You know we’ve gone through the looking glass when the hottest health care money on Wall Street is chasing Medicaid.

No, I didn’t mean Medicare, the $560 billion per year federal program for insuring the elderly that has launched a thousand IPOs. The current darling of health care investors is Medicaid, the hybrid federal-state program for insuring the poor that now dominates, and often overwhelms, state government budgets.

Last month, Wellpoint agreed to pay $4.5 billion for Amerigroup, a Medicaid managed care company, representing a nearly 50% premium over Amerigroup’s market price.  Not to be outdone, Aetna this past week purchased Coventry for $5.7 billion, which also services Medicaid populations. These deals and several others like them rumored to be in the pipeline have driven up the share prices of Amerigroup’s competitors – other Medicaid managed care companies like Centene and Molinas – in anticipation of the latest round of monkey-see, monkey-acquire deals by health insurers.

Why the gold rush into Medicaid, the poorest, toughest segment of our health care system? Are there really fortunes to be made squeezing margins out of the pittance – $4,314 per year for adults, $2,717 for children – spent on the most destitute Americans? Wellpoint, Aetna, Independence Blue Cross, and other major insurers rushing in seem to think so, for two reasons.  First, those pittances roll up: analysts estimate that the enrollment of an expected 16 million new Medicaid beneficiaries under Obamacare could generate $40 billion in potential revenue.

Second, buried in Obamacare is a forced migration of as many as nine million Americans, currently eligible for both Medicare and Medicaid, from richer Medicare plans into threadbare Medicaid programs – a transfer of the most costly and complex patients worth some $300 billion in potential annual revenue.

Big numbers, big money, and big profits, right? An inflow of the uninsured poor into the nation’s most financially sssed insurance program, combined with a systemic downgrading of benefits for the poor and disabled, will surely translate into great, uncontested corporate riches. Why shouldn’t the nation’s now largest insurer spend shareholders’ cash on what amounts to 18.4 times Amerigroup’s forward earnings on forays into the most economically distressed quarters of American medicine?

Because they will fail miserably. Unless they succeed.  In which case they will be driven, by a coalition of government budget-minders and populist scolds, into failure, thanks to a political process ever more hostile to profiteering on the sick.

In normal businesses, with willing buyers and sellers and functioning marketplaces, enormous revenue opportunities do not necessarily translate into commensurate opportunities for profit. And Medicaid is about as far from a normal business as one can imagine. It is the emergency room for our worst chronic social problems. Illiteracy, drug addiction, broken families, migrant labor, illegal immigration, teen pregnancy – you name it, and Medicaid gets to deal with it. Medicaid programs attempt, mostly through heroic individual efforts, to serve a desperately needy population of the poor, chronically ill, mentally unstable, and recklessly pregnant. They do so by overworking and underpaying the nation’s most aggrieved providers, gouging drug companies, and transferring costs wherever they can to the rest of the system.

This is why states offload these programs to companies like Amerigroup and Coventry, and why many states do not want the programs expanded under Obamacare.  Medicaid is a hybrid federal/state program because the fed does not want to manage; the states manage it only because the fed blackmails with just enough money to keep them hooked.  Obamacare attempted to double-down on this blackmail by threatening to withhold all Medicaid funding to any state unwilling to accept the expansion – a provision so coercive the Supreme Court struck it down while giving the rest of Obamacare a pass.

Despite the ruling, Obamacare proceeds apace, trying to jam between 8 and 16 million more people into the same system. (The estimate varies by a factor of two because Florida, Texas, South Carolina and Louisiana, emboldened by the Court’s decision, are just saying no.)  And the horses dragging the nine million duals into Medicaid, which will entail massive disruptions in their medical care, have also left the barn. But with $340 billion in combined potential annual revenue going into play, it would be hard for companies – starved for growth and squeezed by the profit-regulation rules in Obamacare – not to rush in with their picks and shovels.

Those Pesky Implementation Details

So how might the Medicaid gold rush actually pan out? It is difficult to imagine anything but a disaster, if you know where the miners are actually headed. There is encyclopedic health services literature documenting Medicaid’s chronic economic desperation, yawning unmet medical needs, and horrific outcomes, but a more visceral illustration of the challenge comes with a simple stroll through the waiting room of a typical Medicaid provider.  On my last visit to one, I watched a morbidly obese patient die, while slumped over in his wheelchair, among the 30 patients lined up that morning to see the doctor.  It took that doctor almost ten minutes to find his way to the waiting room to declare the patient dead, and an hour for the paramedics to show up and haul him away.

