The big money in Medicaid (p. 2)
The stock market rewards growth, and the growth in this business has been spectacular as states have awarded new managed-care contracts. But the companies' profit margins have also been outsized by Medicaid standards. An industry benchmark holds that plans should spend at least 85 cents of every premium dollar on medical care - a proportion known in insurance jargon as the "medical loss ratio." Indeed, a recent study by the Center for Health Care Strategies (CHCS) says the average plan has a medical loss ratio of 86.5 percent. Administrative costs should run about 10 to 11 cents, with the remainder left over as a slim profit after interest and taxes.
"Dad used to say that this was a business of nickels," says Dr. Molina, whose company has a medical loss ratio of about 86 percent. But with the exception of Molina, the pure-play Medicaid insurers spend less than 85 percent on medical care and more than 10 percent on administrative costs. In 2006, Amerigroup had a medical loss ratio of 82.1 percent and administrative costs of 13 percent. Over the past three years Centene's medical loss ratio has been around 82 percent, and WellCare's has been around 81 percent.
The CHCS study, co-authored by Dr. Robert Hurley, a professor at Virginia Commonwealth University who has researched Medicaid for 30 years, concluded that the pure plays as a group were spending less on medical care. Dr. Hurley worries that because "Medicaid is a meager payer, how can anyone make money by paying even less and not suffer adverse consequences?" He says, however, that there is "no clear evidence" that the profit is coming at the expense of beneficiaries.
The companies claim they hold down their medical loss ratios by operating efficiently.
There have been disturbing episodes, however. In 2002 a former Amerigroup employee filed a whistleblower case alleging that the company's Illinois plan discriminated against pregnant women and others dubbed "unhealthies" by discouraging them from enrolling in its plan. (In 2002 and 2003, Amerigroup's medical loss ratio in Illinois was shockingly low - under 50 percent.)
Last October, after a three-week trial, a Chicago jury found both Amerigroup Illinois and the parent company liable under the federal False Claims Act. Amerigroup's total bill - damages plus civil penalties - is $334 million, or more than three times its 2006 net income. Judge Harry Leinenweber, who oversaw the case, called Amerigroup's behavior "egregious and calculated." The company "pilfered money from Medicaid coffers to pad its own pockets," he wrote.
Amerigroup, which is appealing the decision, says the state told it to follow this policy to ensure that pregnant women could keep seeing their current doctors. "We did what we were asked to do," says McWaters.
Controversy has also arisen in Georgia, which in 2006 turned its Medicaid population over to Centene, WellCare and Amerigroup. In its state budget, Georgia estimated that the move to managed care would save $84 million. But some physicians - who even staged a rally last August on the steps of the Georgia state capitol - say that the managed-care companies, particularly Centene, don't pay their bills in a timely fashion, don't have enough specialists in their networks to provide care for patients and are discouraging preventive care. Dr. Beth Sullivan, a family physician in Commerce, Ga., says she had to send a boy with a broken arm to Augusta, 140 miles away, because no doctor any closer would accept a Medicaid managed-care plan.
Sullivan and others also say the insurers are discouraging prenatal care by cutting out a bonus that doctors used to receive for seeing an expectant mother before she was 13 weeks pregnant. The companies say they aren't aware of this issue; Centene says 95.2 percent of its claims are now paid in 15 days or less. In general, "the physician community has always fought reform," says Jim Carlson, COO of Amerigroup. "They're just trying to preserve the status quo that will bankrupt the state."
It's no surprise that in a business this highly regulated, the insurers would be politically connected. McWaters, for instance, served on President George W. Bush's Health and Human Services transition team, and the boards of the companies are stacked with politicos. A close look at WellCare's Florida operations reveals just how strong its political connections are.
The Florida Agency for Health Care Administration is the top regulatory agency in the state. A former WellCare board member, Dr. Andrew Agwunobi, stepped down in December 2006 to become the agency's secretary. During his brief time on WellCare's board - he joined in June 2006 - he received stock in the company that was worth over $350,000 when he stepped down. (He has sold his stock.)
In addition, according to a Fortune analysis of campaign finance records, WellCare executives and their family members, along with the company PAC, gave a total of $1.5 million to Florida candidates for state and federal elections in 2006. Florida is already a profitable state for the insurers; in fact, the state "appears to be overpaying its Medicaid plans," wrote CIBC analyst Carl McDonald in a recent report.
But this spring legislators slipped a rate increase into Florida's budget. They also removed a state requirement that insurers spend at least 80 cents of every premium dollar meant for behavioral-health services on patient care. (In May, Amerigroup had to pay $5 million for failing to meet this requirement, which the company says is due to "startup issues.") A bill containing both provisions passed the Florida legislature. But on May 24, Governor Charlie Crist vetoed it, calling the provisions "alarming" and saying the rate increases were "not justified."
That may be a sign that the flush times for the pure-play Medicaid companies are over. "There's a consensus that the business won't be as lucrative as it has been," says Hurley. "States have an obligation to wise up in terms of how they monitor their plans."
There may be other signs as well: Since late 2006, WellCare's chief medical officer and the head of its Florida business have resigned. In February, Amerigroup's chief medical officer resigned. The company also lost its EVP of plan operations. (Both companies say the turnover is normal.) At WellCare, insiders have sold over $25 million worth of stock since late 2006. The company says those are planned sales.
As for McWaters, he says his company is in the Medicaid business for the long haul. "We've got some people trying to knock us down, but over time they will stand down, because what we do is valid, capitalistic and ethical," he says.
But if profits do shrink, then how investors react will have a major impact on the Medicaid landscape. After all, McWaters's prescription for fixing the health-care system doesn't include unhappy shareholders.
From the June 25, 2007 issue