I'd say, mix 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 it in the high 200s and now it's at 350, you've done it pretty well. But I guess just having looked at these for a while, I've walked through a lot of just the random risks that have popped through my head.

I just want to ask you having spent a lot more time on this than me, what kind of keeps you up at night having an investment in Molina, right? Like, it trades for a low price to earnings. Yes, they've reset a lot of the stuff, but it seems they're temporary headwinds. You've got this great growth outlook. 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, if the medical costs, to your point, and that's something that we discussed earlier, is that if medical costs continue to go up faster than the rates, you could have irrational policy that impacts Medicaid in general. And you can see that with the budget, the fact that people are losing Medicaid coverage, and that's clearly, that's negative for the industry. So if you will have, one, again, like 10% of the people lose coverage, once again, it's a healthier group of people, you can have this, the period in which the profitability will be lower, will be extended. So we're not going to see when you look at the company like, so if you look at company

like sensing that's in the same space, I think they have, I think, 180 billion in revenue and its company with 16 billion market cap. If you apply the normal margin that they used to earned in the past to their numbers, the upside is so much, and the normal P, 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, than other players in space. And to your point, what keeps me up at night, if I was invested in Santee, I would be very much worried about how long this period takes for them to, for the, for the rates to

catch up with medical cost inflation. With Molina, because their profitability went down for 4% to 2%, but they are still profitable. I'm a lot more comfortable sleeping at night here. And if we're going to, if this stock wouldn't trade for the next five years, to the Buffett's point, if the stock wouldn't trade for the next five years, do you tell me the market's going to be close tomorrow or do you very comfortable with that? So in many ways, if I'm just kind of like flipping about through mental models, what you think you have here is,

got the ExxonMobil of Medicaid, right? Like, they have the, they are the lowest cost producers, but in part because of, I mean, Exxon Motor. I have the Walmart of retail. I don't think Walmart is what you said. Yeah, Exxon is not the world. You know, I do already see where you're coming from Walmart, but they're the most efficient. They're the lowest cost producer. So yes, the industry is going through kind of a trow. That's why I chose Exxon because they're going, they're going through a trow. But these guys, you know, they're still quite profitable while the industry is going through their trial and everyone else is just bleeding, bleeding money. So what's going to happen is at some point, the governments have to stabilize this because

or else you'll just have every single player will exit the system and nobody will provide Medicaid coverage. And some, exactly, and somebody has to do it. 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. That makes total sense. It made it still a sense. I just want to ask quickly on acquisitions. I think you've actually touched on the reason why, but I'll still ask because I had done.

When they talk about their growth, they talk about double-digit growth. You can go read their 2024 investor today. They're actually still hitting that on the revenue side. It's the cost, as you've said, that's caused it. But their growth is split pretty much evenly between organic, where they win new business or add more members and inorganic, where they go and acquire plans. And I just want to talk a little bit about their inorganic M&A expansion plans, because I'm surprised that there's still small baltons 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 five players, so the Sentin, United Healthcare, WellPoint, Humana, Molina, they're only like 50% of the industry in terms of the Medicaid coverage. And the rest is these smaller players in that may be a present in one. one or two states, or more often not just one state, that are covering 100,000, 50,000, 200,000 people because of the tender that they have won in them. And these are exactly the type of companies that Molina usually buys, because these guys

usually are unprofitable, so they do have revenues, they do have members, but they don't have profits. And Malida usually, but they, so going back to the point of administrative, they will buy guys that have administrative expenses of 10, 11%. The medical costs may be the same, maybe a little higher, maybe a little lower, but they will buy guys that have administrative expenses of 10 to 12%. And then they put them through Malina Playbook to bring those costs within two to three years down to their levels and have the same profitability. So if you look at the amount of money, I think they spent something like $2.6 billion

in acquisitions over the last five years. years, they have acquired about 1.2 million numbers as a result of them. They have acquired about 9 or 10 billion of revenues. And if you put their normal margin of what they're earning on this, they paid somewhere between 5 and 12p. So if you apply today's margins, 12p, if it's their normal margin, it's more like four. So then you can pick any number in between. So it seems like And to your point, and my company makes the same point, their return on equity is quite high. And that return on equity includes the returns of acquisitions. I'm reading the John Malone came out with the memoir, and I'm reading it right now.

And it's funny because what you described is very much like how John Malone talked about TCI in the 80s, their acquisition program, where 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 cost. So between getting the best programming cost and knowing exactly where the M&A program goes to, like, it was almost impossible for them not to accretively acquire someone. And this just fits that acquisition model to the T.

