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In a post-ACA world, new state rules could impact Medicaid managed care margins

Health Care Current | March 27, 2018

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My Take

In a post-ACA world, new state rules could impact Medicaid managed care margins

By Sarah Thomas, Managing Director, Deloitte Center for Health Solutions, Deloitte Services LP

Last week, I shared some of our key findings from a recent analysis of health plans’ financial status in the Medicare Advantage (MA) program. That same report also examines health plans that provide coverage to Medicaid beneficiaries.

I was a bit surprised that health plans have fared as well as they have with Medicare Advantage, despite reduced payments called for by the Affordable Care Act (ACA). With Medicaid, I didn’t know what we might find. States are relying more heavily on managed care for their Medicaid programs. The ACA gave states the ability to expand Medicaid eligibility and offered federal dollars to pay for it. As the program expanded, I expected overall revenues from Medicaid would grow for health plans. But I was less sure what we would find when we looked at profitability.

States are usually fiscally constrained when it comes to setting Medicaid rates. I remember the CEO of a Medicaid managed care plan in California telling me how much more he could do if his plan was in New York, where premiums are much higher. Furthermore, the new populations covered under managed care include a mix of low- and high-cost beneficiaries. Individuals who are newly qualified for Medicaid (e.g., low-income adults) tend to have lower medical costs than older and disabled enrollees. However, some states also have been shifting their dual-eligibles (i.e., people who qualify for both Medicare and Medicaid benefits) and other categories of higher-cost individuals into managed care plans. These high-cost members can impact margins.

Here are my three takeaways from our study:

  1. Health plan revenues from Medicaid more than tripled. In 2016, health plans collectively generated $207 billion in revenue—up from $64 billion five years earlier. Underwriting gains for Medicaid managed care have been more modest than those in MA. In 2016, for example, underwriting gains for Medicaid managed care were $3.0 billion, compared with $5.8 billion for MA.1 (For our analysis, we define underwriting gains as the profits that an insurance company makes after paying all claims, and incurring general and administrative expenses.)
  2. The largest health plans in Medicaid managed care captured a disproportionate and growing share of underwriting gains. This appears to mirror the trend we saw among large health plans in the MA space. In Medicaid, the top three health plans captured 80 percent of underwriting gains in 2016, and 37 percent of aggregate revenue. The three largest health plans by national revenue (2011 through 2016) were Anthem, Inc., UnitedHealth Group, and Centene Corp., according to our research.
  3. Margins were higher in expansion states: In states that expanded Medicaid eligibility, Medicaid managed care plans had higher margins each year except 2016. Medicaid managed care markets exhibited widening performance variation at the company and state levels beginning in 2014.

I find this last point particularly interesting. Between 2011 and 2013, underwriting margins in expansion states were comparable to (or even slightly lower than) underwriting margins in non-expansion states. As some states expanded their Medicaid programs in 2014 and 2015, their aggregate underwriting margins were, respectively, 2.6 and 1.4 percentage points higher than margins in non-expansion states.

This trend appears to have reversed in 2016. That year, the aggregate margin in Medicaid expansion states was just one percentage point lower than margins reported by health plans in in non-expansion states. What might have caused this? One explanation could be that rate assumptions might have been too low. Some of these new members may have had significant health issues and significant demand for services. This could have helped flatten overall Medicaid managed care margins in 2016.

Many of the rules that govern Medicaid programs are set by state policymakers. That can make Medicaid managed care particularly hard to analyze as a whole. Indeed, as we looked deeper into the data for this study, we saw lots of variation.

Following the overall pattern, among Medicaid expansion states, health plans in Michigan, Ohio, and New York had positive margins for at least five of the six years we studied. This seems to indicate some stability in state-level policy for Medicaid pricing. Furthermore, 51 percent of health plans in these states saw positive underwriting gains for at least four years.

But not following the pattern, during the same period, health plans in three non-expansion states—Virginia, Georgia, and Tennessee—consistently had more favorable results compared to health plans in other non-expansion states. Health plans in those three states had positive underwriting margins for at least five of the six years covered in our analysis.

What lies ahead for Medicaid managed care?
A year ago, the outlook for Medicaid coverage expansions was highly uncertain. Proposals to repeal and replace the ACA would likely have reduced the number of Medicaid beneficiaries below what would have been expected under current law, potentially negatively affecting the fortunes of health plans serving this population. Significant legislative activity on this front is unlikely from where we sit in 2018.

However, the administration has indicated—in words and deeds—that it is eager for states to propose changes to their Medicaid programs. Several states have responded by requesting waivers to modify their existing programs. Our report on state-led Medicaid reform efforts discusses the flexibilities states have, under current law, to design and administer their programs. Many states are also asking their Medicaid managed care plans to drive delivery system reforms and value-based care initiatives, as noted in our other report on Medicaid Alternative Payment Models.

