States push back as Medicaid insurers lobby for rate hikes

By Nona Tepper / October 29, 2024

State officials are skeptical of Medicaid managed care company claims that payment rates are falling short this year.

Twenty-five of 41 states surveyed increased Medicaid capitation payments for fiscal 2024 and fiscal 2025 to reflect rising acuity in the aftermath of mass eligibility redeterminations, according to a report the health policy research institution KFF published last week. Michigan, for example, boosted rates in April to address escalating costs. But health insurance companies argue the raises did not do enough to steady their finances.

"The rates are still inadequate. We take risks. We're health plans; it goes right to our bottom line," said Guy Gauthier, vice president of state markets at Priority Health, a nonprofit insurer owned by Grand Rapids, Michigan-based Corewell Health.

Priority Health, like other Medicaid contractors, is lobbying Michigan to take another look at payments for fiscal 2024, arguing the money has not kept up after a cohort of relatively healthy enrollees lost benefits in 2023 and 2024.

But states generally rely on medical cost trend information from two years prior when determining capitation rates. A mismatch between payments and expenses will persist through 2026 as authorities accumulate information to justify more funding, said Suzanna-Grace Tritt, a senior consulting actuary at Wakely Consulting Group.

"Insurers wouldn't be taking risk if you were just like, ‘Let me just see what the costs are coming in at and set the rates there.’ That's a big part of this dispute, and that's not going to change,” said Tritt, who is working with Michigan to assess Medicaid capitation payments.

The Michigan Department of Health and Human Services is exploring whether an additional rate increase is necessary, a spokesperson wrote in an email.

Medicaid managed care has been around since 1968, three years after the program itself came into being. But the Balanced Budget Act of 1997 ushered in the modern system by allowing states to contract with insurers to administer Medicaid and to mandate that most beneficiaries are covered through private plans.

Forty-two states have Medicaid managed care programs. By paying insurers flat monthly fees, states sought stable and predictable spending on Medicaid, one of the largest line items in their budgets.

The Centers for Medicare and Medicaid Services must approve Medicaid capitation rates. The agency requires payments to be actuarially sound and adequate to finance medical and administrative costs, taxes, and fees. Otherwise, insurers would have a financial incentivize to limit care for a vulnerable population.

Health insurance companies in California, Colorado, Michigan, Minnesota, New Mexico, New York, Pennsylvania and Virginia contend that CMS needs to intervene to ensure states are using up-to-date cost trend data to calculate rates.

“States have been slow to respond to what is an urgent problem and slow to take a look at the 2024 data that has been shared with them. We don't quite understand why that is. But as these critical weeks have passed, it's a very unfortunate situation,” said Ceci Connolly, president and CEO of the Alliance of Community Health Plans, a trade group for nonprofit health insurance companies.

CMS did not respond to an interview request.

For example, in Colorado, where Medicaid is named Health First Colorado, behavioral health managed care companies cite data from this summer to support a pay hike fiscal 2025, said Bettina Schneider, chief financial officer for the Department of Health Care Policy and Financing. But federal regulations bar the state from considering such a short time frame, she said.

“There's a data lag. I can't base a 12-month rate on one or two months of data. That's not an actuarially sound rate,” Schneider said. With CMS' approval, Colorado awarded Medicaid behavioral health insurers a midyear increase in fiscal 2024 to reflect a sicker risk pool, she said.

Pennsylvania, which also refers to Medicaid as Medical Assistance, built a profit cushion into its financial reserve requirements for managed care contractors, said a spokesperson for the commonwealth's Department of Human Services. These extra profits should buoy insurers during years when they do not collect enough revenue to cover costs, he said. Pennsylvania Medicaid carriers have reported a 5.9% average profit margin over the past five years, he said.

Pennsylvania authorities will not offer a midyear rate increase for 2024, he said. In June, CMS certified that Pennsylvania met Medicaid payment standards.

By accepting financial risk, Medicaid managed care companies show they recognize that losses may occur, the Pennsylvania spokesperson said. “Given these safeguards and recent experience with excess revenues, a single year of poor financial outcomes should not threaten viability,” he said.

Nationwide, Medicaid insurers generated $753 in per-member profits in 2023, 28.9% higher than the $584 they earned in 2019, before the COVID-19 pandemic, according to a report KFF issued in July.

Insurers reaped big rewards during the early months of the public health emergency because utilization slumped, said Andy Schneider, a professor at the Georgetown University Center for Children and Families. They did not rush to return the extra money, he said.

“It is ironic that, when all of a sudden utilization fell off the cliff after the pandemic started, I didn't hear a large public outcry from the plans about using more recent utilization data,” Schneider said.