By J.D. Kleinke

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.