In the Medicaid managed care market, health plans that specialize in Medicaid are more likely to be profitable.  Health plans that also offer commercial and Medicare products tend to operate at a loss for their Medicaid line of business.

An interesting new study by Mike McCue, DBA, at Virginia Commonwealth University – Financial Performance of Health Plans in Medicaid Managed Care – examines the profitability of health plans in Medicaid.  It shows that health plans that specialize in the complex Medicaid market are more likely to be profitable than mixed players.

It has interesting implications for the fast growing, increasingly competitive Medicaid managed care business.  With the massive expansion of Medicaid eligibility under the Affordable Care Act, Medicaid health plans will see significant increases in enrollment.

Key Findings on Medicaid Health Plan Profitability:

  • Plans specializing in the Medicaid market had a significantly lower medical loss ratio (87.7% vs. 90.6%) than multiproduct plans.
  • Plans specializing in the Medicaid market also had a higher operating margin (1.3% vs. -1.0%) than multiproduct plans serving multiple markets.
  • Publicly traded plans had a significantly lower medical loss ratio (87.4% vs. 90.1%) and a significantly higher administrative cost ratio (12.7% vs. 10.1%) than non–publicly traded plans. The higher administrative expense led to a lower operating margin among the publicly traded plans (0.2% vs. 0.6%).
  • Provider-sponsored plans had a significantly higher medical loss ratio (90.6% vs. 88.4%) than non–provider-sponsored plans and a significantly lower administrative cost ratio (8.9% vs. 11.9%).

Financial Performance of Health Plans in Medicaid Managed Care:

Here’s the study abstract:

Objective: This study assesses the financial performance of health plans that enroll Medicaid members across the key plan traits, specifically Medicaid dominant, publicly traded, and provider-sponsored.

Data and Methods: National Association of Insurance Commissioners (NAIC) financial data, coupled with selected state financial data, were analyzed for 170 Medicaid health plans for 2009. A mean test compared the mean values for medical loss, administrative cost, and operating margin ratios across these plan traits. Medicaid dominant plans are plans with 75 percent of their total enrollment in the Medicaid line of business.

Findings: Plans that are Medicaid dominant and publicly traded incurred a lower medical loss ratio and higher administrative cost ratio than multi-product and non-publicly traded plans. Medicaid dominant plans also earned a higher operating profit margin. Plans offering commercial and Medicare products are operating at a loss for their Medicaid line of business.

Policy Implications: Health plans that do not specialize in Medicaid are losing money. Higher medical cost rather than administrative cost is the underlying reason for this financial loss. Since Medicaid enrollees do not account for their primary book of business, these plans may not have invested in the medical management programs to reduce inappropriate emergency room use and avoid costly hospitalization.

The study is published in Medicare & Medicaid Research Review, the house journal of the Centers for Medicare and Medicaid Services (CMS) Center for Strategic Planning.  The research was supported through a grant from the Commonwealth Fund.

To read the complete study, click here (PDF).