Medicaid-only plans show increasing strength

With commercial health plans exiting from the Medicaid market in the last few years, state Medicaid programs are becoming more dependent on Medicaid-only plans. But are Medicaid-only plans able to provide high-quality cost-effective care and remain in business for the long-term?

The Center for Health Care Strategies (CHCS) in Princeton, NJ, set out to find the answers to those questions by examining financial data from 183 plans and nonfinancial data from 59 plans, and interviewing officials in 13 states and 26 plans. Results of the study, conducted by Robert Hurley and Michael McCue, both of Virginia Commonwealth University in Richmond show:

  • The shift to further reliance on Medicaid-focused plans appears inevitable.
  • Most Medicaid participating health plans are profitable, although margins are narrow.
  • Member satisfaction and clinical quality ratings are similar between Medicaid-focused and other plans as states require them to comply with identical contractual requirements.
  • Strong collaborative relationships between states and surviving Medicaid-focused plans are growing as both parties have become more experienced and reliant upon each other.

Mr. Hurley tells State Health Watch that a Darwinian-type evolution has occurred among health plans, with the fittest ones surviving, and the less-capable plans falling by the side. "The surviving plans have grown because of the shrinkage in participating plans," he says. "The upside of plans exiting the Medicaid market is that the remaining plans are redistributing the members of the departed plans and thus are becoming larger and more sophisticated."

In his report, Mr. Hurley says that concerns about financial and nonfinancial performance among Medicaid-focused plans have not become a reality. "The current roster of Medicaid-focused plans is financially robust," he says. "States generally have not needed to relax contract requirements or arrange special financial accommodations, although there were some extraordinary interventions in a few instances.

"While member satisfaction levels for some Medicaid-focused plans appear to be slightly lower than other plans, beneficiaries have not shunned Medicaid-focused plans as inferior or gravitated toward mainstream commercial plans when provided with the opportunity to do so," Mr. Hurley explains.

Through his interviews, he says, he determined that plans that specialize in Medicaid often develop more intensive outreach, are more frequently engaged in community-related initiatives, and employ more aggressive hands-on management approaches for their members. He attributes such increased sophistication to both the increasingly demanding contract requirements imposed by states and recognition of the added efforts that health plans need to succeed in the Medicaid product line.

According to Mr. Hurley, this latest study validates a prediction made in earlier studies — that state agencies and health plans remaining in Medicaid managed care have moved to a higher level of interdependence or mutual reliance. Medicaid payment rates are critical for the continued viability of plans, he says, and the plans exert a major impact on sustainability of the state Medicaid program.

This is particularly true in states such as Ohio, Rhode Island, and Washington, where more than half of all beneficiaries are enrolled in one or two plans that are Medicaid-focused, and in urban markets in many other states.

Mr. Hurley points out that both sides are acutely aware of the high degree of mutual dependence, but so far that has motivated them to function as partners rather than adversaries, something he had suggested in the earlier studies. However, he says, "without question, the current financial crises in the states are severely testing the sustainability of relationships and increased brinkmanship appears inevitable. Next year will be a truer test of the lasting nature of these relationships as contract renewals become due and as plans reconsider their tolerance for the rate increases proffered."

Mr. Hurley tells State Health Watch that the future of many plans probably hangs in the balance of how the fiscal crises in states play out. In California, he says, many plans are vulnerable; and in Oklahoma, a pre-paid program is being dropped because of an inability to get agreement on rates. "We don’t know how well states will maneuver through this," he says. "The issues are very much in play right now, and we really won’t know until the end of state legislative sessions and we can see the rates."

According to the report, the prominence of investor-owned Medicaid-focused firms bolsters the market while raising challenging issues for state agencies. A small number of companies is collectively involved in more than 25 Medicaid-focused plans, and they can affect Medicaid agencies directly by expanding or sustaining the number of contractors when they enter new markets, acquire available plans, or merge existing plans into larger ones.

The companies, Mr. Hurley says, also are openly and strongly committed to promoting political and financial support for Medicaid, perhaps more forcefully than previously done by other program advocates. Because these publicly traded firms must report financial performance quarterly, their growing involvement in Medicaid raises a new set of concerns that states may find increasingly challenging.

"Touting profitability to shareholders every 90 days will inevitably invoke concerns from some state policy-makers and ire from many Medicaid providers, irrespective of the ability of these firms to support their claims of delivering real value," he says.

In his report, Mr. Hurley says the durability of the Medicaid managed care market remains uncertain, but he points out he generally is optimistic about the future of Medicaid-focused plans.

