California Medicaid generating big profits for state administrators

Centene's corporate headquarters.

Medicaid is rarely associated with getting rich. The patients are poor, the budgets tight and payments to doctors often paltry.

But some insurance companies are reaping spectacular profits off the taxpayer-funded program in California, even when the state finds their patient care is subpar.

A unit of Centene Corp., the largest Medicaid insurer nationwide, raked in $1.1 billion in profits from 2014 to 2016, according to state data obtained and analyzed by Kaiser Health News. Anthem, another industry giant, turned a profit of $549 million from California's Medicaid program in the same period.

Overall, Medicaid insurers in the Golden State made $5.4 billion in profits from 2014 to 2016, in part because the state paid higher rates during the inaugural years of the nation's Medicaid expansion under the Affordable Care Act. Last year, they made more money than all Medicaid insurers combined in 34 other states with managed care plans.

"Those profits are gigantic -- wow," said Glenn Melnick, a health economist and professor at the University of Southern California.

Alan Sager, a health-policy professor at Boston University, was surprised -- and dismayed.

"California is being wildly open-handed and excessively generous with insurers," he said.

[Also: Practices seeing fewer uninsured due to Medicaid expansion]

Jennifer Kent, California's Medicaid director, said that health plan profits were higher than anticipated during the ACA expansion. But she said the state expects to recoup a significant amount of money within the next year, once audits are complete and retroactive rate adjustments are made.

"We're going to be taking a lot of money back. We're talking billions of dollars," Kent said in an interview last week. No one should think "these plans just made off like bandits and we're not going to see them again … We are very mindful we use taxpayer money."

Health insurers who profited substantially from Medicaid, known as Medi-Cal in California, defend their good fortune. They say these surpluses follow losses in earlier years, and they always run the risk of red ink if medical costs jump.

"The expansion may have been a little rich in the beginning," said Jeff Myers, chief executive of the Medicaid Health Plans of America, an industry trade group. But "you are starting to see margins come back down."

More than 1 in 3 Californians, or 13.5 million people, are covered by Medicaid -- more than the entire population of Pennsylvania. About 80 percent of those in California's program are enrolled in a managed-care plan, in which insurers receive a fixed rate per person to handle their medical care. The goal is to control costs and better coordinate care.

In anticipation of the Obamacare rollout, officials in California and elsewhere boosted their payments to managed-care companies because they expected Medicaid costs to increase as newly insured patients rushed to the doctor or emergency room after going years without coverage. But those sharply higher costs didn't materialize -- and insurers pocketed more money as a result.

Moreover, California's payments keep flowing steadily even when patients fare poorly. Two of the most profitable insurers in California -- Centene and Anthem -- run some of the worst-performing Medicaid plans, according to medical quality scores and complaints in government records.

"If there is that much extra money sloshing around in California, then it's worth asking whether you could expect more in terms of performance," said Andy Schneider, a research professor with Georgetown University's Center for Children and Families.

California officials acknowledge they need to do a better job of connecting money and quality.

"We are looking at alternative payment methods and those types of things that we can do to help improve and to tie quality to payment," said Lindy Harrington, a deputy director at the California Department of Health Care Services, which runs Medi-Cal. "But as you can imagine, it's a difficult ship to turn."

Medi-Cal Suddenly A Cash Cow

Before the ACA expansion, California's Medicaid plans collectively were barely in the black, with $226 million of net income for 2012 and 2013 combined. Traditionally, these insurance contracts have yielded slim profit margins of 2 percent to 3 percent. California said it aims for 2 percent when setting rates, based on prior claims experience and projected costs.

But in the years since the health law took effect, many health insurers have posted margins two or three times that benchmark.

Centene's Health Net unit in California enjoyed a profit margin of 7.2 percent from 2014 to 2016. Centene acquired Health Net for $6.3 billion in March 2016. Anthem's profit margin in California's Medicaid program was 8.1 percent for 2014 to 2016.

Investors have cheered those results. Shares in Anthem have more than doubled since January 2014, when the Medicaid expansion began. Centene shares are up 50 percent since the company purchased Health Net last year.

"We have proven our ability to provide high-quality, cost-effective healthcare to state beneficiaries while saving states money and delivering strong returns to our shareholders," Michael Neidorff, Centene's chairman and chief executive, told investors in February.

[Also: Billions in proposed budget cuts to Medicare, Medicaid threaten provider compensation]

In a statement, Health Net said its profit margins are comparable to other Medi-Cal health plans and the company has made major investments to improve Californians' health and access to care.

Anthem declined to comment on its financial results. The company said in a statement that it has worked with the state to meet the needs of Medicaid patients by extending clinic hours and helping with transportation to appointments. The company said it's committed to providing "high-quality care to our Medi-Cal members."

Charles Bacchi, chief executive of the California Association of Health Plans, said they deserve some credit for making the Medicaid expansion work.

"The expansion was an incredible lift and we can't do it for nothing," he said. "It would be a shame to look at one snapshot in time and ignore the success of California's expansion that has helped millions of people."

Overall, Centene has 7 million Medicaid enrollees across the country, with about 2 million in California. Anthem is close behind with 6.4 million Medicaid members, about 1.3 million in the state.

With so many people's healthcare at stake, state officials say they did not want to risk having health plans come up short during the expansion.

As it turned out, they need not have worried.

