Health plans eye Medicaid as profit source

As other business lines become less attractive and enrollments in Medicaid spike, managed care companies are angling to get a piece of this market.

By Emily Berry — Posted Oct. 26, 2009

Print  |   Email  |   Respond  |   Reprints  |   Like Facebook  |   Share Twitter  |   Tweet Linkedin

With commercial health insurance membership dwindling and Medicare profits under fire, health plans are looking for profits from another major public health program: Medicaid. Enrollment in Medicaid has swelled, thanks to unemployment rates topping 10% in many states, a trend that also has sent commercial membership diving.

"We are pretty excited about the long-term prospects of the Medicaid business," UnitedHealth Group Chief Financial Officer Mike Mikan told investors at a Sept. 15 conference.

Even under best-case scenarios, the profit margins are more modest for Medicaid than for commercial insurance or Medicare Advantage. But Goldman Sachs investment analyst Matthew Borsch predicts the smaller managed care organizations that specialize in Medicaid will be gobbled up by the big national plans, which want to expand their presence in the growing business without having to start from scratch.

According to Borsch's research, 65% of states contract with managed care companies to coordinate benefits for Medicaid beneficiaries. The leaders in that business are UnitedHealth Group's AmeriChoice, which administers benefits for about 2.5 million people in 16 states, followed by Amerigroup with 1.7 million enrollees in 11 states, and Molina Healthcare, with almost 1.4 million beneficiaries in nine states.

In a report released to investors Oct. 12, Borsch wrote, "Medicaid managed care offers a compelling growth opportunity not found in commercial and Medicare; in addition, Medicaid is well positioned for nearly any likely outcome of health reform."

Along with Coventry and United executives, Aetna Chair and CEO Ron Williams was among executives at an investor conference in September who made it clear he is interested in expanding his company's Medicaid business. Aetna bought most of its stake in Medicaid by purchasing the Phoenix-based firm Schaller Anderson in 2007, and manages benefits in five states.

"The anticipated health reform bills increase the levels of participation in Medicaid by bringing in the cohort who may be above the federal poverty level of some threshold," Williams said. Medicaid eligibility for adults with dependent children ranges widely between states, from incomes at 25% of the federal poverty level in Alaska to 200% in Minnesota, according to data gathered by the Kaiser Family Foundation in a report released in September. Only a few states offer Medicaid benefits to childless adults. It's expected that more people might become Medicaid-eligible under health system reform.

"We want to be well positioned to serve that market," Williams said, "and we think we are."

Kaiser's report for fiscal 2009, which ended June 30, stated that Medicaid enrollment grew by 5.4% and that spending grew by 7.9%, a much higher rate than had been predicted. It was the highest growth in six years.

Another 6.6% jump in enrollment is expected for fiscal year 2010 -- and that's before any reform that could expand Medicaid eligibility. As with nearly every element of health system reform, it remains to be seen how House and Senate bills will be merged and reconciled, so it's unclear to what degree the final health system reform bill will expand Medicaid.

Regardless, the health plan customers who fell off the rolls when they lost employer-sponsored insurance could show up again as Medicaid enrollees -- but only if the health plans are contracted with states and ready to take on those members.

Higher enrollment does not guarantee higher profits, and health insurers who tried to squeeze earnings out of the managed Medicaid market have had trouble doing so. In the mid-1990s numerous commercial plans moved into Medicaid but pulled out because of a lack of profitability.

More recently, some large insurers have pulled out of Medicaid contracts for similar reasons. For example, WellPoint pulled out of Medicaid programs in Connecticut, Nevada and Ohio in 2008, citing payment rates from the state governments that the health plan said were not adequately profitable. UnitedHealth Group's AmeriChoice subsidiary ended a Medicaid contract with Texas earlier this year after it proved unprofitable.

Generally, the medical-loss ratio, the industry term for how much of every dollar pays for health care, is higher for Medicaid than for commercial business.

But there is a safeguard for Medicaid managed care organizations: Federal law requires that the rates states pay MCOs to manage Medicaid be "actuarially sound," so they have to be adequate given medical cost projections, regardless of whether the state's budget is under pressure, said Vernon K. Smith, PhD, former director of Michigan's Medicaid program. He is now a consultant for Health Management Associates, based in Lansing, Mich.

"States don't have the ability to just slash payments to the managed care organizations," Smith said. "That provides a certain financial security for the health plans."

Even if rates remain stable, however, there could be further risk for MCOs as states continue to cut back on spending in response to falling tax revenue, Smith said.

Back to top



Read story

Confronting bias against obese patients

Medical educators are starting to raise awareness about how weight-related stigma can impair patient-physician communication and the treatment of obesity. Read story

Read story


American Medical News is ceasing publication after 55 years of serving physicians by keeping them informed of their rapidly changing profession. Read story

Read story

Policing medical practice employees after work

Doctors can try to regulate staff actions outside the office, but they must watch what they try to stamp out and how they do it. Read story

Read story

Diabetes prevention: Set on a course for lifestyle change

The YMCA's evidence-based program is helping prediabetic patients eat right, get active and lose weight. Read story

Read story

Medicaid's muddled preventive care picture

The health system reform law promises no-cost coverage of a lengthy list of screenings and other prevention services, but some beneficiaries still might miss out. Read story

Read story

How to get tax breaks for your medical practice

Federal, state and local governments offer doctors incentives because practices are recognized as economic engines. But physicians must know how and where to find them. Read story

Read story

Advance pay ACOs: A down payment on Medicare's future

Accountable care organizations that pay doctors up-front bring practice improvements, but it's unclear yet if program actuaries will see a return on investment. Read story

Read story

Physician liability: Your team, your legal risk

When health care team members drop the ball, it's often doctors who end up in court. How can physicians improve such care and avoid risks? Read story

  • Stay informed
  • Twitter
  • Facebook
  • RSS
  • LinkedIn