New Medicaid work requirements in a few states could impact health plans, as my colleague Jim Hardy recently noted. Along with the potential of lower enrollments, health plans also could see higher administrative costs (e.g., processing enrollments/disenrollments, sending welcome kits and identification cards, handling claims pre- and post-eligibility). They will also likely need to invest in systems that can connect with states to ensure up-to-date employment data.

The overall economy is likely to be a factor affecting Medicaid managed care. When a state’s fiscal health is strong, policymakers are less likely to put pressure on payments to Medicaid plans and providers.

That said, my take is that the health of the Medicaid managed care business will likely—as we have seen in the past—largely depend on policy and initiatives at the state level. To really understand the opportunities and drivers behind financial performance, we should look at payment rates, health care spending trends, and policies within each state.

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1 Our MA findings do not include MA underwriting gain information from California. Approximately 15 percent of national MA revenue in our data comes from California. Our Medicaid findings do include underwriting gain information from California.


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In the news

Congress passes omnibus spending package

In the early morning hours of March 23, Congress passed a $1.3 trillion spending bill, H.R.1625 (115), which will keep the federal government running through September. The bill funds military and domestic discretionary programs by more than $100 billion over last year’s levels. The president signed the bill Friday afternoon.

Under the spending package, the US Department of Health and Human Services (HHS) will receive $98.7 billion, a 13 percent increase from its fiscal 2017 level. The National Institutes of Health (NIH) gets a $3 billion boost over the $34.1 billion it received in fiscal 2017. The Department of Veterans Affairs (VA) will receive $81.5 billion in discretionary funds.

Breakdown of how federal spending package will impact health programs

Many health care provisions that appeared in earlier versions of the bill did not make it into the final package. One provision not included was funding for cost-sharing reduction payments to help stabilize the individual health insurance market.

Also not included was language that would have reduced the share that drug manufacturers pay for Medicare Part D coverage-gap costs (the so-called donut hole). The pharmaceutical industry had advocated that its portion be cut from 70 percent to 60 percent. Manufacturers previously paid for just 50 percent of a drug's costs in the coverage-gap phase of Part D, but a short-term spending bill in February raised the industry's contribution to 70 percent (see February 13, 2018 RegPulse blog).

White House outlines initiative to combat the opioid crisis

The White House has released its plan to stop opioid abuse, and to reduce drug supply and demand. The initiative, announced March 19, follows the president’s declaration of the opioid crisis as a national public health emergency last October. The initiative outlined three main goals:

  • Reduce drug demand and over-prescribing 
  • Cut off the flow of illicit drugs
  • Expand access to proven treatments 

In addition, the plan calls for strengthening criminal penalties for dealing and trafficking in fentanyl and other opioids. Where appropriate under current law, the plan encourages seeking the death penalty against drug traffickers.

The president set objectives for a Safer Prescribing Plan to curb over-prescription. This includes decreasing nationwide opioid prescription fills by one-third within three years. Within five years, the administration wants to ensure that 95 percent of the opioid prescriptions paid for by federal health care programs are issued using best practices. The initiative outlined a number of programs to support these goals, including a nationwide evidence-based campaign to educate the public about the dangers of opioid and drug use. The administration intends to use federal funding to transition states to a nationally interoperable Prescription Drug Monitoring Program network.

The president’s initiative is part of a Congress-wide effort to address the opioid crisis. The House Energy and Commerce Committee held a two-day hearing on the topic last week. More than 20 pieces of legislation related to opioids are under discussion by the committee.

Related: Florida Governor Rick Scott (R) recently signed legislation to combat opioid abuse, allocating $65 million for the related efforts. The bill includes funding for treatment, naloxone for first responders, and support for the state’s Prescription Drug Monitoring Program, among other initiatives.

CMS issues coverage decision on cancer genetic tests

Medicare will now cover genetic tests for advanced cancer patients to help care teams personalize patients’ treatment, the US Centers for Medicare and Medicaid Services (CMS) said March 16. The newly-approved laboratory tests use next-generation sequencing to diagnose cancer at the genetic level. The tests can identify genetic mutations and markers in tumors, allowing physicians to more accurately treat cancers. The results are sent to a treating physician to help manage the patient’s care.

The US Food and Drug Administration (FDA) approved the test last November during parallel review, in which FDA and CMS review devices simultaneously. Under CMS’s National Coverage Determination, the agency will cover FDA-approved in-vitro diagnostics when the test has a companion FDA-approved option.

