Jessie Hellmann and Nona Tepper 
Private insurers are set to win big if House Democrats’ plan to close the Medicaid expansion coverage gap passes Congress.
The proposal, which passed a key committee this week, would create a new federal Medicaid look-alike program in non-expansion states, with its administration to be outsourced to managed care organizations and other third parties by the Health and Human Services Department through a bidding process.
Managed-care organizations, which deliver Medicaid benefits on the behalf of states, already cover 54 million people, nearly 70% of Medicaid beneficiaries, according to the Kaiser Family Foundation.
The proposal would give MCOs the opportunity to cover more than 2 million uninsured low-income adults who live in the 12 states that have refused to expand Medicaid under the Affordable Care Act, mostly for political reasons. Most people in the coverage gap live in the South and are people of color. Another 2 million people who are currently eligible for ACA subsidies would also be eligible for Medicaid if the program was expanded, offering them more comprehensive benefits and lower cost-sharing than they receive under exchange coverage, according to KFF.
“It’s a big business opportunity to try to get these new enrollees because it’s potentially a lot of people,” said Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation, where she studies health insurance markets.
The majority of the people in the coverage gap live in Texas, North Carolina, Florida and Georgia, making those states the most enticing to insurers, she said.
“If you think of those big four states, that’s a really big deal,” she said.
The drafters of the ACA intended Medicaid to cover all low-income adults in all 50 states, but the Supreme Court ruled in 2014 that was unconstitutional. Medicaid expansion became optional, with 38 states adopting it as of this year.
Democrats gained control of both houses of Congress and the executive branch after the 2020 elections. They vowed to finally close the coverage gap. Under the proposal, people in the coverage gap would become eligible for ACA subsidies to buy exchange plans until 2025, when the new federal program would start. Insurers have made a hard play for a solution that utilizes managed care.
“We’re urging Congress to make sure that we build on the existing Medicaid infrastructure,” said Craig Kennedy, president and CEO of Medicaid Health Plans of America, which represents MCOs. He noted that 40 states already have managed care organizations, including Texas, Georgia, North Carolina and Florida.
“We believe it would be more effective to leverage the existing managed care infrastructure to expand Medicaid to those uninsured populations.”
Many of the 38 states that have already expanded Medicaid contract with MCOs to manage those populations.
But it’s not entirely clear what would happen in the three non-expansion states that don’t have any MCOs, though the legislation gives HHS the option to contract with a “third party plan administrator.” North Carolina, another state that hasn’t expanded Medicaid, recently contracted with several MCOs, including Centene Corp. and UnitedHealth Group, to manage their program. Large national carriers Centene, UnitedHealthcare, Anthem, Molina Healthcare and Aetna have contracts to cover 60% of the Medicaid managed-care market, according to an analysis from KFF.
Hempstead said there have been many entries into the ACA markets in non-expansion states, with insurers that operate MCOs potentially anticipating those states will eventually expand Medicaid or Congress will act to close the coverage gap.
Insurers may feel it gives them an advantage to already be serving customers in the marketplace or in Medicaid when it comes time to submit bids, she said.
That’s what regional and local plans are worried about.
Regulators must ensure that community plans only operating in a certain area of the state are not disadvantaged through their bidding process, said Dan Jones, vice president of federal affairs at the Alliance of Community Health Plans. Local and regional MCOs control about 40% of the market, according to KFF.
“If you just had two bids across the whole non-expansion state, we have plans that operate within certain parts of the state,” Jones said. “So, it seems like they would be disadvantaged if that’s the route that they would go.” The legislation says the HHS secretary can contract with more than one MCO or plan administrator in each coverage gap geographic area.
While the idea of offering a federal Medicaid option has been debated since at least the creation of the Affordable Care Act, the proposal to privatize the service is new, Jones said.
Managed-care organizations in the past have been criticized for charging more for the administration of the plans than traditional, fee-for-service Medicaid. The ACA allows plans to keep 15% of the premiums collected on administration—the rest must be spent on members’ medical care, which insurers measure through their medical loss ratios. Some states have said local regulators operate the program more efficiently than private companies.
In the run-up to privatizing healthcare for the state’s most vulnerable population, the Oklahoma Health Care Authority, which supported moving to managed-care, said its administrative costs of running fee-for-service Medicare ran at just 5%, for example. The move to privatize Oklahoma’s Medicaid program, named SoonerSelect, ultimately failed.
“In terms of what they’re counting towards administrative costs, what benefits are included? What type of coordination of care is provided to improve health outcomes and save costs?” Jones said. “I just think that there’s a lot of variables that go into looking at the value that private companies provide.”
Medicaid managed-care organizations have also caught the attention of regulators recently. The federal government unsealed a whistleblower suit accusing Aetna of lying about its provider network to secure Medicaid contracts in Pennsylvania this week, although the Hartford, Connecticut-based insurer denies the claims. Aetna is owned by CVS Health.
The legislation gives the HHS secretary the power to set provider rates, network adequacy standards, quality requirements and any other standards he or she deems necessary. The contracts must also include a minimum MLR and a requirement for “timely” payments to providers.
“I don’t think it’s universally true that managed-care entities get it right,” said Dr. Vikram Bakhru, chief medical officer at Medicaid managed-care startup Circulo. “Certainly, you know, there are cases of failure.”
But he believed introducing private companies in the marketplace added a level of competition that would benefit the government and enrollees, and that managed-care companies’ experience managing costs and care would ultimately translate to lower costs across the program, compared with a traditional fee-for-service option. As an example, he pointed to the success of the lucrative and growing Medicare Advantage market, a private alternative to fee-for-service Medicare that covers 26.7 million seniors, or more than 42% of all eligible seniors, according to the most recent federal data from July.
In 2021, member satisfaction with their Medicare Advantage program increased for the third year in a row, according to a report from data analytics firm J.D. Powers. But as satisfaction grew, so did federal spending. The cost per beneficiary is growing faster for people on Medicare Advantage than it is for people on traditional Medicare and Part D prescription drug plans, according to MedPAC. Medicare Advantage also makes up a larger portion of the federal budget, or 46%, than the enrollee population it serves, according to KFF.
“Is the private option a guaranteed solution? No, of course not,” Bakhru said. “But it represents an option that brings competition to the landscape, and I think that is a healthy component to the ecosystem.”
While privatizing a federal Medicaid plan would offer a short-term bump to those companies chosen to manage the program, the long-term proposal could negatively impact insurers since it could lead to a small portion of commercial members switching to Medicaid, which offers lower profit margins, said Glenn Melnick, a health finance professor at the University of Southern California.
In 2020, Medicaid managed-care enrollees delivered insurers the lowest profit margin across all plan types, according to KFF.
“If you want to bid, and you only have one buyer, which is the federal government, they have the power in negotiating a contract,” Melnick said. “I’m guessing all other things equal, commercial companies would rather keep their members commercial.”
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