Do Medicaid Managed Care Plans Succeed Financially?

Can a company actually make a profit managing—and paying for— the care of Medicaid beneficiaries? CMS and the Commonwealth Fund recently published a study on the financial health of Medicaid managed care organizations. The study compared the profitability of Medicaid managed care organizations operated by insurers with other lines of business (multi-product plans) to those operated by insurers focused specifically on Medicaid members (Medicaid-dominant), considering three ratios: medical loss (MLR), administrative cost, and operating margin.

The author defined “operating margin” as premium revenue minus both medical and administrative costs;the operating margin ratio was a measure of how well the organization managed its costs in relation to its revenue.The relationship between financial health and provider sponsorship also was examined. The author defined provider-sponsored plans as plans owned, operated by or affiliated with hospitals, health care systems or medical clinics.

Which were more profitable?

Medicaid-dominant plans did better than multi-product plans. Provider-sponsored plans did better than those sponsored by others. Medicaid-dominant plans sponsored by providers had an operating margin ratio of 2.2. Of the Medicaid-dominant plans that were not sponsored by providers, publicly traded plans had the worst results financially, with an operating margin of 0.6.

In contrast, the multi-product plans all fared poorly. Those that were provider-sponsored broke even; their operating margin was zero. The others all lost money. Publicly traded plans did as well as those that were privately owned, with operating margins of -1.1.

So, how did the plans spend their money? What percent was paid out for medical care, and what was spent on administrative costs?

On this measure, one variable that stood out was the difference between provider-sponsored plans and those that weren’t.Provider-sponsored plans, on average, spent the most on medical care (90.6 percent) and the least on administration (8.9 percent). When provider-sponsored plans were analyzed further  by Medicaid-dominant or multi-product status, they still were consistent in spending more on care and less on administration. To be fair, the spending pattern of the Medicaid-dominant plans that were not provider-sponsored but also were not publicly traded was the same as the provider-sponsored Medicaid plans,unlike plans that were publicly traded. The publicly traded Medicaid-dominant plans had the lowest MLR (86.2) and the highest administrative cost ratio (13.3). In contrast, the MLRs of the other Medicaid-dominant plans were 88.5 (provider-sponsored) and 88.6 (not publicly traded), and their administrative cost ratios were 9.5 and 9.6, respectively, which might mean that the priorities of smaller, locally owned plans differ from those of the publicly traded plans.

The multi-product plans tended to spend less on administration and more on medical care than the Medicaid-dominant plans. The multi-product provider-sponsored plans had the highest MLR, 91.6 percent, and the lowest administrative cost ratio, 8.4 percent. They were the ones who broke even.

The author concludes that Medicaid managed care organizations do best financially when they focus on serving the Medicaid population. Those that are publicly traded might do better if they shaved their administrative costs, but perhaps they are hiring staff with expertise on the needs of the diverse Medicaid population, or investing in modern computer systems, which would result in greater efficiency.

The developments discussed in earlier posts might lend support to a different conclusion, however.  Perhaps the multi-product plans spend more on care because they are serving members who expect it. Do plans that are paid more in premiums spend a higher percentage on care? Maybe the publicly traded plans spend more on administration because they must report to shareholders and a parent corporation, or they have more layers of bureaucracy.And how do all these changes affect quality of care?

With the states increasingly moving to a model where care is managed by private companies, more research is certainly needed.