A nationwide study published in September found that average monthly spending on newly eligible Medicaid enrollees was 21 percent less than the amount spent on those who were already eligible. It helped that many of the new enrollees appeared to use fewer medical services than those already on the program, researchers said.

In 34 states and the District of Columbia, Medicaid managed-care profits more than tripled to $3.9 billion in 2015 from $1.1 billion in 2013, according to consulting firm Health Management Associates' analysis of insurance filings. Those figures don't include California.

By 2016, profits dropped as some states reduced Medicaid rates to insurers to reflect the lower costs incurred during expansion. Kent, the California Medicaid director, said the state's rates paid to insurers for enrollees in the expanded program have decreased by 38.5 percent since January 2014.

The federal government footed the entire bill for Medicaid expansion during the first three years, instead of taking the usual approach of splitting the costs with states. Now, states have more incentive to rein in spending, as their share of the costs grows to 10 percent by 2020.

Quality Not In The Equation

In the meantime, however, some evidence suggests that in California, richer plans provided care of poorer quality.

The state scores Medi-Cal insurers from zero to 100 percent on how they perform on dozens of measures, such as diabetes testing, cancer screenings and checkups for children. Statewide, the average score was 63 percent for 2016.

For Centene and its Health Net unit, seven of its 10 regional health plans in Medi-Cal scored below average on quality. The company's San Joaquin health plan ranked last statewide at 31 percent. State officials have ordered the company to improve in areas such as ensuring women get postpartum care and providing routine eye exams and other tests for diabetics.

Among patients, a chief complaint is how hard it is to find a specialized doctor. In a March audit, Medi-Cal said Health Net "did not maintain an adequate number of specialists within its network." The state found that "member grievances on referral for services and availability of appointments with specialists were among the highest complaints."

Five months later, after reviewing the company's corrective actions, the state said Health Net was back in compliance.

Chandra Marshall, a Medicaid patient in Modesto, Calif., said she has suffered from limited access to specialty care.

She said her primary-care doctor in her Health Net plan recently recommended she visit a dermatologist for a biopsy. But she said the only available dermatologist on her plan was 90 miles away in San Francisco.

Worried she might have skin cancer, Marshall agreed to go but still hasn't heard back about an appointment.

"Why can't Health Net afford more specialists in the area?" said Marshall, who also suffers from kidney disease. "If Health Net doesn't provide access to dermatologists and other specialists, people may just risk [not going]."

Her Health Net plan in Stanislaus County scored below 50 percent on quality care measures.

In a statement, Health Net said it is "committed to helping improve the quality and availability of healthcare services for our members that produce enhanced health outcomes. We work diligently with our contracting medical groups to help ensure our members get care that is easy to access."

In the case of Anthem, eight of its 12 regional Medi-Cal plans scored below average on patient care. The state has told Anthem to do better at providing prenatal care, controlling patients' high blood pressure and monitoring medications for asthma patients, among other issues.

In a written response to questions, Anthem said its scores have improved over time and two of its plans, in San Francisco and Tulare counties, are among the top 10 statewide.

While not tied directly to payments, California officials said they do reward insurers with higher quality scores by assigning more Medicaid enrollees to those plans.

Profits A Political Hot Button

The profits of managed care plans feed into Republican criticism of the ACA's costs and its expanded Medicaid rolls. President Donald Trump has called for the law's repeal, in part, because it enriches health insurers.

"They have made a fortune," Trump tweeted on Oct. 13.

Sen. Ron Johnson (R-Wis.) has demanded that California and seven other states account for how they spent federal Medicaid expansion dollars. Johnson, chairman of the Senate Homeland Security and Governmental Affairs Committee, asked California officials in a letter Sept. 27 whether they have conducted audits and requested information on insurance company payouts.

In an Oct. 11 response, Kent said the state spent $6,181 per expansion enrollee in 2015, below the national average of $6,365.

"California is a cost-efficient Medicaid program," she wrote.

By one standard measure, the state's oversight has been less than efficient.

Starting in 2014, the federal government required that 85 percent of Medicaid expansion funding be spent on care and quality improvement efforts, rather than administrative overhead and profits. But three years in, California officials acknowledged they have just started audits to determine whether companies might have to return excess money.

What's clear is that insurers' spending on both expansion and traditional Medicaid enrollees often falls short. Eight of California's 22 Medicaid insurers failed to hit 85 percent in medical spending for the year ending June 30, 2016, according to state data obtained by Kaiser Health News. Anthem ranked lowest at 77 percent; Health Net spent 81 percent of Medicaid premiums on medical care, state records show.

Each percentage point below the threshold can amount to tens of millions of dollars that should have been spent on behalf of patients.

In July, a federal rule went into effect establishing 85 percent as a national benchmark for all Medicaid managed care. Three months later, California Gov. Jerry Brown signed a law mandating that same percentage. But the state requirement doesn't kick in fully until 2023.

Michael McCue, a professor at Virginia Commonwealth University who studies Medicaid managed care, said the profit margins in California "raise a lot of red flags." He said government officials owe it to taxpayers and patients to do more to hold insurers accountable.

"You have to make sure you're getting a bang for your buck," McCue said. "Right now, [for insurers] California's Medicaid program is the golden nugget."

This story was produced by Kaiser Health News, which publishes California Healthline, a service of the California Health Care Foundation.