Administration appoints new CDC director

Longtime HIV/AIDS researcher Robert Redfield, MD, has been appointed to lead the CDC, the administration announced March 21. Redfield, a clinical scientist and former Army doctor, co-founded the Institute of Human Virology in Baltimore. The Institute led a large treatment program in Baltimore for hepatitis C and HIV patients, and a global program funded by the president's Emergency Plan for AIDS Relief. Redfield previously served on former President George W. Bush's HIV/AIDS advisory panel and in various advisory roles at the NIH. Redfield has been active in initiatives to combat the opioid crisis, including the development of medication-assisted treatment facilities.

The position does not require Senate confirmation.

More small employers are self-insuring, but rates are falling among large firms

New research from the Employee Benefit Research Institute (EBRI) finds that more small organizations have some self-insured health insurance options, while the numbers are decreasing among large organizations.

Self-insuring means the organization holds all the risk for insuring its employees, instead of pooling that risk with other organizations through a health insurance company. The researchers noted that the smaller organizations might be self-insuring in an effort to insulate themselves from higher coverage costs.

EBRI analyzed data from the Medical Expenditure Panel Survey Insurance Component from the Agency for Healthcare Research and Quality.

Source: “Self-Insured Health Plans: Recent Trends by Firm Size, 1996‒2016,” EBRI, March 12, 2018.

Actuaries call for health plans to use their data to develop high performance networks

Health plan data around performance measures is key to developing high-performance networks (HPNs) that deliver high-quality, cost-effective care, according to a new report from the American Academy of Actuaries. HPNs are narrow provider networks aimed at decreasing costs and increasing quality for specific patient populations. They have been gaining momentum as value-based care arrangements have grown.

Health plans, health systems, physicians, and third-party administrators have to choose the right partners and establish meaningful goals to meet these aims, according to the report. Health plans can provide data and incorporate Healthcare Effectiveness Data and Information Set (HEDIS) measures or other measures that align with each HPN’s patient population.

The report notes that establishing relevant financial measures, as well as clinical measures, is important. Health plans have detailed cost information from claims, which can be used to create financial measurement frameworks for an HPN. These include loss ratios, per-member per-month costs, and costs per episode of care. Health plans can also share performance information from claims data to increase awareness and to enhance quality.

The report suggests that health plans aim to create financially balanced agreements through risk sharing and incentive payments that encourage clinicians to earn higher quality scores. It also suggests that bundled or global payments can cover the general cost of care, and that traditional fee-for-service reimbursement arrangements are not adequate to support incentives in HPNs.

Breaking Boundaries

Flu is fading from headlines, but is top of mind for researchers

We are past the peak of this year’s flu season, one of the worst in the past decade. CDC reports that flu-related hospitalizations are still a challenge, and there have been additional pediatric deaths in recent weeks. Researchers and public health officials are trying to learn from this years’ experience to prepare for the next flu season, and beyond that, to a time when a universal flu vaccine is a reality.

The effectiveness of this season’s flu shot is about 36 percent, according to an interim CDC report. In children, it is more effective—59 percent. But other routine vaccines are much more effective. After one or two shots, many vaccines in the recommended childhood immunization schedule remain about 90 percent effective for many years.

Why does the flu vaccine vary so much in its effectiveness from year to year, and why do we need to get a shot every season? The challenge is the changing nature of the influenza virus. There are two proteins on the virus’s surface: Hemagglutinin and neuraminidase (the H and the N in the names of A strains, like H3N2, and H1N1). Hemagglutinin lets the virus enter human cells, and it is the target of seasonal flu vaccines. The proteins have a head and a stem. The head is what mutates each season. The immune system makes a response against the head, but the stalk does not change. Researchers have faced challenges getting the immune system to make a response to the stalk.

To help develop an effective universal vaccine in the coming years, officials from the National Institute of Allergy and Infectious Diseases (NIAID) have published a roadmap. Officials intend this roadmap to be a foundation for future investments in influenza research and to support a consortium of multidisciplinary scientists. The roadmap, published this month in the Journal of Infectious Disease, includes recommendations from a working group of scientists from academia, industry, and government convened by the NIAID last year. The group agreed on a few guidelines for a universal vaccine:

  • It should be least 75 percent effective 
  • Protect against group I and II influenza A virus
  • Have durable protection that lasts at least one year
  • Be suitable for all age groups

The plan would focus resources on a few key areas of research. These include learning more about how the flu virus is transmitted, deepening the understanding of how immunity occurs (and how to tailor vaccine response), and supporting the rational design of universal influenza vaccines. Specifically, in the development of a universal flu vaccine, the consortium is interested in how to boost inmmunity and extend the duration of that protection.

The NIAID spent an estimated $64 million on universal influenza vaccine research in fiscal year 2017. Recently, a group of US senators introduced the Flu Vaccine Act to make additional funds available. The bill calls for a federal investment of $1 billion over five years for the NIAID to create a universal influenza vaccine. The omnibus spending package released last week includes $100 million for NIH directed at developing a universal flu vaccine (see first story).

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