GOP Medicaid overhaul will hit insurers where it hurts

The Affordable Care Act's insurance marketplace has been tough on payers looking to make a profit on that business, but Medicaid expansion funneled millions of new members to insurers, boosting revenue. That soon may change.

Legislation passed in two House committees last week would repeal the ACA and essentially roll back Medicaid expansion. That could result in 4 million to 6 million beneficiaries losing insurance between 2020 and 2024, slashing health insurers' premium revenue and, by proxy, earnings.

Most states contract with private insurers to provide coverage to Medicaid beneficiaries. That gives insurers more patients and a more predictable stream of revenue.

Molina Healthcare took in about $3 billion in Medicaid expansion premium revenue last year. The company's CEO, Dr. J. Mario Molina, said the states are not in a position to take on more costs and predicts many will drop Medicaid expansion.

The GOP's American Health Care Act, introduced last week, would phase out the enhanced federal contribution that finances Medicaid expansion starting in 2020. The 31 states that expanded Medicaid could respond by reducing reimbursement rates to offset lost federal funding. That would squeeze insurers in the long run. Medicaid, which covers around 76 million people, accounts for about 20% of insurance companies' total premiums, according to S&P Global, which released a report last week on the impact of the new bill.

Investor-owned insurers that focus almost exclusively on outsourced Medicaid coverage, including Molina and Centene Corp., have thrived under the Medicaid expansion. Molina covered 673,000 new members at the end of last year, or about 16% of its total membership, according to Securities and Exchange Commission filings.

Centene served 1.1 million members in Medicaid expansion programs across 10 states last year, compared with 449,000 in 2015. That's about 10% of its total membership. The company wouldn't disclose its revenue from Medicaid expansion.

WellCare Health Plans, which deals mostly in Medicaid, grew its Medicaid membership 39% from 1.8 million members in 2013—before Medicaid expansion—to 2.5 million at the end of 2016. Its Medicaid premium revenue totaled $9.5 billion in 2016, up 67% from $5.7 billion in 2013.

UnitedHealth Group, which also has a large footprint in Medicaid, added more than 1 million members through expansion programs in 15 states as of the end of 2016, an SEC filing shows. Despite uncertainty in state funding going forward, Leerink Partners analyst Ana Gupte said in a recent research note that UnitedHealth's “earnings exposure specifically to Medicaid expansion is manageable.”

Anthem's Medicaid membership jumped 49% to 6.5 million members in 2016 from 4.4 million in 2013. The insurer doesn't break out premium revenue from Medicaid.

Centene CEO Michael Neidorff believes states will figure out how to cover the Medicaid expansion population once federal funding is rolled back. Even if the states receive less money for Medicaid, the health plans still must be actuarially sound, said Jeff Myers, CEO of trade group Medicaid Health Plans of America. Federal law requires that only financially healthy insurers receive Medicaid funding. Congress will have to change the law to allow plans to “significantly alter the benefit,” he said.

And that can't be done through budget reconciliation, which is how congressional Republicans intend to pass their repeal bill.

Myers said his organization is concerned about the cuts, but it's not inconceivable, he said, that states would chip in more to make up what is lost in federal funding.

He predicts that states will transition more Medicaid members to capitated managed-care plans to rein in costs. About 73% of the Medicaid population is already enrolled in fully capitated risk models, Myers said. The remaining enrollees are the most expensive ones.