Medicaid, Medicare integration rule to shake up market

By Nona Tepper / May 9, 2024

A new federal policy promoting integrated Medicare and Medicaid coverage seems poised to boost health insurers such as Centene and Molina Healthcare with Medicaid experience and large numbers of high-needs Medicare Advantage members.

A final rule the Centers for Medicare and Medicaid Services issued last month underscores the agency's commitment to supporting Dual Special Needs Plans that serve dual-eligible beneficiaries, making the fast-growing D-SNP market a potential source for growth in an industry that has recently struggled to hit its financial targets for Medicare Advantage. Dual-eligible beneficiaries qualify for Medicaid and Medicare.

Special Needs Plan enrollment grew 22% in 2024, according to data from Chartis Group, compared with a 5.4% increase in Medicare Advantage overall. Nearly 70% of new Medicare Advantage beneficiaries are covered by a Chronic Condition SNP, Institutional SNP or D-SNP this year.

CMS aims to improve health and cut costs by more tightly coordinating Medicare and Medicaid benefits. By 2030, the agency will limit most D-SNP enrollment to a single integrated Medicare-Medicaid plan per geographic service area, usually defined as one county.

At the same time, more states are requiring coordination between Medicaid and Medicare, including California, which last year mandated that insurers with new D-SNP contracts also be Medi-Cal contractors.

The regulatory changes could disrupt the Medicare Advantage landscape by heightening competition for state Medicaid contracts, encouraging mergers and acquisitions, and giving an advantage to insurers that have healthy Medicaid businesses, said Mike Cheek, president and CEO of the Special Needs Plan Alliance, a trade group.

"It's going to create a good bit of additional competition," Cheek said.

Concurrently, other Medicare Advantage regulatory changes — including a benchmark rate cut for 2025 — and an unexpected rise in utilization, are roiling insurers. Some struggling companies view a reshaped D-SNP marketplace as salvation.

Centene, the largest Medicaid insurer, is banking on growth in dual-eligibles to rescue it from sizable Medicare Advantage losses.

The insurer is mulling an additional premium deficiency reserve charge — essentially lending itself money — to cover a surprise jump in Medicare Advantage utilization, after booking a $250 million premium deficiency reserve charge last year. Among large insurers, Centene also has the longest way to go to improve its star ratings and earn lucrative quality bonuses.

Centene’s Medicaid experience is an advantage in the D-SNP space that creates an opportunity for improved financial performance, Chief Financial Officer Drew Asher said when the company announced its quarterly earnings last month.

“To accomplish our strategic goals with our Medicare Advantage business, it doesn’t matter if we ultimately level off at $14 billion, $15 billion or $16 billion of Medicare Advantage revenue,” Asher said. “What is strategically important is the alignment with Medicaid and those complex populations we want to serve, especially given where the puck is heading with regulations pulling duals and Medicaid closer together.”

Molina Healthcare, which has traditionally focused on Medicaid, likewise sees the new D-SNP rule as an opening, CEO Joe Zubretsky told investor analysts last month.

“We’re very, very pleased with the final rule that came out from CMS, which basically says that Medicaid will be the anchor tenant for enrolling the dual-eligible population,” Zubretsky said. Last year, the insurer announced plans to acquire two Medicare Advantage plans and it closed the deals in January.

Centene and Molina Healthcare did not respond to interview requests.

Medicare Advantage strategy

UnitedHealthcare and Humana, the leading Medicare Advantage carriers, expressed opposition to the federal D-SNP regulation, contending it will reduce choice and weaken state policies designed to tailor coverage to local markets.

“It’ll be a material revenue risk to the two largest MA players in 2030,” said Gary Taylor, managing director and senior equity research analyst at TD Cowen.

The UnitedHealth Group subsidiary and Humana collectively cover almost half of Medicare Advantage enrollees and more than half of SNP members, according to Chartis Group. Most of their offerings for dual-eligibles are limited to care coordination D-SNPs, which do not entail assuming risk under Medicaid contracts.

Next year, CMS will limit coordination-only D-SNP plan sales to the annual enrollment period, whereas "highly integrated" and "fully integrated" D-SNPs will be available at any time. Under current policy, enrollees may switch to coordination-only D-SNPs quarterly. The new marketing rules will disadvantage coordination-only carriers, Cheek said.

“The market dynamics are pretty significant. The competition for enrollees in that environment will become much more pronounced,” Cheek said.

To position themselves to better compete in the D-SNP market, UnitedHealthcare and Humana are likely to seek more state Medicaid contracts and acquire small Medicaid insurers, Taylor said.

UnitedHealthcare did not respond to an interview request. Humana declined to comment.