As states weather the economic hits from the coronavirus pandemic, some are setting their sights on Medicaid, in particular the rates paid to private managed care providers.
California, Michigan and Ohio are among those with plans to cut rates to these payers, and more are likely to weigh that possibility, particularly as big Medicaid players like Centene and Molina post large profits as members delay care.
Ohio cut its Medicaid funding by $220 million, according to the Ohio Capital Journal, largely cuts that private payers will bear. SVB Leerink analysts expect Molina and Centene to be hit the hardest of the MCOs in the states that have announced the cuts, including Ohio.
These rate cuts were heavily discussed on earnings calls this week as analysts peppered executives with questions about the potential headwind. Centene executives declined to quantify how reductions may impact financial performance or guidance, while rival Molina detailed the financial impact so far.
"We're currently in active discussions with the states and the starting point is rarely the ending result," Jeff Schwaneke, Centene CFO, told investors Tuesday during the company's second quarter earnings call. "It really isn't constructive for us to publicly discuss our individual state expectations. We continue to believe that we're on a path in many states toward finding actuarially sound solutions toward the budgetary strain."
Centene reported net earnings of $1.2 billion for the second quarter, more than double its profit from the prior-year period.
"That lack of transparency is understandably frustrating for investors as they contemplate potential cuts from states tightening budgets. It also begs the question, is guidance at risk?" Jefferies analysts commented in a recent note after Centene reported its second quarter results.
Centene CEO Michael Neidorff attempted to assuage investors' concerns by detailing the discussions with states as they contemplate cuts. Essentially, Neidorff said Centene is encouraging states to take a longer view of the public health crisis, not just making decisions based on a single quarter.
Neidorff seemed to be trying to dispel the narrative that insurers are gaining from the pandemic as they take in per-member-per-month payments, but pay fewer claims as care is prolonged either voluntarily or as a result of stay-at-home mandates.
Centene's Medicaid segment is its largest with 12.5 million members spread across 24 states, including Ohio and California.
"The states' issue, when they saw the reduced utilization, [was] 'Oh, you're saving all this money'," Neidorff said during Tuesday's call.
Neidorff maintained that utilization will come back in the second half of the year. And even though utilization may be down, it's being offset by COVID-19 costs. Centene has spent $550 million on COVID-19 related claims through the end of June.
Rival Molina also has benefited from the pandemic due to lower utilization and reported its second quarter profit increased more than 40% to $276 million.
Unlike Centene, on Friday's earnings call with investors Molina CEO Joe Zubretsky did disclose the financial impact of state rate cuts, and how much Molina has returned so far due to retroactive changes in six states, including Ohio, Illinois, California, South Carolina, Mississippi and Washington.
Through June 30, Molina has refunded those states $75 million in per-member-per-month payments, Zubretsky said. He was adamant the money should be returned to states as managed care providers are paying for less care.
"We do not intend, nor do we want to keep state Medicaid money that was intended to be spent on medical benefits but was not due to utilization curtailment caused by COVID," Zubretsky told investors.
He later said that Molina is open to voluntarily returning money back to states or adding on additional benefits for members. Zubretsky contended throughout Friday's call that it's not helpful for the Medicaid managed care industry to have surplus margin in the middle of a pandemic.
For states, they can only go so far in cutting rates as they attempt to claw back resources to balance budgets.
"Based on federal requirements, states must continue to pay their managed care plans rates that are actuarially sound, so there are limits," Darin Gordon, a former director of Tennessee's Medicaid program, told Healthcare Dive. "Any proposed reductions in those rates that result in the rates no longer being actuarially sound would be challenged as a violation of federal requirements."
Medicaid is Molina's biggest slice of business with 3.5 million members in 15 states, the largest share of which are in Washington and California.
Still, Loren Anthes, who leads Medicaid policy for The Center for Community Solutions in Cleveland, said it's important for states to re-examine the rates they pay MCOs, particularly amid lower utilization.
"The laws include these checks to make sure that public money does not end up as profit," Anthes said. "It's an easy way to recapture some state resources."
But it's not all bad news for the private payers. At the same time they may be experiencing rate cuts due to depressed utilization, it's expected that Medicaid enrollment will increase as Americans continue to lose their jobs amid this crisis.
And some are calling for the federal government to increase the rate it pays states to help them fund their Medicaid programs, particularly as their budgets are squeezed.