Death, Taxes And Medicaid Expansion

The 2010 Affordable Care Act (ACA) significantly expanded both eligibility for and federal funding of Medicaid, the means-tested healthcare program for low-income families and individuals. The program is jointly sponsored by federal and state governments and managed by the states, with each state having broad latitude to determine eligibility. ACA expanded Medicaid eligibility to nearly all adults with incomes below 138% of the federal poverty level (FPL). However, in 2012, the Supreme Court ruled that states could choose whether or not to accept this eligibility expansion, which would be paid for in-full by the federal government for the first three years. In 2014, 27 states and the District of Columbia (the “opt-ins”) have expanded the Medicaid enrollment threshold while 23 states (the “holdouts”) including Texas and Florida have not.

From 2013 to 2023, the Congressional Budget Office (CBO) forecasts that Medicaid enrollment will increase by 14 million lives, or 25%, to 71 million, if all states opt in to Medicaid eligibility expansion. By comparison, in 2013, there were 52 million Medicare enrollees and over 165 million commercial (private plan) enrollees. Almost half of Medicaid enrollees are children. Regardless of further opt-ins, the Medicaid enrollment growth forecast exceeds the growth forecast for all commercial health insurance.

Beginning in the 1980s, many states received waivers from the federal government to create Medicaid managed care programs and move away from traditional fee-for-service coverage. Under managed care, Medicaid recipients are enrolled in private health plans that receive fixed monthly premiums from the state. The health plan is responsible for providing for all or most of the recipient’s healthcare needs. The plans accept the risk of managing total costs, subject to negotiated adjustments for developments like the expensive new hepatitis C medicine. A small minority of Medicaid managed care simply provides administrative services and healthcare provider network access to the state, which assumes all the risk.

About 60% of Medicaid enrollees are in managed healthcare plans, with as many as 70% of new enrollees in such plans, both non-profit and for profit. No matter their coverage, newly-insured individuals tend to consume more healthcare services and goods than existing enrollees, as they are treated for previously untreated health conditions. States have smartly moved their highest acuity Medicaid enrollees into full-risk managed care programs covering almost all aspects of care, from providers to facilities to pharmaceuticals; states are rapidly doing the same for high-cost dually-eligible Medicare-Medicaid beneficiaries, the elderly poor. Medicaid managed care insurers operate on thinner margins than commercial insurers and even Medicare. Insurers must carefully manage the volatility inherent in rapid enrollment expansion and work closely with the states to fulfill their contracts while earning sufficient returns to incentivize their seeking to renew and expand contracts. Some publicly-traded Medicaid managed care insurers, the “pureplays,” focus only on Medicaid and are smaller and faster-growing. Others offer multiple commercial and government plans. Both classes of companies produce attractive returns on invested capital and generate solid free cash, though the pureplays have high capital reinvestment requirements, funded recently by debt and, occasionally, equity.

As things stand now, Medicaid managed care enrollment will expand as states transition beneficiaries from less productive and less efficient fee-for-service coverage to managed care and the “opt-in” states broaden eligibility. Of course, the biggest Medicaid managed care enrollment growth opportunity is if and when the Medicaid eligibility expansion “holdouts” accept the federal offer of support. The table below depicts this opportunity from present baseline enrollment to eligibility of either 100% or 138% of the FPL. At 100%, over nine million individuals would become eligible for Medicaid; at 138%, over 16 million.

Clearly, then, Medicaid coverage expansion will be a source of accelerating revenue and earnings within the managed care industry. Other companies operating within the growing publicly-funded healthcare market conduct audits and oversight to reduce waste and fraud, help improve public health programs, focus on child support services, work with businesses to maximize their tax credit incentives and regulatory compliance, and develop software. Additionally, the expansion of healthcare insurance, particularly under managed care, and subsequent higher utilization by those patients, continues to offer large opportunities to drug and device manufacturers, hospitals, and other healthcare providers, most of whom have developed collaborative relationships with the insurers who pay their bills, directly or indirectly.

The Affordable Care Act may as easily have been called the Medicaid Expansion Act, and seems likely to serve as a positive catalyst for investments across the managed care and ancillary services industries.