And 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. See, but 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 a listener, you think listeners should be thinking about when it comes to Molina? So I don't know to what extent that makes big difference on that, but I did mention

the CEO who's been there from 2017. He owns about 400,000 shares, which is, what is it, about 80, 90 million. So, I mean, he used to be about 200, 200, he gets paid reasonably well. I think it was last year that he got, and he's about 67 years old, and they want him around. So they gave him an uncensored package to stick around through 2027, through which if he sticks around for 2027 and the company achieves $36 of EPS, By 2027, he gets another $150,000 shares. It's a lot of money.

Which is, you know, I'm guessing he's reasonably well off. But it's a number that makes a difference, especially if you put a 10P on 36, like it will be something. Look, you know, it's one of those things where Elon Musk buys a billion dollars of Tesla on the open market. And people say, well, you know, it's funny to say this. Well, Elon's a trillionaire or whatever he is, right? Like, 500 billionaire. This is not that big of an insider purchase room.

And it's like, I hear you, but it is a billion dollars like he cares. And, you know, in this case, we just walked through, hey, the CEO owns, let's just call it 100 million of stocks 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 going to be, it's not going to be a $200 stock. It's going to be $400,500, $560. But, you know, $150,000 years, he's going to get $30,000, $45 million in Stockholm if he gets it. Yeah, 60 million.

It'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 liver hand to hit that. And it's not lost on me. Like, you know, they pause their share buybacks. I believe, I'd have to, but they buy back about 2% of their shows. They pause it in 2020, in late 20404, when the stocks at $3.50.

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, like, 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 they are, I think to some extent, they sort of deterioration at MCRs and they want to take a pause and arguably that's a, it'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 no, they're still pausing and that's going to be important to look at. But yeah, I think we did cover that. That's great. That's great. What about would Molina, I think there's been rumors, some Rumblings past, would a United Healthcare or pick your companies and team whoever, would they, would Malina be an acquisition target or between DOJ risks plus, you know, companies with unique cultures tend to be difficult to bolt into bigger companies. Between those two, is this not a great kind of get acquired? Yeah, I don't think EOH has a problem of being too small. And yeah, so I think this is a company that has a different culture. Could you buy Molina as a way of fixing your own private?

I guess it's plausible, but not of these companies, you're not going to use your own shares because they're trading. You can have a merger, like share-for-share merger, you can have to do something like that. I honestly didn't think about it from that point of view. Could it be a target, like we're talking about a $10 billion company. It could be taken private. Like, it's not that huge. But I honestly, I prefer it that because I do want, to your point that this is a company that's compounded from 2017, even to this day, with the share price down by 50%, since Joseph Britsky came in, they still compounded at 11%. The shares are compounded at 11%.

Operating cash flow per share, which is the metric that we looked at at 30%. I'm not saying it's going to compound at 30% from here, but if it compounds at 15% to 20%, I want to keep it for the next 5, 10 years, and I think they have the runway to do that. Is there any Scooby-Doo being going on here? not that I know. The only reason I ask, for those who don't know, someone at Firebird posted, one of my favorite posts of this month,

which was when a company's management team is intentionally trying to drive the stock down, they call it Scooby-Doey-Doing because you're the meddlesome kids who are getting in the way of the... As an analyst, you're the meddlesome kids who are buying the stock up and getting in the way of the management team driving there in stock down.

You tell me if I'm saying it wrong, but... No, you're saying this right tonight, I think it's a good opportunity to give a shout out to my partner, Harder, who wrote that, and this is, it's his substack. He, I think he's a phenomenal manager and phenomenal writer, and he's really enjoying doing this. So anyone who is listening to this and doesn't follow it, I think that will probably enjoy doing that.

I loved the piece. I love the framework. My only criticism of it would be in the past, like, he is right. Again, I'm reading the John Malone book, and I think John Malone, the reason he got so rich is he very much Scooby-Dude when TCI spun out Liberty Media, he very much Scooby-Dood that, in my opinion. I'm sure it was 30 years ago, who cares?

But my only question back on the Scooby-Doo is sometimes I'll talk to management teams, I'll be like, I didn't know the term, but I'd be like, these guys are Scooby-Doing it. They're trying to impress the stock price. And then what it absolutely is, no, these guys suck. And they're just, the stock is going down because they're really bad.

It's a great question. And I would say that it's a something, it's a question that we should be asked. 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 ask 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-Doo in their 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 up. This is good. See, this has been awesome. I've really enjoyed this.

I didn't even know Falling Knife until I was pregnant for this podcast. you know, but I've just really enjoyed falling firebird stuff. Really appreciate you coming on and looking forward to having you on for the third time. Thank you, Andrea. This was a pleasure. Thanks again. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.