Another quarter, another round of earnings reports from the “Big Five.” The story of Q3 continues the basic narrative of Q1 and Q2. For all but one of the companies that dominate the Medicaid managed care market, net Medicaid enrollment continued to decline, driven primarily by the PHE unwinding. There is one new wrinkle, however. This quarter, company managements are stressing what they view as the failure of state Medicaid agencies to increase capitation rates sufficiently to take into account the greater use of services by enrollees remaining after eligibility redeterminations.
As shown in Figure 1, total Medicaid enrollment for all five companies has fallen by 7.3 million, or 16.6 percent, since the end of Q1 2023, just before the PHE unwinding began. These net enrollment numbers reflect not just the disenrollments due to the PHE unwinding—although that has been the primary driver—but also normal enrollment trends, wins (or losses) in state MCO contract procurements, and acquisitions and divestitures. Note that, despite the decline, total “Big Five” Medicaid enrollment at the end of September 2024 was 6.8 million higher than at the end of March 2020, when the COVID-19 PHE began. Put another way, the “Big Five” have lost a little more than half of their enrollment gains since the beginning of the PHE continuous enrollment period.
The enrollment results for each of the companies differ considerably (Table 1). For Elevance Q3 2024 Medicaid enrollment is 25 percent lower than in Q1 2023; for Centene, 20 percent lower; for UnitedHealth Group, 11 percent lower; and for CVSHealth/Aetna, 10 percent lower. In contrast, Molina reports Q3 2024 Medicaid enrollment that is 2 percent higher than in Q1 2023. The company attributes its overall enrollment growth primarily to “new Medicaid contract wins, acquisitions, and growth in our current footprint, partially offset by the impact of Medicaid redeterminations.”
Only three of the “Big Five” report Medicaid revenues. Nonetheless, the data are intriguing (Table 2). In the case of Centene, which experienced a 20 percent decline in Medicaid enrollment since Q1 2023, Medicaid revenues also declined over this period, with Q3 2024 revenue 4.1 percent lower. Molina, with a 2.2 percent increase in enrollment between Q1 2023 and Q3 2024, realized a 21 percent increase in revenues. So far, so good. But then there’s UnitedHealth Group, which reported Q3 2024 Medicaid enrollment 11 percent lower than in Q1 2023 but reported revenues nearly 8 percent higher. Quarterly Medicaid revenue figures can be quirky, since one-time events like retroactive rate adjustments or the making of state directed payments can distort results. Still, the notion that Medicaid revenue can increase while net Medicaid enrollment declines is not intuitive.
Only Centene and Molina report medical loss ratios (MLRs) specific to their Medicaid lines of business. MLR—what Centene has rebranded as the health benefits ratio (HBR) and Molina as the medical care ratio (MCR)— is the generic term for the percentage of premium revenue spent on medical care costs. As shown in Table 2, for both companies the ratio in Q3 was above 90 percent; most investors are looking for ratios considerably lower, so that a greater share of capitation revenues is available for distributions to shareholders.
Of the 42 managed care states, all but DC and North Carolina had finished conducting their PHE unwinding eligibility redeterminations by August. For MCO managements, however, one piece of unwinding business remains unfinished: the perceived need for rate increases to reflect the higher use of services by the remaining enrollees. In prepared remarks, the UnitedHealth Group CFO explained what he called “the continued timing mismatch” between the health status of Medicaid enrollees and updates to state capitation rates:
States often use care activity data that is well over a year old in setting their rates. That typically has minimal impact when member mix levels are relatively stable. Eligibility redeterminations significantly shifted both the number and average acuity of people covered has changed. As a result of the lagging care activity data, as well as the annual rate cycle timing, updates remain well short of current care activity ... a factor that for us was more pronounced through the period than anticipated.”
(As noted above, UnitedHealth Group continues to report increases in Medicaid revenues despite declines in Medicaid enrollment).
The Elevance, Centene, and Molina managements echoed this theme of capitation rate/enrollee acuity “mismatch,” but the concern was not limited to national publicly-held companies. Two trade associations for regional not-for-profit MCOs, the Alliance of Community Health Plans and the Association for Community Affiliated Plans, recently sent a public letter to the Secretary of HHS urging adjustments to capitation rates for 2024 and 2025. They wrote: “Plans are confronting significant upticks in utilization across the board, including in prescription drugs and behavioral health services. … However, rates do not reflect this surge, and many plans have been presented with egregiously low rates that completely negate current costs, acuity and utilization.”
The KFF annual Medicaid budget survey released at the end of October provides some context. Many but not all of the states contracting with MCOs appear to acknowledge that individuals remaining eligible for Medicaid after the unwinding have greater health care needs as a population and that capitation rates need to reflect that change. More specifically, two thirds (25 of 41, with Florida not responding to the survey) reported that, as of July 1, they have sought or will seek CMS approval for a rate increase to adjust for acuity shifts in MCO enrollment for FY 2024 and/or FY 2025. (CMS approval is required for federal matching funds). On the other hand, twelve states reported that they have not and do not plan to seek approval for a rate increase, and four told KFF they had not decided how to proceed.
An October survey by Wakely finds that various actuaries with MCO clients are using different methodologies to determine the relationship between rates and acuity, noting that “[t]his situation is dynamic, with many states changing their approach due to merging information and ongoing negotiations.”
In order for states to receive federal Medicaid matching funds for their payments to MCOs, CMS must approve their capitation rates as actuarially sound. That determination is state-specific, based on the certification of actuaries, and informed by CMS’s 66-page Medicaid Managed Care Rate Development Guide. The devil is decidedly in the details. As the comments above suggest, there is currently little agreement on whether a particular state’s rates are, in fact, actuarially sound. Given the implications for company financial metrics and for state budgets alike, we can expect the rate/acuity “mismatch” conversation to continue for some time to come.
