The Medicaid market can be complicated and terrifying, but it has its charms.

Hema Singh and other analysts at Standard & Poor’s Ratings Services write about the charms in an article about the effects of the Patient Protection and Affordable Care Act (PPACA) Medicaid expansion program.

Getting and keeping state Medicaid contracts can be difficult, but “the expansion of Medicaid in 29 states and the District of Columbia is generating significant revenues for health insurers,” the analysts write.

These days, during quarterly earnings calls, executives at many publicly traded health insurers spend more time talking about PPACA exchange plans and about Medicaid program bids than about traditional commercial plan sales.

See also: PPACA Enrollment Period 2015: The curtain (really) falls

Singh and her colleagues write about the potential Medicaid program challenges as well as about the potential rewards. The challenges include state budget pressure, political battles, and ferocious bidding processes that typically hold annual reimbursement rate increases down to 1 percent to 3 percent, the analysts say.

Because of the lingering effects of the Great Recession on state health care program budgets, “Margins at these insurers typically will remain between 1 percent and 3 percent,” the analysts say. “In addition, some Blue Cross/Blue Shield insurers that are new to Medicaid may be particularly vulnerable to losses during the startup of their Medicaid business, as they ramp up their own capabilities or find partners with Medicaid expertise.”

But many insurers do seem to be more interested in building Medicaid capabilities, or finding partners with Medicaid expertise, than in schmoozing agents and brokers.

Medicaid accounted for 91 percent of 2014 revenue at Centene Corp. (NYSE:CNC), a “Medicaid managed care company,” but it also accounted for 24 percent of 2014 revenue at Anthem Inc. (NYSE:ANTM), 20 percent at UnitedHealth Group Inc. (NYSE:UNH), and 11 percent at Aetna Inc. (NYSE:AET).

For a look at the reasons why insurers may not be that into producers, and might be passionate about Medicaid and Children’s Health Insurance Program (CHIP) plan procurement bidding documents, read on.

handshake

1. The contracts can be huge.

States often use complicated, drawn-out, appeal-muddled request for proposal (RFP) systems to sign Medicaid plan managers, but winning a contract can get an insurer hundreds of thousands of new plan enrollees, or even more, and a contract may last three to seven years.

The length of a contract and the pressure to submit a low bid can lead to losses.

“Some Medicaid insurers in this position have petitioned a state for more revenue or abandoned operations there entirely,” the S&P analysts write.

But some states provide some risk-adjustment relief, and an insurer that can predict and manage health care costs effectively can earn a profit, the analysts say.

See also: Indiana wins approval to expand Medicaid

A woman and a man with dementia.

2. Medicaid managed care programs give health insurers a low-risk way to enter the long-term care (LTC) market. 

In recent decades, life insurers have dominated the private long-term care insurance (LTCI) market.

LTC planners have traditionally told clients that Medicare pays for no nursing home care, and that Medicaid does pay for nursing home care, but only for the poor, or for families skilled at playing poor.

In recent years, however, state and federal agencies have developed “dual eligibles” programs for people who eligible both for Medicare coverage and Medicaid coverage. Many of those people are elderly people, and people with severe disabilities, who need LTC services.

Expanding into programs to manage Medicaid LTC services is “likely to mean significant growth for insurers,” the S&P analysts write.

Trying to manage Medicaid LTC services without adequate care coordination and case-management services place could lead an insurer to its doom. But insurers that can manage LTC services well “are likely to see better margins than their competitors,” the analysts say.

“Our analyses lead us to believe that insurers will eventually become adept at assessing the actuarial risks of these new enrollees,” the analysts say.

See also: Aging baby boomers make health insurer Humana a target

Diabetes testing

3. The rise of the PPACA exchange system improved the risk profile of Medicaid plan enrollees.

Enrollees in Medicaid and CHIP plans tend to be in worse health than enrollees in traditional commercial plans, and many Medicaid plan managers assumed that PPACA efforts to get uninsured people into Medicaid would bring in enrollees who were much sicker than the typical Medicaid enrollee.

“This has proven less the case” than expected, the S&P analysts write. “The industry has benefited from the lower-than-expected cost of treating these newcomers.”

See also: Just how sick are exchange plan enrollees?

A hospital

 

4. Successful PPACA Medicaid expansion programs could put hospital rate negotiators in a good mood.

Traditionally, hospitals have lost money on treating Medicaid patients, and even more on uninsured patients, and shifted the cost of caring for the poor on to patients with commercial health coverage.

In theory, reducing the number of uninsured patients, and reducing hospitals’ losses on Medicaid patients, could reduce pressure on hospitals to pass the burden of caring for the poor onto commercial plans.

PPACA Medicaid expansion has been increasing patient volume, revenue, profits and cash flow at the hospitals S&P rates, the S&P analysts write.

See also: Medicaid expansion may cut hospitals’ losses on caring for poor