Such human misery, multiplied by tens of millions of people, rolls up into a bureaucratic colossus of breathtaking complexity. Running a Medicaid program involves coping with a jungle of paperwork, cacophony of regulations and, worst of all, sanctimony in nearly every conversation with every stakeholder. It requires constant vigilance against scam clinics, crooked providers, rogue labs, pill mills, vaporware vendors, and a scuzfest of health care bottom-feeders.  A successful day in the Medicaid “business” is measured not by goals achieved but catastrophes averted.  I have been involved in restructuring one of the Medicaid disasters the commercial health plans are suddenly so hellbent on turning into shareholder gold; from under every rock we rolled over, out would crawl something slimy, and its lawyer.

Wellpoint, Aetna, Independence, and the other insurers rushing into this business no doubt believe they have a magic formula for turning this misery into a profitable growth engine.  But such growth cannot come from the top-line: the federal and state governments funding Medicaid are already under intense political pressure to reduce deficits and spending, while expanding coverage, meaning total funding available per Medicaid enrollee – and the “duals” switched from Medicare to Medicaid – will inevitably shrink, fast. As a result, the profits needed to justify these acquisitions and the ongoing tie-up of capital needed to support them must come from cost-takeouts, from the squeezing of the Medicaid turnip.

The insurers have obviously convinced themselves there is much in the turnip to squeeze. That may certainly be true for the duals, who could benefit from coordinated case management and the other bells and whistles of “managed care.” But the real money will come in the form of arbitrage margins, as the duals are switched to Medicaid doctors and hospitals, who are paid a pittance compared with Medicare. This will work fine – for a time – if these “duals” happily tow the line and change doctors.  But history shows otherwise. People do not like to have their benefits downgraded, and they do not like  being forced to switch to cheaper doctors, especially if there are no doctors to switch to – overwhelmingly the case in Medicaid. Their doctors’ lobbyists may also have something to say about it.

As for the general Medicaid population, the single greatest medical demand placed on the program, in terms of volume if not dollars, is pregnancy and childbirth. It is the reason for half of all Medicaid hospitalizations; seven of the ten most common procedures performed during those hospitalizations are related to pregnancy, childbirth, and newborns. If cost-takeouts are the only road to profitability, are the insurers prepared to deal with pesky little matters like the public funding of birth control, abortion, home births and c-sections, i.e., with arguably health care’s ugliest culture wars?  My own experience working with insurers on the least incendiary of these issues – the silent epidemic of c-sections – is not encouraging.  C-sections account for more than 30 percent of all deliveries in the US, at roughly 1.5 times the average costs of a normal delivery, when the medically indicated rate is easily less than half that.

This would be the first place for an insurer to step in to reduce Medicaid costs, yes?  One little technical problem: aside from captive provider systems with electronic medical records like Kaiser, not a single insurer I know of in the US has any ability to affect this scandalously high rate of often unnecessary, always expensive, high-volume surgery.  Two major insurers have admitted to me that they have no systematic way of knowing who in their population of millions of covered women are even pregnant, until after they have delivered, the probably unnecessary c-section has been done, and the claims are coming in.  This might be an example of why the insurers are acquiring the Medicaid managed care companies – because they may have this expertise.  If so, no one is talking about it, because companies cannot even bring up the subject of pregnancy and childbirth among the poor without triggering the worst landmines in the health care policy debates, as we have witnessed since the daylighting of the Obamacare birth control mandate.

No Good Implementation Goes Unpunished

Let’s give the Medicaid gold rushers the benefit of the doubt, and assume they pull off something like this. A few managed care type miracles, they lower costs for Medicaid patients without actually harming them and, in the case of unnecessary surgeries, actually help some of them.

Imagine also they pull off the trick of shuttling the “duals” from Medicare to Medicaid.  These highly motivated patients and their doctors somehow don’t scream bloody murder, and the insurers earn arbitrage margins on the switch. How long will financially stressed governments fund these margins, before putting the turnip squeeze on the insurers themselves? For those insurers who find Medicaid gold, what happens next? They will be vilified by the public as corporate, profiteering, care-denying murderers of the poor, and their margins will be mowed down with the stroke of the legislative pen.

Every health care sector has been on the receiving end of this at some point – hospitals, dialysis, home health, the list goes on – usually right after its own gold rush.  The government programs that represent an ever larger share of health care purchasing in the US do not overtly regulate profitability – that would be transparent and at least manageable. Instead they regulate profits implicitly, line-item by line-item via reimbursement adjustments, selective and punitive enforcements of providers, a whole gamut of bureaucratic tricks designed to avoid honest political debate about the role of money and medicine.

