Health Plan CEOs & Investors: I’ve Got Carolina [Medicaid] On My Mind
First off, after having time to reflect in Thailand and Cambodia, I would like to personally thank you all for reading Healthcare Pizza. If you haven’t already, be sure to subscribe for weekly notification emails here and follow me on Twitter @AMychkovsky. Now back to the regular blog.
Let it be known I’ve got mad love for the Tar Heel state. I intentionally say Tar Heel, because that plus Old Crow Medicine Show’s version of Wagon Wheel and James Taylor are how I remember North Carolina. As a proud Michigander, I likely would’ve never experienced Cosmic Cantina’s deluxe nachos with guacamole or Cookout’s absurd burger with a side of chicken nuggets combo if not for my wife. She is originally from the state and is a proud graduate of NCAA basketball powerhouse, the University of North Carolina at Chapel Hill. The classroom halls where the legendary Michael Jordan surely studied… occasionally… I’m sure it happened at least once.
Speaking of the NCAA basketball universe, this blog post is not about how the NCAA makes over $900 million from March Madness in commercials, ticket sales, and corporate sponsorships, off the unpaid backs of college athletes. This is about a $6 billion annual revenue opportunity in North Carolina that five Medicaid health plans will compete for beginning sometime 2020 as the state migrates away from a state-administered fee-for-service (FFS) program towards managed care.
Medicaid covers 75 million low-income Americans and represents a huge growth engine for the top for-profit health plans. These include Centene, Wellcare (soon to be Centene), UnitedHealthcare, Anthem (includes Amerigroup), Molina, and Aetna. As a federal-state partnership, the federal government ponies up majority of the cost, but the individual states decide what flavor of Medicaid (up to a point) they want to administer. If you look at the 50 states plus DC, all but 10 utilize a managed care system approach with private health plans. A lot of different reasons for this, but states seem to like having a pre-determined budget for their largest line item (more than even education) that reduces the threat of unexpected increases in medical trend cost. Of the top 25 largest states by Medicaid enrollment, 24 of them are already in Medicaid managed care. The only one missing is North Carolina. That is until 2020.
By now you’ve probably gathered that states that initially move from fee-for-services (FFS) to managed care present a unique opportunity for health plans to gain incremental membership, revenue, and profit. If an individual is not already enrolled with a competitor health plan, it is much easier to attract that new member with marketing and bending to optimize the auto-assignment logic, versus convincing a Medicaid enrollee to actively drop and select a different health plan during open enrollment.
But then why is North Carolina so important? There are 9 other states that health plan CEOs could attack who fit this same criteria. The reason is because the other 9 plans are significantly smaller. Connecticut hates managed care (my words not theirs), having dropped a previous managed care program like a bad habit back in 2012. Alabama tried to move into managed care back in 2017, leveraging Regional Care Organizations (RCOs), but failed due to uncertainty about funding and high start-up costs. Oklahoma has reviewed managed care is the legislature for several years running, but never gains enough legislative traction due to cost. And no offense to the remaining states, but from a business perspective alone, the 6 states leftover combine for less than 1 million lives.
In 2018, the state of North Carolina Department of Health and Human Services (DHHS) ran a competitive procurement process to determine which health plans would be allowed into the state. Everyone and their mother applied for the aforementioned reasons and NCDHHS ended up selecting 5 health plans, 4 for-profit national Medicaid MCOs (AmeriHealth, Centene, UnitedHealthcare, Wellcare) and Blue Cross NC. These 5 plans will initially manage 1.6 million lives in 2020 (exact date of implementation has stalled due to budget gridlock), which presents each plan with the potential to gain 320,000 lives if everyone divided the enrollment equally and we assume fair market share (1.6M / 5 plans). If we also assume the blended risk-adjusted average Medicaid per member per month (PMPM) payment is $300 (caveat I haven’t reviewed the rate books but this is a reasonable estimate) from the state, each plan would add $1.2 billion in premium revenue. And because the population has not previously been managed, it is reasonable to assume the average spend of a North Carolinian is historically higher than what it will be in the future, leading to potential pricing arbitrage.
Another significant revenue opportunity will occur in July 2021, when populations who meet eligibility for Behavioral Health Intellectual / Developmental Disability (I/DD) and foster care populations are scheduled to be added to the managed care program. Despite being a much smaller number of lives, the I/DD population cost up to 10 times more on medical spend than TANF populations, and therefore provide meaningful revenue opportunity for the health plans as well.
This doesn’t even take into account the battle over Medicaid expansion, which is being fiercely debate between Democratic Gov. Roy Cooper and the Republican-controlled legislature. One expansion study between George Washington University, the Cone Health Foundation, and the Kate B. Reynolds Charitable Trust, estimated more than 634,000 would gain Medicaid coverage in North Carolina by 2022. That could be at least another 100,000 lives or $360 million in premium revenue per plan (assuming the $300 PMPM assumption).
Making money in the health plan business is complicated in practice, but simple in theory. Reduce medical spend and limit administrative expense. Interestingly, the North Carolina Department of Health and Human Services published a 7-Year Medicaid report that forecasted the cumulative reduction in medical spend they expect the managed care companies to create. These reductions are partly the reason for moving into managed care in the first place and will be built into the pre-set capitated PMPM rate provided to the health plans. Long story short, the state believes significant opportunity exists to reduce spend across the board, especially at the hospital (inpatient, outpatient, ER) and within the durable medical equipment category.
All-in-all, movement of 1.9 million lives into Medicaid managed care, plus the potential of another 634,000 lives from expansion and a 0.5% conservative enrollment growth rate due to changing demographics, creates the perfect recipe for executives to hit their financial growth targets. That’s why Carolina is on the mind of a health plan CEO, at least for the five that have won contract awards.