Our research into the impact of healthcare reform on managed Medicaid suggests that membership growth is virtually certain. Less certain is the level of profits this business would generate.
Most Medicaid plans we interviewed pointed to net profit margins in the 1% to 2% range — with 2% being a good year. That’s backed up by hard numbers crunched by Oppenheimer, which tallied statutory filings on 182 Medicaid plans (serving 15 million members) and found that net EBITDA margin was about 1.5% on premiums of $41 billion.
Oppenheimer’s analysis goes further, suggesting that publicly traded Medicaid plans enjoy higher-than-average margins at 3-5%; however, Oppenheimer notes, a few strong markets account for most of the difference, with others struggling to make money. Notes Oppenheimer:
This has a couple of implications. The positive is that it means there are regions the Medicaid plans could exit as an easy way to boost margins in the short term, as WellPoint has done in a number of states, and several plans threatened to do in Florida last year before a higher rate was granted. The negative is that the Medicaid plans generally have little earnings diversification, with profitability heavily tied to a couple of markets.
Here’s something else to consider. One big issue with newly enrolled Medicaid members is that quite often little is known about their medical histories. That’s another way of saying that little is known about the impact these new lives will have on medical costs at Medicaid plans.
You get the picture. Following reform, Medicaid plans with razor-thin margins will be adding millions of people without a clear understanding of their medical histories or their likely impact on medical cost ratios — all at a time when state budgets are hamstrung. Should be fun.
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