After abrupt leadership shakeup, what's next for Molina?

Molina Healthcare could undergo some big changes now that the health insurer is no longer being steered by a Molina family member.

Under new leadership, Molina may shift its stance on participating in the Affordable Care Act insurance exchanges, where it provides coverage to over 1 million people and has lost millions of dollars. Its retreat would be a major blow to the exchanges that have suffered other recent insurer exits.

Industry analysts also said the Long Beach, Calif.-based insurer, which specializes in Medicaid managed care, is an attractive target for other health insurers looking to expand their presence in Medicaid.

"They are a very interesting asset for other companies that would like to build out a strong Medicaid footprint," Leerink Partners analyst Ana Gupte said. "There's no one permanent at the helm, so it opens the doors for any acquirer."

A Molina spokesman said the company wouldn't "speculate on hypotheticals." Molina offers Medicaid plans in 12 states and insures 4.8 million members, most of which are enrolled in Medicaid.

On Tuesday, Molina abruptly announced that it fired its longtime CEO Dr. J. Mario Molina and his brother John Molina, who was the CFO. The two took over the company from their father in 1996.

The announcement shocked observers, but sent Molina's shares soaring by 18% at Tuesday's market close. Several industry analysts noted that the announcement seemed unplanned or the timing was odd.

Molina also released its first quarter 2017 financial results two days ahead of schedule on Tuesday after the leadership change was announced. The company delivered solid first quarter results. Revenue and profit both increased.

But analysts pointed out that Molina's profit margins have long been below those of other insurers. Gupte said Molina's net margin on its Medicaid business runs about 1%, while other managed care insurers record margins of 2% to 3%.

Molina's board is hoping to improve those results. It's looking for fresh blood to do so. "It's just all about execution — execution and paying attention to the day-to-day details of medical cost management and administrative expense control," Dale Wolf, Molina's new chairman and former board director, said Tuesday. He added that Molina is a good franchise, but "we just need to improve the results."

Molina has lost money on the plans it sells through the individual insurance exchanges, though leadership said Tuesday that the business is already performing better this year.

Dr. Molina, an outspoken critic of the GOP's plans to repeal and replace the ACA, previously said the company would continue to sell exchange plans if the Trump administration provided funding for the cost-sharing reduction subsidies that help low-income Americans afford insurance policies.

But already, the company is backing away from that position. It is still evaluating whether it will sell exchange plans in 2018.

Analysts have long considered Molina to be a potential acquisition target for a larger insurance company. The Molina families' leadership, however, was a roadblock.

Now that the Molina brothers have been ousted, a sale could be easier, David Windley, an analyst at Jefferies, wrote in a note to clients.

Many insurers are interested in growing their Medicaid business. Medicaid expansion has pushed lots of new members and thus, revenue, to insurers in the space. Molina took in about $3 billion in Medicaid expansion premium revenue last year. Even with the GOP in control of Congress, Medicaid will likely remain a growth market, Gupte said.

Medicaid insurer WellCare Health Plans and national insurer Aetna, which has a weak Medicaid presence, are the most likely potential buyers if Molina were to be sold, analysts agreed. Any deals would require some divestitures, however.

Analysts also mentioned that Anthem and Humana could make a go at Molina. Thomas Carroll, an analyst at Stifel Financial, said in a client not it's unlikely any sale would occur in the near term because "immediate attention will be directed at improving operations."

Molina's Wolf also said finding permanent CEO could take as many as six months, though the board is hoping to pinpoint one sooner. The board is looking for someone who has experience in Medicaid and Medicare, Wolf said.

Barclays analyst Joshua Raskin noted that the leadership change could put some of Molina's Medicaid business at risk. The Molina brothers had close relationships with state Medicaid directors, Raskin said. Molina has about $3.5 billion of existing Medicaid contracts up for renewal. Potential customers could also be wary of the leadership change. "At a minimum, this will lead to an additional question from prospective customers."