The Medicaid managed care market continues to grow. A review of the Q2 financial reports of the “Big Five” national managed care companies by my colleague Allie Corcoran finds that, over the first six months of 2021, Medicaid enrollment increased, on average, by 14.9 percent year-to-year. This increase is being driven in part by the continuous Medicaid enrollment requirement during the COVID-19 pandemic Public Health Emergency (PHE). (Between February 2020 and January 2021, an additional 10 million Americans enrolled, and remained enrolled, in Medicaid, an increase of 13.9 percent). Given the surge in cases due to the Delta variant, including among children, it is highly likely that Medicaid enrollment generally, and enrollment in managed care organizations (MCOs) in particular, will continue to grow for at least the rest of 2021. Increased MCO enrollment, of course, means increased revenues and, potentially, increased underwriting gains.
A recent Milliman Research Report analyzing Medicaid managed care financial results for 2020 shows it is not only the “Big Five” national companies that benefit from growth in the Medicaid market. Milliman analysts reviewed the annual financial statements filed in 36 states by 181 different MCOs in 36 states, the District of Columbia, and Puerto Rico. The analysts found that 139 MCOs reported underwriting gains ranging from under 2 percent to over 16 percent, while 42 reported underwriting losses ranging from under 2 percent to over 6 percent. (Underwriting gain is the proportion of revenue the MCO has remaining after paying medical costs and administrative expenses). The composite underwriting gain for all 181 MCOs—3.0 percent on revenues of $205 billion, or about $6 billion—is the highest Milliman has observed in 13 years of such analyses.
How is this large—and growing—public investment in Medicaid managed care being spent? How much of the capitation revenues received by MCOs during the PHE are going toward medical care and quality improvement, and how much is going toward administrative overhead and profit? These are the questions that the medical loss ratio (MLR) metric is designed to answer. Currently, state Medicaid agencies have the option of requiring MCOs to meet an MLR of at least 85 percent and, if an MCO fails to do so, requiring the MCO to remit any excess capitation payments to the state. (A state and the federal government share in any remittances in proportion to the state’s federal matching rate). A recent HHS Office of Inspector General report found that, as of September 2020, six Medicaid managed care states (GA, KS, RI, TN, TX and WI) did not require MCOs to meet a minimum MLR, and five of the 36 states that did impose a minimum MLR did not require remittances from MCOs that did not meet the minimum. Of the MCOs subject to minimum MLRs, 39 did not meet their target, and 19 reported owing a total of $198 million to six states.
It’s not entirely clear why some states would want to leave money on the table when it is not going toward medical services. It’s even less clear why the federal government, which on average pays about 65 percent of the cost of Medicaid, would want to do so. After all, the federal government requires insurers participating in the Marketplaces to meet a minimum MLR; insurers that did not meet the minimum over the three-year period 2018, 2019, and 2020 are projected to pay out about $1.5 billion in rebates directly to consumers ($299 per enrollee) this year. Similarly, Medicare Advantage plans are subject to a minimum MLR and are required to issue rebates to the federal government if they fail to meet the minimum, as many may have done in 2020. Why shouldn’t the federal government’s investment in Medicaid managed care—$234 billion in FY 2021 for acute care services —receive the same protection from excessive administrative costs and profits as its investment in Medicare Advantage?
Currently, the federal government rewards Medicaid expansion states that have elected to adopt a minimum MLR of at least 85 percent and collect remittances from MCOs that fail to meet that standard. That provision, section 4001 of the 2018 SUPPORT for Patients and Communities Act allows these states to keep their regular state share of any remittances paid by MCOs attributable to expansion adults rather than only 10 percent. Although the provision applies only for three years (FFYs 2021 through 2023), the Congressional Budget Office (CBO) estimated that it would result in federal savings of $2.7 billion over 10 years. A mandatory minimum MLR enforced through remittances that applied to all managed care states, not just those that have taken up Medicaid expansion, would likely result in additional federal savings.
The search is on in Congress for ways to pay for Medicaid improvements such as requiring states to extend postpartum coverage for 12 months from the end of pregnancy. Medicaid savings that CBO will recognize that don’t cap or cut federal matching payments to states or otherwise harm beneficiaries are hard to come by. A minimum MLR requirement is one of those rare birds. Not only will it produce real savings for the federal government—savings that are likely to grow as the federal investment in Medicaid managed care grows—but it does so without cutting eligibility or benefits or reducing federal matching payments. It has the added advantage of incenting MCOs to spend more of their Medicaid capitation revenues on payments to network providers for treating beneficiaries and on activities to improve quality rather than returning funds to the state and federal governments. That incentive may not be as strong as the incentive to maximize underwriting gain and, in the case of publicly held companies, share value, but every little bit helps.