Rising costs spur insurers to seek higher Medicaid rates

By Nona Tepper / January 11, 2024

Health insurance companies are having some success persuading states to boost Medicaid capitation rates amid risk pools that have worsened during the ongoing redeterminations process.

Insurers such as Centene and Molina Healthcare have securing additional financing over the past year as more than 14 million people lost Medicaid coverage while states carry out unwinding the continuous coverage policy implemented early in the COVID-19 pandemic, which expired last year. These companies chief argument is that although Medicaid enrollment has shrunk, the enrollees who remain tend to incur higher medical costs.

“What is the set of folks who remain eligible for Medicaid? What level of acuity are they at and what kind of costs are associated with that?” said Kate McEvoy, executive director of the National Association of Medicaid Directors. “That's the predictive piece that all states are challenged with, and why it’s so challenging because it is not known exactly what the composition of the resultant population will be.”

Medicaid managed care claims totaled $407.5 billion through the third quarter of 2023, a modest increase from the same period in 2022 but notably higher than before the pandemic, according to a TD Cowen analysis of data on 55 million enrollees. Claims for first nine months of last year amounted to almost 90% of spending during all of 2019.

Centene has achieved Medicaid funding increases in 22 of the 25 states where it administers the program and Molina Healthcare has had the same result in 10 of the 12 states where it has Medicaid contracts. Both companies also are seeking retrospective adjustments to compensate for difficulties in 2023.

“We’re still owed money and visibility for the rest of 2023,” Centene Chief Financial Officer Drew Asher said during the company's earnings call in October.

More than 22 million new people enrolled in Medicaid between February 2020, the month before the pandemic hit the U.S., and March 2023, the month before the unwinding began.

Most states initiated eligibility redeterminations in April to disenroll people whose incomes grew too high to qualify for benefits during the period of continuous coverage. More than seven in 10 of the millions affected by redeterminations lost benefits over procedural issues, such as a state not having current contact information, rather than because the authorities confirmed they no longer qualified.

Fluctuations in enrollment and utilization made it difficult for states set Medicaid budgets for this year, said Duane Wright, a senior research analyst at Bloomberg Intelligence. States pay insurers a set monthly fee to cover anticipated expenses and determine that rate using factors such as past expenses, healthcare inflation trends and benefits requirements.

“You have 23 million people that hopped on to states' Medicaid rolls, all with varying levels of healthcare needs. Trying to predict where this is all going to go moving forward creates complications, which is why there’s so much uncertainty,” Wright said.

Some states struggled to forecast expenses as redeterminations continue. For example, Indiana’s 2024 Medicaid budget faces a nearly $1 billion shortfall and New York could accrue up to $1.5 billion in excess cost.

“The challenge is states have to be budgeting on a biennial basis. Looking ahead, they're making their best estimates of how medical costs are actually going to manifest. But they'll have to actually review the reality of it and course correct, if it is substantially different than predicted,” McEvoy said.

Health insurance companies have warned since the unwinding began that it would result in relatively healthy, and less costly, people exiting Medicaid and leaving behind less-desirable risk pools. In addition, Medicaid insurers saw higher expenses as patients sought care they postponed during the worst stretches of the pandemic, a common theme across the healthcare sector.

Coverage churn

How many disenrolled people have signed up for another form of health insurance, or restored their Medicaid benefits, varies by state. Some health insurance companies report that enrollees moving in and out of coverage is a significant contributor to troublesome and unpredictable risk pools.

Centene, the largest Medicaid carrier with 15.2 million enrollees, experienced a 40-basis-point revenue hit in the third quarter because of churn. At the time, the company estimated that about one-fifth of disenrolled Medicaid beneficiaries switched to different Centene policies.

Molina Healthcare reported about 30% of its former Medicaid members stayed with the with the company during the third quarter. The company also increased its estimate of how many Medicaid enrollees it would lose from 400,000 to 480,000 because of the high rate of procedural disenrollments.

Likewise, Elevance Health disclosed that about 30% of its customers affected by redeterminations opted to stay with the insurer by choosing other plans, such as exchange or employer-sponsored insurance. That's more than the company expected, Elevance Health told investor analysts during an earnings call in October. Unlike other insurers, however, Elevance Health said it has not seen significant changes to its risk pool during the unwinding.

“It’s just been a little bumpier or rockier along the way because of the gaps in coverage and because of the administrative churn,” then-Chief Financial Officer John Gallina said at the time.

Centene, Molina Healthcare and Elevance Health did not respond to interview requests.