By Jeff Goldsmith and David Mosley via Health Affairs
Enrollment of the nation’s 74 million Medicaid recipients in managed care plans continues to increase. By 2016, an estimated 71% of Medicaid recipients were receiving their care via private health plans, both investor-owned and nonprofit. The theory behind this shift is that managed care plans can do things that state Medicaid agencies cannot, such as use sophisticated network contracting, information technology, and utilization management systems to squeeze out low-value care and improve the health of beneficiaries.
We are not managed care skeptics. There are exceptional Medicaid managed care plans that incorporate advanced medical homes, do population health risk assessments, contract with community health centers, and identify and manage the highest-risk beneficiaries such as those with disabilities and those who are dually eligible. Some of these health plans have 20-plus years of operating experience in the toughest managed care markets in the U.S. They contract with sophisticated risk-bearing care enterprises (independent practice associations and integrated delivery networks) to deliver high-value care.
However, recent revelations about Medicaid managed care contracting raise legitimate policy questions. Recent reports that managed care contractors in California’s vast 13.3 million person Medi-Cal program earned $5.4 billion in profits on their contracts in 2014 and 2015 (the first two years of the Affordable Care Act [ACA] coverage expansion) have raised questions about the value proposition for taxpayers. According to the Los Angeles Times report, two prominent investor-owned firms generated 7.1% and 8.2% margins on their contracts.
These margins represent a lot of taxpayer cash. California is a big state with more Medicaid managed care enrollees than any other state. But the trends were similar across the nation. In 34 other states and the District of Columbia, Medicaid managed care contractor profits more than tripled, from $1.1 billion in 2013 to $3.9 billion in 2015. Some of this was an artifact of state Medicaid agencies overestimating the acuity, and thus the costs of care, for the large Medicaid expansion population from the ACA, and some of these overages were recouped in subsequent rate negotiations.
All of this is happening in an environment where many state legislatures are struggling to fully fund other state program priorities. Our goal in this analysis is not to indict managed care organizations (MCOs); rather it is to focus attention in the management challenge states face in this complex contracting environment, and to ask some key questions states ought to answer about their managed care programs.
Owing to the enthusiasm for state contracting with MCOs, Medicaid beneficiaries are the fastest-growing class of health plan members, outstripping even growth in Medicare Advantage. The number of full-risk commercial insured lives have been shrinking steadily for the past decade, as more employers adopt self-funding arrangements and contract with health plans on an administrative services only (ASO) basis.
The Medicaid population holds other attractions to the plans. For older or sicker patients, particularly for the dual-eligible Medicaid patients, both per capita payments and potential underwriting profits per member may significantly exceed those of commercial customers (see chart below). Many health plans are increasingly dependent on Medicaid contracting for growth, a circumstance that would appear to enhance states’ bargaining leverage with their contracting MCOs.
Source: CitiGroup, 2012. Notes: EBITDA is earnings before interest, taxes, depreciation, and amortization. ASO is administrative services only. ABD is aged, blind, and disabled.
Many contracting MCOs are subsidiaries of large regional or national health plans. Key aspects of the relationship of those local subsidiaries to the national parent are opaque. Investor-owned national firms do not report their plans’ profitability by state Medicaid program to investors. One large national plan does not even break out its overall Medicaid profits or losses from its commercial or Medicare Advantage business. In many states, there is less than optimal communication between the Medicaid agency and the insurance commission that regulates the plans. It should not be surprising that individual states may have difficulty determining what happens to their tax dollars if they seem to disappear into a large black box.