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Factors associated with Medicaid managed care plan financial performance.

Article Excerpt
Using 2001 and 2003 Interstudy data, we developed and tested a model of market, policy, and plan-level factors that are associated with performance variation on standard industry financial indicators. The analysis found that policy variables showed the most significant findings, followed by plans' characteristics, with only slender support for market level influences. The one market measure that was consistently significant over time with the health benefit ratio (HBR) was the Medicaid HMO penetration rate, which indicated that states with a longer commitment to managed care paid out a higher percentage of premiums for health benefits. The one policy measure that was consistently significant over time was the HMO bid rate which found that competitive bidding rather than administered rates result in a lower HBR. Finally, for profit ownership status was significant and negatively associated for both time periods with HBR, which suggests lower health benefit ratios in for-profit plans.

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The number of Medicaid beneficiaries enrolled in managed care arrangements reached 27 million in 2004 or nearly 60 percent of all persons in Medicaid. (1) Of the more than 200 health plans participating as Medicaid contractors, a growing number of them are owned by investor-owned corporations. Four publicly traded companies specializing in the Medicaid market have completed initial public offerings since 2001 and currently include more than 30 plans with over 3.5 million lives. (2) Two national commercial insurance giants, Wellpoint and United Healthcare, have more than three million lives enrolled in their Medicaid product lines and related subsidiaries. An expanding number of stock analysts and investors are showing a keen interest in a Medicaid market that spends over $270 billion a year. (3)

Both the growth in enrollment and the expanded importance of investor-owned, profit maximizing health plans pose key questions about how and why Medicaid has become so attractive in terms of profitability. Previous research in this area has been descriptive and limited, with little effort to examine factors that may be contributing to variation in plan financial performance. (4) We attempt to fill this gap by building a model of market, policy, and plan level factors that reflect distinctive features of the Medicaid managed care business opportunity and use it to analyze financial performance data drawn from large samples of plans in both 2001 and 2003.

Background

State Medicaid agencies have been enrolling beneficiaries in managed care arrangements in earnest since the early 1990s in pursuit of both improved access and cost containment. (5) The number of enrollees jumped from 2.7 million in 1990 to 25.0 million by 2000, a nearly tenfold increase. (6) While some enrollment was with individual primary care case managers, the preponderance of the enrollment--more than 80 percent--was in HMOs or other prepaid health plans. The decade witnessed turbulence in plan participation, particularly in states where rate setting was unstable or where states exercised little discretion in selecting participating plans. In addition, after a rapid increase in the number of commercial plans entering the market in the mid-1990s, many of them subsequently withdrew from participation. (7)

The Balanced Budget Act of 1997 included a number of changes designed to facilitate state expansion of Medicaid managed care, including allowing states to enroll some beneficiaries on a mandatory basis without obtaining a federal waiver and permitting plans to serve exclusively a Medicaid population. Prior to this change, states could only contract with health plans that had at least 25 percent of their members coming from outside of Medicaid, the so-called 75/25 rule, though it was possible in special circumstances to obtain an exemption from that regulation. The change opened the door to a burgeoning interest in multi-state Medicaid-focused health plans. (8)

By 2001, two companies serving only Medicaid and S-CHIP beneficiaries, Amerigroup and Centene, had positioned themselves to carry out initial stock offerings in that year. A third company, Americhoice, filed its intention to do the same, but before it completed its IPO, it was acquired in June 2002 by United Healthcare Group, which subsequently consolidated all of its Medicaid enrollment in (currently) 11 states in this Medicaid-focused subsidiary. Two other firms that enroll primarily Medicaid population, Molina and Wellcare, completed IPOs in July 2003 and June 2004, respectively. (9)

The emergence of Medicaid as a lucrative and relatively stable managed care market in the early 2000s, stands in sharp contrast to the troubled financial straits experienced by most states during the recession of that same period. (10) From all indications, Medicaid managed care plans, in general, and publicly traded plans, in particular, fared remarkably well. Understanding the forces at play in 2001 and 2003 that contributed to making this an attractive market has important implications for both health plans and their members, and for policymakers who have, in effect, created a thriving industry in recent years.

Contributing Factors

There are a number of distinguishing features of Medicaid managed care as a business opportunity that must be considered in assessing what factors influence health plan financial performance. (11) In most states, enrollment in managed care is mandatory for low income women and children. This gives plans an assurance of a substantial volume of members who can be enrolled with limited customer acquisition expense and limits their ability to manage their member mix by attracting healthier, less costly members. Likewise, initial enrollment and/or planned expansions are typically phased in according to a fixed timetable, offering plans considerable predictability in start up and capacity expansion activities. These...