Insurers may lose upper hand in talks with states on Medicaid

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An expansion of Medicaid under the health-care law may bring a projected 16 million new customers to insurers such as Centene Corp. and Molina Healthcare Inc. Whether profits follow is an open question.

Illinois and other states struggling with budget gaps are requiring Medicaid beneficiaries to join commercial managed-care plans to save money. Enrollment will rise further as the health-care law pushes people with incomes below 133 percent of the federal poverty level into the program starting in 2014.

Medicaid managed-care plans have protected themselves from the unknown cost of caring for new enrollees by putting risk-sharing provisions into contracts, where states promise to take on some of the financial burden. Many states with fiscal issues may be less willing to use these provisions, say health-care analysts and consultants.

“It’s a change in power structure,” said Bob Bullen, a partner at the Milwaukee-based accounting firm Clifton Gunderson LLP, in an interview. “Right now, Medicaid managed-care organizations have the upper-hand with states in certain markets. In the near future, they may lose some of that power to negotiate.”

Texas, whose Medicaid program in 2009 comprised a quarter of its total spending, is leading states renegotiating their contracts for the program, according to the Texas Health and Human Services Commission. A draft request for proposals, released in November, will expand the scope of services and the geographical areas covered by Medicaid managed-care plans.

Budget Gaps

Other states may follow. A $132.5 billion budget approved by New York legislators last month limits future spending growth on Medicaid to U.S. medical-cost inflation, starting in April 2012. In Illinois, Democratic Governor Pat Quinn has proposed a $550 million reduction in Medicaid rates to doctors who treat the poor, according to a budget summary.

State governments may not have enough claims information to set payment rates that accurately reflect the cost of covering newly eligible people, said Alan Weil, executive director at the National Academy for State Health Policy in Washington, in an interview. Many of the newly insured will be younger men, who have avoided primary care and may have neglected health conditions.

“If that’s your new market, vetting your premiums appropriately for that risk profile is going to be challenging,” Weil said.

The expanding Medicaid patient pool may pose a financial risk to Centene, a St. Louis-based managed care plan that specializes in Medicaid, the company said in a Feb. 22 10-K filing. “States have to pay for a portion of the care, states may reduce our rates in order to afford the additional beneficiaries,” the company said.

Benefits Of Check-Ups

Centene and Molina, based in Long Beach, California, declined multiple requests for comment.

Medicaid health plans that create incentives for patients to eat healthier, get check-ups and avoid expensive emergency room visits will fare better than those that view their job as processing medical claims for states, said David Brailer, chairman of Health Evolution Partners, a San Francisco-based private equity firm.

Centene may almost triple its revenue from 2010 to 2019 under a best-case scenario in which states don’t drastically cut payments to plans, said James Shurtleff, a health-care analyst for Stifel, Nicolaus & Co. in St. Louis, in a note to clients.

The company may not have such luck if states cut rates or more insurers begin competing for states’ business, he said.

Margins Suffer

“New enrollment could lead to a temporary decline in margins,” Shurtleff said. Moreover, if Medicaid companies compensate for inadequate rates in their state contracts by paying doctors and hospitals less money, “it could threaten the safety net for beneficiaries in some markets,” he said.

The insurers’ downside risk in the changing Medicaid market boils down to a “conversation that would happen between states and their MCO providers,” said Mary Kahn, a spokeswoman for the Centers for Medicare and Medicaid Services in Baltimore, which administers Medicaid.

Insurers in New Mexico insisted on risk-sharing clauses when the state in 2005 expanded its Medicaid eligibility to cover adults as much as 200 percent of the federal poverty level, said Carolyn Ingram, a former director of the New Mexico Medicaid program.

Wary Of Risk

“The managed care companies said, ‘We’re not going to accept full risk and this scares the bejesus out of us because you aren’t going to pay us enough,’” she said in an interview.

“The companies that controlled more of the provider network and hospitals around the state were very reluctant to take on risk, and we needed them. On the other hand, there were other companies who just wanted to break into the market, so they didn’t care about the risk as much.”

States will gain “more purchasing power” under the health-care law’s Medicaid expansion and “will probably be resistant to sharing risk,” said Ingram, now senior vice president at the Center for Health Care Strategies in Hamilton, New Jersey, in a phone interview.

The creation of marketplaces called “exchanges” where patients may comparison shop for coverage under the health-care law may also boost states’ leverage. Plans may be under pressure to offer a variety of insurance options and cater to people who shift in and out of Medicaid eligibility because their income fluctuates from year to year.

More Competition

“The combination of increased price competition and increased demands, in terms of what managed care organizations are delivering, will probably create more competition and, from a managed care perspective, that might be not great news,” said Melinda Dutton, a partner in the New York office of Manatt Health Solutions, a law and consulting firm.

Medicaid health plans that have trouble negotiating rates in a state typically leave, Brian Wright, a health-care analyst at Citadel Securities LLC in Chicago, said, adding that this may change.

In Florida, the state Senate Health Regulation Committee recently approved legislation that would force plans that reduce enrollment or leave a region before the end of their contracts to reimburse the agency for the cost of enrollment changes and other transition activities.

“That’s a reaction to having plans come in and, after a fairly short time, exit those counties,” Wright said in an interview. “If we see more states coming out with requests for proposals with draconian provisions like those, it could alter the outlook for growth in Medicaid managed care.”

--Editor: Cary O’Reilly, Adriel Bettelheim

To contact the reporter on this story:
Danielle Ivory at 202-654-7381 or divory@bloomberg.net

To contact the editor responsible for this story:
Cary O’Reilly at 202-624-1859 or caryoreilly@bloomberg.net