The health insurers already got a face full of cold water with this under Obamacare: new administrative cost and profit margin regulations set at completely arbitrary numbers. Those numbers will appear generous when the Medicaid gold proves to be nothing more than a very big flash in a very broken pan.

J.D. Kleinke is a Resident Fellow of the American Enterprise Institute and a former health care executive.  His latest book is Catching Babies, a novel about the training of obstetrician/gynecologists.

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13 Responses for “Fools’ Gold Rush: Obamacare And The Medicaid “Opportunity””

  1. DeterminedMD says:

    Thanks for the validation that the insurance agency did not support PPACA for anything else than a new approach to profit margins. I can’t wait to read the spin a Maggie Mahar disciple for this legislation will cry “foul” and innundate us with the torrent of numbers crush dissent to blur reality further.

  2. Vikram C says:

    Maybe Medicaid will grow in future as Democrats make gains. Maybe there are segments within it to make some money off. Maybe constant reminders and some help from insurance nurseline will help patients to be more disciplined and yield better results. Combining with social organizations could in fact get things a lot better. Medicaid patients didn’t get in the life what they deserve or had any hands to hold them. At least getting some respect and care would be healing.

    Just pointing some silver linings amongst the dark clouds.

    • DeeKay says:

      As someone who happens to have been in these trenches working for a very long time for this population-I happen to know all the “I know betters”. To think that everyone pretty much doesn’t have an agenda here except for these Medicaid patients themselves is pretty much the myth. And we all wonder in amazement at their non compliance at times? That’s almost comical to me.

      Yes-lets talk about Caesarean Sections for a brief moment-that magically invasive surgery that is always indicated for 30 percent of all women in the United States of America. Right? Especially since she has had one once…or because she has made it to 38 weeks in gestation- (give or take a week)? Its this very type of egotistical thinking (yeah, I said it) that has partially gotten us into the situation we are into today with Medicaid in particular. Go ahead and tell me I am wrong. Twenty years of Labor and Delivery would prove you otherwise. Yes-its being monitored a bit more now. Good. Yes, there better be a great medical reason for doing what was medically indicated…even better. Its called best practices-safe practices..and saves billions of dollars in un-needed NICU stays. We didn’t even address THAT one. This also falls under the big blanket of Medicaid dollars…how did we forget THAT one? You are correct in how heavily regulated its it all became. Its expensive to do all of that, and it needed to happen. Taking care of the poorest of the poor was never the problem here. They will always be among us-even Jesus and The Bible told us so…

  3. BobbyG says:

    Wow, JD. Throw it down.

  4. spike says:

    I keep hearing that about 25% of people who are poor enough to be on Medicaid aren’t actually on Medicaid because they never applied. That means they never access healthcare. So metrics designed to get at “average spending per enrollee” are off because they’re risk-adjusted against only high utilizers.

    Once Medicaid expands, if they keep the per enrollee funding mostly the same, average revenue will stay the same but average costs will go way down because you just diluted the risk pool with the healthy “non-eligible eligibles”. It’s possible the government figures this out and “squeezes the turnip”, but who is going to do it? The author forgets that nobody actually cares about deficit reduction. Democrats won’t cut Medicaid, Republicans won’t cut overpayments to big business.

    It was definitely an entertaining article filled with clever word play, but ultimately I question Mr. Klienke’s understanding of the underlying dynamics at work here.

    • Sandra_Raup says:

      I’m not sure the newly eligible enrollees in Medicaid will behave the same way as previously eligible non-enrollees did. It’s a higher income group that has probably more experience with the healthcare system so will actually use it when it’s available. And if more employers stop giving health insurance, at least some of those people who previously had employer-sponsored insurance will end up in Medicaid, more than likely. At least in the states that take up the expansion.

  5. tcoyote says:

    This is interesting and colorful stuff, JD. The Medicaid population is all about slices. Regular Medicaid managed care plans can look forward to generating about $7 PMPM, largely because a lot of the younger folks are healthy and relatively low cost. The “duals” on the other hand could generate $90 PMPM, or roughly double the profitability of Medicare Advantage and triple that of full risk commercial insurance (estimates from Carl McDonald of CitiGroup). Plans are piling into Medicaid because their core business isn’t growing, the profits from that core business are going to be capped if ACA survives the election, and they won’t make much money on the new Exchange lives. Medicaid is where the growth is- it’s that simple.

