Milliman Updates Analysis of Medicaid HMO Profitability

For the fifth consecutive year, Milliman Research  has issued an analysis of the financial performance of Medicaid managed care organizations (MCOs). Authors Jeremy Palmer  and Christopher Pettit have compared the performance of 162 Medicaid MCOs in 32 states. Although there was not enough data for them to include California and Arizona, they did cover multiple regions of the country. The review was limited to MCOs that reported at least $10 million in 2012, so it did not include some MCOs owned by large nationwide organizations.

Measuring Profitability

Palmer and Pettit used the medical loss ratio and administrative loss ratio to measure profitability. Medical loss ratio (MLR) is a fraction in which the numerator is the amount paid for claims or saved for payment of future claims and the denominator is all premium revenue. The administrative loss ratio (ALR) is the percentage of revenue spent on administration. The MLR and ALR are subtracted from 100 percent, and the remaining percentage is the profit from operations, called the underwriting ratio. (Investment income is disregarded for this purpose.)

Making Comparisons

Palmer and Pettit then compared the MCOs in several different ways, grouping them by revenue, affiliation with a larger  organization, financial structure, i.e., not-for-profit or profit-making, as well as  geographically. Each company’s MLR, ALR, or underwriting ratio was ranked by percentile; the figures presented were  the mean and the 25th, 50th and 75th percentile for each variable. The individual scores of MCOs were not identified.

The MCOs were grouped by capitated payments per member per month (PMPM), from $225 or less, $226 to $300, and more than $300. Not surprisingly, the MCOs that received higher PMPM payments spent more on claims. The average MLR for the lowest paid group was 86.5 percent, while the highest paid group’s MLR was 88.4 percent.

Affiliation Status

Although some people would hypothesize that economies of scale would reduce an MCO’s ALR, that was not the result. There were 35 independent MCOs and 127 were affiliated with larger organizations. In actuality, the independent organizations both had higher MLRs (89.3 vs 87.7 percent) and lower ALRs than the affiliates (10.4 percent compared to 11.5 percent). The affiliates had a higher percentage left over after MLR and ALR were subtracted, 0.8 percent compared to 0.3 percent.

Profit Status

The loss ratios of an MCO may reflect the purposes inherent in its financial structure. The for-profit MCOs had lower MLRs and higher ALRs than the not-for-profits; in other words, they spent comparatively less on health care and more on administration. The not-for-profits had a lower percentage of revenue remaining after ALR and MLR were subtracted from revenue, but they retained more capital than the for-profits, perhaps because they have no need to pay dividends to shareholders and are free to save for other projects.

State of Operation

The breakdown of statewide averages showed that all but two states had average MLRs over 80 percent, and 23 states’ MLRs exceeded 85 percent. Illinois MCOs had the lowest average MLR, 75.1 percent, and the highest ALR, 17.5 percent. Nevada’s MCOs averaged 77.0 percent devoted to health care and 12.8 percent to administration, and had the underwriting ratio, the profit from operations. Given the developments in the administration of Kentucky’s Medicaid managed care program, perhaps it is not surprising that the state had the largest percentage of loss, 11.4 percent.  All four Kentucky MCOs lost money in 2012.

Gains vs Losses

The only information about specific MCOs was a table that identified the qualifying MCOs in each state  and indicated, among other things,  their total annual revenue, PMPM payment group, affiliation status and financial structure, as well as whether they had gains or losses in 2012. The specific affiliations were not listed, however, so unless the MCO’s name reflected its affiliation, as United Health Care, Amerigroup, and Coventry usually did, one could not compare the success of the large organizations with affiliates in several states without checking their affiliations through other sources.  It appeared that Amerigroup, Coventry, and United made gains in more states than they had losses.  Of the states where Milliman listed a Centene affiliate, more had losses than gains.