Healthcare Business News

Medicaid expansion offers slim initial profits for insurers, report says

By Paul Demko
Posted: May 9, 2014 - 4:45 pm ET

Health plans with Medicaid contracts are poised to see significant enrollment growth with the expansion of the program in roughly half the nation's states. But those insurers are unlikely to see significant profits from new Medicaid customers in the early years of expansion, and could be at risk of losing money, according to a report by analysts at Standard & Poor's (PDF).

That's in large part because those signing up for coverage under the expansion—which has increased eligibility to 138% of the federal poverty threshold—are expected to be older, with more expensive healthcare needs than the existing Medicaid population. Those demographics could lead to significant costs stemming from pent-up care demand in the early years of coverage. According to HHS, at least 4.8 million additional individuals enrolled in Medicaid and the Children's Health Insurance Program since the Oct. 1, 2013 start of the open-enrollment period. Unlike the state and federal exchanges, Medicaid enrollment continues throughout the year.

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Insurers just entering the Medicaid managed-care market could be particularly at risk because they lack experience dealing with that population, according to Standard & Poor's. Profit margins for Medicaid managed-care contracts are already slim, in the range of 1% to 3%, indicating that any unanticipated costs could push plans into the red.

The Standard & Poor's report cites the example of Kentucky, which began transitioning to managed care for all its Medicaid enrollees in 2011. All three carriers that initially won contracts—WellCare, Coventry Health Care (which is now part of Aetna) and Centene Corp.—have reported losing money on the program.

Medicaid managed-care plans must also be wary of state governments reducing payments because of stressed budgets. Even though the federal government will pick up the tab for 100% of new enrollees in the first years of expansion, and 90% thereafter, states will still be responsible for covering roughly half of the costs for the traditional Medicaid population.

“Most states are in the red and this is a growing expenditure for them,” said Hema Singh, an associate director with Standard & Poor's, and an author of the report. “I don't see the reimbursement rates getting any better.”

Despite concerns about the uncertain profitability of the expanded Medicaid market, Standard & Poor's does not expect it to lead to lower risk-ratings for insurers. That's in part because Medicaid still represents a small share of revenue for most large, publicly traded insurers.

In 2013, UnitedHealthcare relied on Medicaid contracts for 16% of its revenue, while Aetna received 9% of its revenue from the government program.

Follow Paul Demko on Twitter: @MHpdemko

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