    Of course, if Paul Ryan’s bloc grant proposal comes to pass, and the feds cut their contribution to Medicaid by 20% (!), the topline revenues on which these returns get calculated are rebased downward, and per JD’s scenario, this becomes a very troubled business.

    Spike is right: there about 12 million people eligible for Medicaid but not enrolled. Those folks are what the real fight over the Medicaid expansion is about, because the state share of their costs will be 35-50%, not 10%, and most of the states with large expansion won’t be able to find the general revenues to fund their share. Where does the state money come from to sustain an 80 million person Medicaid program during the next recession (the one that’s probably already under way)?

    Where’s Maggie when we need her?

  6. Wow JD, them’s fighting words? Tell us what you really think…

    Seemingly tight reasoning, backed with math, yet am I’m smelling some ideology in the let’s slam the Medicaid ‘narrative’.

    Medicaid has traditionally been cast as a ‘book of business’ separate from and considerably less favorable to typical group commercial or Medicare contracting. Perhaps it’s closest book might be workers comp? Anyone remember ‘Affordable Health Care Concepts?’ Yet to dumb down, homogenize and in some sense slam this vulnerable and at risk population, just feels wrong.

    Am I hearing more AEI ideology, than health wonk insights, per se? Kinda surprised.

    We’re all culpable for this mess we’ve created over the last 4 decades. When will be hear about culpability an ‘claw backs’ from the litany of value extraction players (vendors, suppliers, consultants, hospital systems, Wall Street fueled ponzi schemes, dis-organized medicine, etc) via the many IPO spawned and other provider sponsored niche market exploitation games?

    Geesh, we’ve gotta start somewhere, no?

  7. Matthew Holt says:

    Given that Aetna’s stock was up about 5% the day that they bought Coventry at a 40% premium, either capitalism (Wall Street) is wrong or capitalists (in this case JD with his AEI hat on) are wrong.

    I told you guys Marx was right, but you never listen….

  8. J.D. Kleinke says:

    No capitalist ideology here, folks, just calling the game like I see it. I think the health insurers and their shareholders would be better served minding their core business: managing both the health status and costs of commercially feasible populations. No fancy tricks or special press releases for that – just lots of hard work: adjudicating claims, rooting out fraud, aligning payment with evidence, managing provider and patient adherence to that evidence, tracking outcomes, and steering people toward better hospitals and doctors – all those great ideas from the past two decades everyone likes to talk about but almost no one really ever gets around to executing.

    While there will be some down-migration under ACA, most of Medicaid will remain a social welfare and government problem that private enterprise cannot fix without ultimately getting burned for its success.

    Now what were you saying, Gregg, about my AEI ideology?

    • JD, as one of the admitted brighter tools in the shed of health policy and critical thinking, I do not quibble with your business case pessimism. I am simply commenting on my sense of the ‘sub text’ of your characterizations of the nature of the Medicaid population….I may be off track with your argument, which is why I posed the ‘smell’ as a question. Sorry the ‘?’ was omitted.

      The challenged if not suspect nature of some who occupy the delivery, finance and organizational space serving the Medicaid population not-with-standing, at the end of the day, Medicaid beneficiaries are people too. Many of whom are just like you and me, our parents, friends or even colleagues. Whether as gap insurance for long term care not covered by Medicare, or simply the last house on the block option for the self employed for whom individual or small group premium are out of reach, Medicaid need be viewed via a neutral if not reframed lens.

      In the aggregate, ACA seems to put enough innovation options in play to make a difference in the ‘gestalt’ of the redesign imperative. Yes, indeed a lot of bureaucratic inertia in our way, not to mention four decades of aggregate failure in a whack-a-mole resistant healthcare ecosystem. Yet, this time, the debate in not limited to health wonk circles as the entire US economy hangs in the balance of our getting it right.

      Peace bro!

  9. Rob McCray says:

    I have to side with JDK on wisdom of these acquisitions – their success will depend on the continued support of taxpayers and that is a high risk assumption with most states opposing the expansion, Romney/Ryan wanting to block grant Medicaid with dramatically reduced support and the country facing a Medicare spending challenge with no easy political solution when the prevailing attitude among so many voters seems to be, “Don’t touch my Medicare (take it from the poor”). The traders will be out of their positions long before the companies are affected. Perhaps the country would rally around a solution if most of us depended on the same program – Medicare for all, anyone?

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