Although the Texas Medicaid managed care market is highly concentrated, the managed care organizations operate at low margins and most of the funds paid to them is paid out to health care providers for medically necessary covered services.
Health care services covered by the Texas Medicaid program are primarily organized and paid for through managed care organizations (MCOs). This arrangement, generally referred to as Medicaid managed care, allows the state to shift some of the financial risk of the Medicaid program onto the MCOs and is intended to leverage private sector innovation, management expertise, and scale. Texas was an early adopter of Medicaid managed care and, over the last 20 years, has shifted almost its entire Medicaid population into the managed care model.
In Medicaid managed care, the state Medicaid program pays the MCOs a certain amount each month for each Medicaid Member who selects that MCO. With these payments (sometimes referred to as per-member, per-month (PMPM), capitation, or premium payments), the MCOs are responsible for paying for all medically necessary health services, and for Members in certain eligibility groups, long-term services and supports (LTSS). To do this, the MCOs develop networks of providers, review requests for services, and pay claims, among other things. The monthly capitation rates are set by the state at levels that are projected, on average, to cover the anticipated costs of providing health services to the Members, based on factors including Member acuity, region, and eligibility group, and also include amounts for administrative overhead and profit.
The Texas Medicaid managed care framework is actually composed of several different managed care programs. The two largest are STAR, which covers pregnant women and children, and STAR+PLUS, which covers LTSS for the aged, blind, and disabled. For each program, the state procures managed care services by region (ten urban regions and three rural regions), selecting between two and five MCOs for each region.
Some MCOs are large, multi-state companies, such as Superior or Amerigroup, that participate in multiple regions in Texas and provide services in many other states as well. Other MCOs are regional plans owned by public or non-profit hospitals, such as the Parkland Community Health Plan, owned by Parkland Hospital, the large public safety-net hospital in Dallas. The regional MCOs generally only provide services in one or two regions. Across all of the regions, there are 18 unique plans participating in STAR (12 regional and 6 multi-state) and five participating in STAR+PLUS (all multi-state).
The Texas Medicaid managed care program has come under fire lately in an extensive series of articles by the Dallas Morning News. One claim repeated throughout the series is that Medicaid MCOs in Texas deny claims inappropriately. While it may be the case that some claims are denied inappropriately (and some of the anecdotes conveyed in the series are clearly troubling and require investigation), the vast majority of funds paid to MCOs through the monthly capitation rates are paid back out to health care providers.
It is sometimes perceived that MCOs would have an incentive not to pay claims, since their ‘profit’ is based on the amount of the premiums that they do not pay back out. However, if their income after paying for health care services and covering administrative expenses is too high, they are required to pay a portion back to the state through a mechanism called ‘experience rebates’. It is also worth noting that the term ‘profit’ in this context is imprecise because the provider-owned, community-based plans are non-profits and the administrative costs for the large, multi-state plans are heavily composed of costs allocated from the corporate parent companies and may not represent the actual marginal costs of the Texas plans.
Medicaid MCOs in Texas are required to submit Financial Statistical Reports (FSRs) to the state each year that include the amounts that they receive in capitation payments, pay out in medical and pharmaceutical expenses, and expend for administrative activities by region and program. For each region and program, the MCOs must submit two FSRs, one 90 days after the close of the year, and another 334 days after the close of the year. The latter is considered more complete and ‘final’. The remainder of this article is dedicated to a description of some of the variations among plans, programs, and regions in terms of the relationships between the total value of capitation payments received and the amounts paid out for health care services and LTSS, based on analysis of the 334-day FSRs for 2016.
Although provider-owned, community-based MCOs comprise 12 of the 18 unique MCOs participating in STAR, the overall membership distribution is heavily weighted toward the for-profit, multi-state MCOs, which had 54% of the average monthly membership during 2016, with almost 80% of that amount (or about 44% of the total) between the two largest MCOs by membership (Superior and Amerigroup).
During 2016, the 18 MCOs participating in STAR received $8.2 billion in capitation payments, paid out $7.2 billion for health care services, incurred $654 million in administrative costs, and made profits of $283 million, while serving an average of 3 million Members per month, for an average effective profit margin of 3.5%. The following figure shows the STAR revenues, health care expenses, administrative expenses, and net incomes for the five largest STAR MCOs, across all of the regions in which they participate, as measured by their revenue through the STAR program.
Among the STAR MCOs, net income (revenue less claims costs and administrative expenses) as a percentage of revenue varied significantly from a high of almost 11% (Aetna) to a low of -14% (Christus). The following two figures show the net income as a percentage of revenue for the top and bottom five STAR MCOs by that measure.
Although all of the STAR+PLUS MCOs in 2016 were multi-state, for-profit plans, the STAR+PLUS average monthly membership showed a concentration similar to that of the STAR program, with around half of the average monthly membership with the two largest MCOs by membership (Superior and Amerigroup).
During 2016, the five MCOs participating in STAR+PLUS received $8.8 billion in capitation payments, paid out $8.1 billion for health care services and LTSS, incurred $606 million in administrative costs, and made profits of $136 million, while serving an average of 536 thousand Members per month, for an average effective profit margin of 1.5%. (The much higher per-member cost for STAR+PLUS is due to the substantially higher clinical acuity of this population and the inclusion of LTSS in the STAR+PLUS benefit.) The following figure shows the STAR+PLUS revenues, health care and LTSS expenses, administrative expenses, and net incomes for the five STAR+PLUS MCOs, across all of the regions in which they participate.
STAR+PLUS MCOs also experienced variation of net incomes as a percent of revenue, although within a substantially narrower range.
Although this analysis was not structured to compare the current Texas Medicaid managed care framework with alternatives, some observations about its financial performance are nonetheless possible
- Managed care enrollment in the STAR and STAR+PLUS programs is heavily concentrated among just a few large, multi-state, for-profit health plans.
- Administrative costs are consistently low relative to revenues.
- All of the MCOs, both large, multi-state, for-profit health plans and community-based, provider-owned health plans pay out in claims for health care services and LTSS most of the funds that they receive in premiums.
- In some cases plans actually pay out more in claims than they receive in premiums, operating at an effective loss.