He notes that skeptics continue to raise concerns about the commitment of investor-owned Medicaid-focused plans, suggesting they could flee the market if profitability proves difficult to sustain, much like what happened in the Medicare market and among commercially focused plans in Medicaid. Mr. Hurley says the Medicaid-focused plans currently appear to be trading successfully on the upside growth potential of market aggregators or consolidators who can grow substantially and avail themselves of cross-market economies and synergies. To date, he says, capital markets and investors have rewarded them for their strategic positioning and performance.

Nowhere else to go

Perhaps equally important, according to Mr. Hurley, Medicaid-focused plans have nowhere else to go and so have a powerful incentive to make Medicaid managed care a successful enterprise for themselves, the states, and their beneficiaries. "Provider-sponsored plans, as the other substantial segment of the Medicaid-focused plans, also have a strong interest in ensuring that Medicaid is adequately funded, at least in terms of provider payments," Mr. Hurley says.

"Although their long-term commitment to the Medicaid market is unclear, plan sponsorship allows providers to protect their market share ad to avoid becoming overly dependent on the investor-owned Medicaid-focused plans that represent their principal competitors. The competitive tension between these segments of the Medicaid focused market could prove valuable in enabling states committed to Medicaid managed care to maintain a viable set of contracting alternatives," he says.

CHCS vice president for programs Nikki Highsmith tells State Health Watch that she thinks it is a positive situation that there are fewer Medicaid-focused plans and that those plans are more committed to the successful long-term continuation of the Medicaid program. "The trend among the plans that are left is to look at how to raise the bar for everyone in delivering care to Medicaid patients," she says.

One policy concern that has been raised, Ms. Highsmith says, is whether Medicaid-dominated health plans can maintain a high level of quality. But so far, she says, member satisfaction scores and clinical scores show that Medicaid-focused plans can be competitive on quality measures.

She says the partnership between states and plans on the Medicaid line of business is particularly important, as shown in states such as Virginia and Wisconsin where there are good partnerships. "There’s always a fine line," she says. "The dance is always interesting. States are glad there are plans that want to stay in the Medicaid business. I do think states will have to rethink their negotiating strategies with fewer plans and leverage the marketplace in different ways. They could tie rate increases to quality improvements and demand value from their contractors.

Sentara Health Management director of Medicaid Megan Padden tells State Health Watch that Virginia’s payment rates to Sentara’s Optima Health Plan provide a sufficient return. One advantage Sentara has, she says, is that it is organized as a not-for-profit corporation and thus serving Medicaid fits well with its mission. Because it is not investor-owned, its margins are different as well, and the plan is not looking for huge profits, Ms. Padden explains.

A collegial relationship for now

"The partnership we have developed with the state agency makes it easy for us to stay in the program," she says. "Our relationship is more collegial than that in some states."

According to Ms. Padden, Optima’s revamped obstetrics program is a good example of changes that have been made to better serve the Medicaid population. She says the health plan began to focus on high-risk obstetrics patients for obvious reasons, and its revamped program also has helped Sentara’s commercial business. The same type of thing has happened for asthma treatment.

Currently, she says, the federal balanced budget amendments and the Health Insurance Portability and Accountability Act are raising administrative hurdles that Sentara and the state agency are working to resolve. "The state is open to feedback from plans on these issues," Ms. Padden says. "We don’t want things to be so administratively burdensome that they don’t make sense. We’d like to see the state become a better purchaser of health care services and build that into their rate structure," she notes.

Virginia Medicaid director Cheryl Roberts tells State Health Watch that her agency works with seven plans, including one that is Medicaid-only (Virginia Premiere) and one that is partially Medicaid (Sentara). "Working relationships with those plans are easier than with plans on the commercial side," she says. "It’s easier to focus on the product line when it is Medicaid only. There’s more hands-on activities such as disease management, outreach, and marketing. And even though the commercial plans put a lot of energy into their product, it can be difficult for them to make changes."

According to Ms. Roberts, Virginia Premiere and Sentara are more willing to expand to new geographic areas of the state than are the commercial plans. However, she is concerned that if the state’s budget crisis continues, the two plans may cut back to their home areas, although she doesn’t think they will drop the business. Ms. Roberts warns that if Virginia Premiere and Sentara start to lose money, "it’s over because they have no other place to get revenue."

Is the working relationship between the state and the plans likely to change? "Money changes every discussion," she says. "The people we work with now are happy. Those who are likely to come in [from the corporate executive level] when they are losing money are not going to be happy," she adds.

(The report is available at www.chcs.org. Mr. Hurley and Ms. Highsmith can be contacted by e-mail: mppadden@sentara.com and croberts@dmas.state.va.us.)