Commercial insurers shun Medicaid market: Is it a bailout or a shakeout? Nobody’s sure—yet

Hospital-based Medicaid-only HMOs step in to fill the gap but face rocky future

Major commercial health maintenance organizations (HMOs) have been dropping out of Medicaid managed care programs in high-profile departures over the past year. Analysts say it’s unclear whether the HMOs’ actions represent a general exodus from Medicaid or merely a shakeout among companies that found the program less profitable than they had hoped.

"There was an effort by the states when they got serious about managed care to bring in as many HMOs as possible," said William Waldman, executive director of the American Public Human Services Association in Washington D.C., until recently known as the American Public Welfare Association.

"The HMOs began to recognize that this was an important part of the marketplace, and they all wanted to compete. But the number of people to be enrolled didn’t support the number of HMOs, so the marketplace itself began to shake out." (For more information on what HMO flight is doing to states’ efforts to manage plans for dual-eligibles, see related story, below.)

Aetna U.S. Healthcare, for one, took a close look earlier this year at its Medicaid-funded business in New York and Connecticut — and decided it was time to get out.

"We made a business decision," company spokeswoman Stacey Jones said. "We really didn’t have the critical mass necessary to make it profitable. We decided as a corporation to focus on our core business, the commercial and Medicare managed care plans."

Aetna was hardly alone in making that decision. At least one-third of states have seen some commercial HMOs withdraw from Medicaid programs this year. According to a report by the National Academy for State Health Policy, the growth rate for Medicaid managed care among commercial HMOs has fallen by 12% since 1996.

The impact of the contraction in the Medicaid managed care market is evident in both the largest and smallest Medicaid programs. In New York City, where the nation’s most ambitious Medicaid managed care expansion is about to be set in motion, commercial HMOs cover only about 40% of the 386,000 Medicaid beneficiaries who voluntarily enrolled in a managed care program. Most of New York City’s Medicaid managed care is provided by provider-sponsored health plans (PSHPs) established by hospitals and other providers.

The situation is unlikely to change when New York City expands its Medicaid managed care program to cover the remainder of the city’s 1.2 million Medicaid recipients. Only five commercial insurers are expected to participate when the mandatory program begins later this year. On the other side of the country, Utah this summer became the only state without a single commercial HMO providing Medicaid coverage.

Welfare reform has put even more of a squeeze on HMOs’ ability to make a profit on Medicaid, as the number of beneficiaries has dropped significantly over the past couple of years. At the same time, states began squeezing Medicaid rates, said Mr. Waldman, who until a few months ago was head of New Jersey’s Medicaid program. Though he thinks the pendulum will stop swinging before most states become unable to sign up commercial HMOs, he acknowledged it is not yet clear what the final picture will look like. "The question is, does this represent an abandonment or a shaking out? It’s too early to tell."

New York Department of Health spokesman Robert Hinckley is more confident about the continued Medicaid participation of commercial HMOs. He notes that while 18 HMOs have dropped out of New York’s Medicaid managed care program since April 1996, eight have expanded their coverage, and another dozen have applied to the state for permission to expand.

Still, so-called "Medicaid-only" organizations increasingly are stepping in where commercial HMOs have abandoned the Medicaid market. Such organizations often are hospital-based networks whose participants have long been in the business of providing care to the poor. There is disagreement about whether an increased reliance on these groups would be a positive or negative development.

Hospital-based managed care organizations usually are locally based and run by people with a longstanding commitment to the community, noted Kay Johnson, editor of a Medicaid managed care analysis for George Washington University Medical Center’s Center for Health Policy Research in Washington, DC.

"The question is, is it more localized, and does having it be more localized make it better for the consumer?" Ms. Johnson said. A more critical issue than who operates the HMO, she said, is how well the state regulates it. "It appears the state legislatures are beginning to recognize them more as insurers. In the past, they were frequently regulated only as providers. Now states are saying that any risk-bearing entity should be regulated under the same rules as the HMOs. The states’ approach now is, If you’re a risk-bearing entity, you’re a risk-bearing entity.’"

While states are subjecting Medicaid-only HMOs to stringent solvency requirements, some health policy experts have more than financial concerns about Medicaid-only insurers. The report by National Academy for State Health Policy director of special initiatives Alicia Fagan and executive director Trish Riley says relying on these entities may "constitute a retreat to the days and difficulties of a two-tier health care delivery system, the ills of which Medicaid managed care was designed to cure." Even if they are financially solvent, these organizations also may be so strapped for funds — given the fact they can’t spread their costs over a large, commercially paying base of customers — that they may not be able to offer a full range of services, the authors wrote.

The report also noted, however, that many states have had good experiences with these plans. In fact, even before the federal Balanced Budget Act of 1997 expanded states’ flexibility to hire noncommercial managed care entities, nearly half of all Medicaid beneficiaries were enrolled in plans with customer bases composed of at least three-fourths public assistance recipients.

"There was a point in time when I was very strongly opposed to Medicaid-only HMOs," Mr. Waldman said. "One of the things that offsets that now is the state standards. As long as you make sure, even if it’s a Medicaid-only plan, that it has to meet the same regulations and standards for care, I don’t think it makes a difference."

Contact Mr. Waldman at 202-682-0100 and Ms. Johnson at 802-482-3005. A copy of Transitioning to Medicaid Managed Care: Medicaid-Only Managed Care Organizations, by Ms. Fagan and Ms. Riley, is available through the National Academy for State Health Policy. Telephone: 207-874-6524.