Mining for Medicaid gold: Health plans' latest profit strategy
■ Medicaid has lower profits than commercial business -- but it's growing, while employer-based health care is not.
With enrollment in employer-sponsored health insurance steadily declining and more Americans falling into the Medicaid safety net, health insurance companies are going where the growth is -- the Medicaid managed care market.
Adding to the allure of a rapidly growing Medicaid population driven by the poor economy, the Patient Protection and Affordable Care Act is expected to deliver between 15 million and 20 million new enrollees to Medicaid starting in 2014.
Managed care giants like Aetna, UnitedHealth Group and WellPoint will have to fight over territory with Medicaid-dominated managed care organizations like Amerigroup, WellCare and Molina Healthcare.
Many of the largest plans are relatively recent entrants to the Medicaid business, which tends to carry much less profit than employer-based insurance. However, experts say plans might be able to find a way to squeeze out more profit from Medicaid than they once thought.
Medicaid expansion is an opportunity for those companies to win even better margins from the program, said Bradley Herring, PhD, assistant professor at the Bloomberg School of Public Health at Johns Hopkins University in Baltimore.
"Those new people coming in, to generalize, are mostly going to be childless adults, and to a lesser extent some low-income parents who weren't covered before," he said. "If you kind of think about what population would an HMO feel good about covering ... single adults, that's pretty straightforward."
The road for health plans to Medicaid has been paved by unemployment levels that boosted enrollment and budget crises in many states that made Medicaid managed care, run by private insurers, more acceptable to state policymakers.
"In most cases, there is some level of constituent opposition to expansion of managed care," Amerigroup Chief Financial Officer Jim Truess told investors at a conference Nov. 12. "And so in the past, when the budgetary environment was more favorable, states could say, 'Well, I probably should do it. It would be more cost-effective, but I am not going to for a variety of reasons.' In the current economic climate, states are facing many, many tough choices and having to do many, many things that may be politically unpalatable."
Experts say health plan profits are at stake for the foreseeable future as new Medicaid contracts are bid out, not only in terms of direct income from Medicaid, but also because a heavy Medicaid presence could be important strategically for insurers who want to be part of the insurance exchanges launching in 2014 under health system reform.
Whichever companies win in the Medicaid marketplace, physicians can expect to deal with the good, the bad and the ugly sides of managed care when they treat Medicaid patients for years to come.
As enrollment in employer-sponsored health plans has shrunk, Medicaid has grown, and the population within the health plans that do both kinds of business has mirrored that shift. The growth in Medicaid enrollment has kept those diversified insurers from shrinking so much that they can't make money.
Hartford, Conn.-based Aetna, for example, lost 74,000 commercial members in the third quarter of 2010 compared with the second quarter. Of those, 70,000 fell off the rolls due to what Chief Financial Officer Joe Zubretsky called "economic attrition." During the same period, Aetna's Medicaid population grew by 40,000, including additions from new contracts in Pennsylvania and Florida.
Aetna is keenly aware of the business opportunities waiting on the state level, especially those that continue to spring up in states facing major budget crises.
Contracting with managed care organizations can help stabilize Medicaid spending and give states a set expense to plan for from year to year.
Another health plan giant, Minnetonka, Minn.-based UnitedHealth Group, added 335,000 people to its Medicaid population in the first nine months of 2010, and lost 55,000 commercial members during the same period.
Federal law requires states to pay managed care contractors at "actuarially sound" rates, which prevents states from cutting too deeply into those rates during lean budget years. States may pare back eligibility to federal minimums, and may cut reimbursement for physicians and hospitals, but they must pay managed care companies enough to cover the cost of care for enrollees in their plans.
Medicaid-dominated plans have been experiencing a growth bonanza, posting profits two or three times what they had a year ago.
Making money from Medicaid isn't entirely a given, however. For example, WellPoint at one time managed care for Ohio and Nevada Medicaid enrollees but left those markets in 2008, accusing those states of paying rates that were not "actuarially sound."
The profit margin for Medicaid managed care typically is thinner than for other lines of business because the medical-loss ratio -- the ratio of premiums to money spent on health care -- for Medicaid populations tends to run higher than the commercial population.
For example, Aetna's medical-loss ratio for its Medicaid business in the most recent quarter was 88.8%, but its commercial medical-loss ratio was 80.5%.
Managed care organizations normally are reimbursed on a prepaid, capitated basis. In other words, the less health care each enrollee uses, the more money the plan keeps. So, while managed care companies have an incentive to make sure enrollees receive appropriate preventive care and take medications to manage chronic illness, limiting care in general can mean short-term gains.
There's no real evidence to show that states save money or improve their care by contracting with MCOs to manage Medicaid, Herring said.
He co-wrote a study published online June 28 in Health Economics that examined Medicaid data from 1996 to 2002, and found that physician and hospital participation in Medicaid rose when states contracted with HMOs. But that didn't necessarily mean better access to care, and states didn't save money compared with a fee-for-service system.
"One thing we've speculated is that states might find an HMO appealing because they can kind of just outsource it, but also it winds up being a predictable expense," Herring said. "If they stick with a fee-for-service model and reimburse providers directly, there's going to be unpredictability from year to year."
Traditionally, health insurers, which began entering Medicaid managed care in the 1990s, have taken responsibility for the healthier, less expensive part of the Medicaid population -- children and pregnant women -- but recent pilot programs have expanded enrollment to the so-called aged, blind and disabled population and the dual-eligible population, enrolled in both Medicaid and Medicare.
Looking ahead to 2014 when an individual insurance mandate kicks in, along with federal subsidies for low-income adults, a solid Medicaid presence is expected to help managed care organizations that want to participate in state health insurance exchanges.
That's because the lower-income uninsured people who will buy coverage through the exchanges probably will bounce between Medicaid and commercial coverage, said Tom Dehner, former director of Massachusetts' Medicaid program and its health insurance exchange, now a principal at Health Management Associates. "What we will have is a Medicaid program up to a certain [income] point, and then sitting right on top of it, subsidized commercial insurance."
The competition for the Medicaid market will include both Medicaid-dominated MCOs and larger managed care companies for whom Medicaid is one of many lines of business.
Medicaid-focused health plans have been showing record profits.
Amerigroup, a Virginia Beach, Va.-based managed care organization that administers Medicaid benefits in 11 states, has far exceeded investors' and analysts' financial expectations in 2010. The plan announced a profit of $84.3 million for the third quarter of 2010, up 274% from the same period in 2009. Its enrollment rose by 155,000 to 1.9 million from Sept. 30, 2009, to Sept. 30, 2010.
Molina, which runs Medicaid benefits in 10 states, added 186,000 members during that same period, and its profit was up 88% for the quarter.
The Medicaid expansion is a huge business opportunity for health plans, Dehner said.
In terms of health insurance exchanges, it's tough to say which model of health plan will have an edge. Medicaid-dominated plans tend to run lower-cost networks, and that could give them an advantage.
But there also is talk that states could require Medicaid MCOs to offer commercial coverage on state insurance exchanges, Dehner said. In that case, companies that do both commercial and Medicaid business would have the advantage.
Tom Kelly, head of Aetna's Medicaid business, said the MCOs' biggest challenge will be sustaining adequate networks in the face of expanded eligibility and dwindling availability of physicians in every specialty.
Part of the solution will be paying for care from physician extenders -- nurse practitioners and physician assistants -- but it also will mean changing payment methods, Kelly said.
"I'd like to see a simpler and simpler administrative experience as we go along," he said. "We've got to get serious about how we make physicians' experience not so complicated."