Lost in Translation: The Challenges of Integrating Medicaid Managed Care into Commercial Insurer Portfolios

For commercial insurers adding governmental payer managed care plans to their portfolios, ‘lost in translation’ moments can be costly.

In January 2016, a large commercial insurer was hit with sanctions by the Centers for Medicare and Medicaid Services (CMS) for noncompliance issues following a merger. The sanctions demonstrate that CMS can bare its teeth and bite, and it’s crucial that commercial insurers have a certain level understanding of governmental-payer managed care plans when integrating them through an acquisition. If not, serious ramifications may arise – for the future of insurance mega-mergers, access to care and the administration of plans for Americans most in need.

The addition of Medicaid Managed Care programs to commercial portfolios has been posing particularly frequent challenges as commercial payers pursue the financial and scale opportunities they offer.

Why move to managed care?
Three key drivers create benefits for commercial insurers to move toward Medicaid Managed Care plans:
  • Medicaid expansion – As a way to offset Medicaid program costs and to better manage the operation of health services, states are increasingly pushing Medicaid patients into Medicaid Managed Care programs. This larger Medicaid Managed Care market creates more opportunity for commercial insurers should they enter the space.
  • Greater scale – Because Medicaid programs can only charge so much, companies with a good managed care program can achieve greater scale.
  • More data – As commercial insurers move to managed care programs, they gain access to a larger patient cohort and, thus, more data. Insurers can then create a closed network leveraging their proprietary data to identify top users of services and hotspot solutions with care providers – likely driving down the cost of care while pocketing the shared savings.
Risks of integration
When acquiring a Medicaid Managed Care program, the main risks to a company’s portfolio are partially represented below.

First, commercial insurers are not used to dealing with an indigent population. Merger integration is also becoming a bigger challenge because the underwriting and the utilization management is notably different when managing Medicaid compared to Medicare or commercially-insured lives. Cost structures for these different patient populations vary, and overall service levels need to be different, as patient enrollment, patient education and patient communication strategies must be tailored to the right audience. The two models can create a clash of business philosophies and an increase in costs for the insurance carrier to maintain such.

Second, some commercial insurers have failed to adequately understand the mechanisms the state has in place to make Medicaid programs budget-neutral – whether they be incentives or other programs which will not be accessible to the insurance carrier as they begin to take risk for these patients

Third, insurers may have little information about the patients they’re enrolling, what their medical needs are and their likely utilization of medical services – adding a new element of risk to the portfolio and creating uncertainty as to how they should price their plans. This is because for many Medicaid plans, enrollment is simply an allocation of lives drawn from an algorithm based on that data.

Mitigating the risks
Mitigating the risks of integration not only requires due diligence at the acquisition level, but also at the state level. A fair amount of interpretation, understanding and even a leap of faith is required of the commercial insurer to ensure that the state will stick to its settlement of reinsurance amounts.

Commercial insurers can mitigate certain risks of integration by questioning whether a merger will reduce prices without harming competition or creating a barrier to entry in the market; anticipating the algorithm or other unexpected developments to push as much risk as possible to the providers; and developing relationships with relevant state offices with a hand in developing managed Medicaid programs.

Sponsoring a governmental plan in a not-for-profit environment can vary significantly from one in a for-profit company. For example, the not-for-profit’s mission is paramount; financial targets, while important, are secondary. Bringing Medicaid into a for-profit company from a not-for-profit may find additional financial pressures to perform at a level that may not be possible in the new environment. While payers may not be as profitable in that realm, as they diversify, they can apply some of their loss to other areas within the corporate structure and impact the medical loss ratio – adding operational overhead into areas where additional oversight may be needed.

Next shoes to drop
Advantages do exist for payers adding a Medicaid Managed Care plan to their portfolio.

Notably, the Medicaid market has more competition than its Medicare counterpart because many states are still figuring out their response to ACA and strategy for their constituents. This creates opportunities.

Although commercial insurers can expect more CMS sanctions as the industry learns to navigate new waters – particularly those under additional scrutiny through M&A deals – adding a Medicaid program to the portfolio can still be a wise idea.

Before considering integration, though, commercial insurers would be even wiser to learn the language of governmental plans first – to avoid their own costly ‘lost in translation’ moment.