Medicaid Managed Care in the Time of COVID-19 and State Budget Cuts

Three months into the pandemic, Medicaid’s role as the nation’s frontline health insurer has come into sharp relief.  The focus is on the struggles of frontline hospitals, nursing homes, and health care workers; the vertiginous climb in the number of unemployed and uninsured; the threat to the solvency of pediatric and other primary care providers; and the deepening holes in state and local budgets.  And while the relatively good fortune of health insurers generally has been noted, there has been little scrutiny of Medicaid managed care in particular.

This is unfortunate, because some states have already begun to consider cuts to their Medicaid programs in order to address revenue shortfalls.  Unless the federal government steps in and provides useful fiscal relief, more states will be forced to look to Medicaid for spending reductions, precisely at the time when need for the program is dramatically increasing.  Currently, 39 state Medicaid agencies contract with managed care organizations (MCOs) to organize networks of providers to deliver covered services to Medicaid beneficiaries.   In those states, rather than enacting mindless across-the-board cuts, policymakers should first take a careful look at their MCO spending to see whether there are responsible savings to be had.

So how are MCOs doing?  It’s hard to tell.  The prevailing policy culture at the federal, state, and MCO level is one of opacity, not transparency.  Despite some recent encouraging developments, it’s still difficult for beneficiaries, their advocates, or the public to identify which MCOs are doing a good job for children and families and which are not.  Similarly, it’s difficult to determine where the monthly capitation payments go after they are received by an MCO. This is particularly true in the case of subsidiaries of national plans.  As Jeff Goldsmith, David Mosley, and Anne Jacobs noted in their groundbreaking 2018 Health Affairs blog, “[i]t 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.”

Here’s what we do know.  There are about 275 individual MCOs; a fourth of those MCOs are subsidiaries of three national companies: Anthem, Centene, and UnitedHealth Group.  As of March 31, these three firms reported enrollment, through their subsidiaries, of over 25 million Medicaid beneficiaries, more than one third of all Medicaid beneficiaries, whether in fee-for-service or managed care.  Centene reported a Medicaid enrollment of 11.8 million; Anthem, 7.6 million; and UnitedHealth Group, 5.9 million.  The companies’ earnings reports for the first quarter do not disclose how many subsidiaries offer Medicaid products in which states, much less any information about each subsidiary’s financial performance.  The companies do, however, disclose their overall financial results, which, for the first quarter of this year, were robust.

Centene, with a market capitalization of $37.6 billion on May 1, had earnings from operations (i.e., revenues less expenses) of $188 million in the first quarter of 2020.  Its Medicaid enrollment of 11.8 million accounted for 49% of its total enrollment, while its Medicaid revenues of $17.0 billion accounted for 65% of its total revenues.  (Medicaid revenues grew by $4.4 billion year-to-year due in large part to Centene’s acquisition of WellCare).  The CEO’s total compensation in 2019 was $26.4 million.

Anthem Inc., with a market capitalization of $67.9 billion on May 1, had net income of $1.5 billion in the first quarter of 2020.  Its Medicaid enrollment of 7.6 million represented 18% of its total enrollment.  Anthem Inc.’s earnings report does not break out its Medicaid revenues. The CEO’s total compensation in 2019 was $15.5 million.

UnitedHealth Group had a market capitalization of $269.5 billion on May 1.  The company’s health benefits component, UnitedHealthcare, had earnings from operations of $2.9 billion in the first quarter of 2020.  Its Medicaid enrollment of 5.9 million represented 12% of its total enrollment; “community and state” revenues of $11.4 billion accounted for 22% of its total revenues.  The UnitedHealthcare CEO’s total compensation in 2019 was $8.9 million.

These data tell us nothing about how well any particular Centene, Anthem, or UnitedHealth Group subsidiary is doing in any particular state.  Nor do they tell us anything about how other MCOs, whether subsidiaries of other national companies or not, are doing.  And it goes without saying that past results are no guarantee of future performance, especially in the midst of a pandemic coupled with a severe recession.  The distribution of COVID-19 infection among MCO enrollees, their need for hospitalization, and the costs of their treatment are only beginning to be understood, much less able to be predicted.

That said, states are prohibited from disenrolling beneficiaries during the COVID-19 public health emergency, so unless beneficiaries switch plans, enrollment, and accompanying Medicaid revenues, should not fall.  And to the extent that Medicaid enrollment in managed care states grows due to the massive increase in the number of unemployed, enrollment in these subsidiaries is likely to grow, bringing in additional revenues.

Moreover, as long as stay-at-home and social distancing orders remain in place in a state or locality, use of elective services will likely be considerably lower than anticipated when the capitation rates that states currently pay to MCOs were established. To the extent that MCOs pay their network providers on a fee-for-service basis and do not reimburse for telehealth visits, they will not be making payments for patient encounters while continuing to receive monthly capitation payments for their current and any new enrollees that assume patient encounters are occurring.

On the other hand, the costs of testing enrollees for COVID-19 were not anticipated in the setting of capitation rates.  Nor were the costs of treatment for those enrollees who contract the disease and require hospitalization.  And, if an effective treatment is developed, or if a vaccine becomes available, those costs were also not accounted for.

It’s too early to tell how this will play out for any given MCO. But in the midst of this uncertainty, a few things are certain.  Unless the federal government steps in to help states pay for their Medicaid programs and fill their budget holes, they will be forced to make spending cuts for the fiscal year starting July 1, if not sooner.  Medicaid spending will be an issue.  Under the maintenance of effort (MOE) requirement in the Families First Act tied to the temporary 6.2 percentage point increase in the federal Medicaid matching rate,  states are prohibited from establishing more restrictive eligibility rules, increasing premiums, disenrolling beneficiaries, or reducing their benefits.  Thus, the only place for them to turn for immediate reductions in Medicaid spending during the public health emergency is to cut payments to providers or MCOs.  Of course, payment reductions would be self-defeating, especially given the financial damage that hospitals, nursing facilities, community clinics, and other providers serving Medicaid patients have already taken.

Each state’s budget circumstances are different; each MCO’s circumstances are different; each national insurer’s circumstances are different.  But if the federal government does not provide meaningful fiscal relief, and states have no choice but to cut their spending, every effort should be made to avoid blunt reimbursement cuts that will further harm hospitals, clinics, and other providers that currently serve Medicaid beneficiaries.  Given the robust financial health of three of the national health insurers with the largest Medicaid revenue streams, state policymakers should be asking questions of the subsidiaries with which their Medicaid programs are contacting.  Here are some boxes policymakers should open up and look into:

  • Generate revenue by taxing services of MCOs up to the maximum amount allowed by federal law. (According to the Kaiser Family Foundation (KFF), 14 states currently impose such taxes at some level.)
  • Require MCOs to remit to the state Medicaid program excess capitation revenues not applied to the costs of medical services. (KFF reports that 24 states regularly collect remittances and that 6 do so “sometimes”)
  • Review the Risk-Based Capital (RBC) reserves for each contracting MCO and, where appropriate, require the application of the excess reserves to payment of network providers for covered services
  • Allow states that contract with MCOs to cover prescription drugs to negotiate supplemental rebates with drug manufactures, explore whether savings can be achieved by requiring Pharmacy Benefits Managers (PBMs) to pass through supplemental rebate collections to the MCOs and require the MCOs to report supplemental rebate collections to the state Medicaid agency. (KFF reports that only 9 states require PBM pass through and  16 states require MCO reporting).

Of course, these lines of inquiry are applicable to all MCOs, not just the subsidiaries of Centene, Anthem, and UnitedHealth Group.  Future blogs will explore each in greater detail.

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