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Each week, Health Affairs' Rob Lott brings you in-depth conversations with leading researchers and influencers shaping the big ideas in health policy and the health care industry.
A Health Podyssey goes beyond the pages of the health policy journal Health Affairs to tell stories behind the research and share policy implications. Learn how academics and economists frame their research questions and journey to the intersection of health, health care, and policy. Health policy nerds rejoice! This podcast is for you.
Hello, and welcome to a health podocy. I'm your host, Rob Lott. Medicaid is a huge program. 78,000,000 Americans are enrolled in it. That's a little less than one in every four Americans.
Rob Lott:In 2023, about 40% of all births in America were financed by Medicaid. 40%. That's a big number, and it's just this really funky program that follows federal rules, but is run by the states, and through a really complicated matching program funded by both. Now some people may imagine that in each state, there's a singular program operated by a group of bureaucrats systematically paying claims and managing benefits, a closed universe, if you will. But of course, that's not really the case at all.
Rob Lott:In reality, the vast majority of Medicaid recipients are enrolled in a Medicaid managed care program, a whole constellation of third party insurers paid by the state to ensure qualified beneficiaries. This too is an enormous program, and believe it or not, there's a lot we don't know about who is actually covered and by whom. That's the subject of today's health policy. I'm here with Bohan Lee, a doctoral student in health policy management at Harvard Business School. And together with her coauthor, she has a new paper in the July issue of Health Affairs documenting substantial shifts in Medicaid managed care market landscape and acquisitions from 2006 to 2020.
Rob Lott:I can't wait to learn more about their work and to think with her about its implications for this program that occupies such a big and important part of The US health care ecosystem. Bohan Lee, welcome to A Health Odyssey.
Bohan Li:Thank you so much for having me. It's a pleasure to be here.
Rob Lott:So let's just dive right in. Maybe very briefly, we can level set for our listeners, and you can tell us how Medicaid managed care typically works. And I'm thinking about, states responsible for operating their own Medicaid programs. What are the advantages or reasons why they might do so through a managed care universe?
Bohan Li:Absolutely. So as you, very aptly already described, there is essentially two ways that states can choose to provide Medicaid benefits. One is to choose to offer those benefits directly through a publicly managed fee for service program, And the second way is what we're talking about today, which is managed care. And this happens when states contract out the provision of Medicaid benefits to private firms, which we call managed care organizations or MCOs. So these are private insurance companies like Centene or UnitedHealth to name a couple of the big ones.
Bohan Li:And the way it works is the states essentially pay these MCOs a set capitation rate. So it's typically a fixed payment per member per month. The firms essentially take this payment and use it to deliver Medicaid health benefits. Now, there is kind of a key implication from all of this, which is that the firm or the insurance company in this case is the residual claimant, on any spending that goes above or below the set capitation rate. So in other words, if it costs the MCO less than the received capitation rate, they get to pocket that as profit.
Bohan Li:And if they go over the received capitation rate, then the firm essentially internalizes that loss. From the state's perspective, there's a couple of advantages to this. The first one being kind of greater predictability of Medicaid spending. Right? You know exactly how much you're paying and for whom, and then it's up to the firms themselves to kind of manage, the delivery of these benefits.
Bohan Li:Of course, when we think about outsourcing, to private firms, there's always this argument that private firms can actually save costs and provide, these benefits more efficiently than the government can. Some really believe that MCOs are just able to do more, per dollar of Medicaid funding. And one way that they do that is they leverage competition for these contracts, in order to incentivize these private firms to promise better products for beneficiaries.
Rob Lott:Got it. Okay. So before you conducted your study, can you give us a sense of what was typical approach in the field to characterizing the managed care market, understanding who was in and who was out and what the players were. And my sense is that that was a difficult task and maybe you can give us a sense of why that was so difficult.
Bohan Li:Yeah, absolutely. I mean, first of all, I just wanted to acknowledge all the great, wonderful studies that have been done in this space, studying different facets of both Medicaid and Medicaid managed care as that has kind of grown in importance. Our contribution, we see it as twofold. The first one is that we take a really broad lens. Right?
Bohan Li:We look at we look at things nationally, which is really hard because, you know, this is essentially a state program. It's a state by state program. If you see one Medicaid program, you know, some say you've only seen one Medicaid program, which is which is true. So we we take a broad lens. We look at, national trends, and we also look at a pretty long time frame.
Bohan Li:We look at fifteen years between 2006 and 2020. And, obviously, a lot happened, in the health policy space during those years. So the second thing that we do is we move beyond the standard focus, looking at fee for service Medicaid versus managed care. And instead we try to really understand how the Medicaid managed care market has changed over time. And the reason that it's been a little bit tricky to kind of characterize this market is because every state has a very different procurement process.
Bohan Li:And second of all, like a lot of other areas of healthcare, data on ownership is not always transparent. And so it takes a lot of kind of creative cobbling to put together a full picture, of this market. And lastly, which we get into in the paper, there's been a really high volume of m and a activity in this space, which has kind of changed the ownership of these plans.
Rob Lott:Okay. Great. Well, let's, let's hear about your study. What did you measure? What did you find?
Bohan Li:In our study, we set out to essentially paint this comprehensive picture of the Medicaid managed care market. So first, we actually focus specifically on what we call main market comprehensive risk based MCOs. It's
Rob Lott:Which about is like the world the the main kind of a c MCO. Right?
Bohan Li:Yeah. Exactly. It's plans that take on full risk for their membership and that target the general Medicaid population instead of, you know, a group with specific health conditions, for example. And we set out to lay out a set of basic facts that hopefully will inspire future work in this space. So what we actually did is we use publicly available Medicaid managed care enrollment data from CMS and we supplemented it with a decent amount of elbow grease and some proprietary sources to identify, M and A activity in this space.
Bohan Li:And we measure essentially two things. The first thing we look at, is what we call the market landscape, so really enrollment trends. Specifically, we looked at kind of the parent firms that owned these different plans. And we looked at those parent firms across two dimensions. One being, we call it ownership type, but really understanding whether it's mostly firms that are primarily insurance companies that are owning these plans or is it, you know, provider organizations that are running these plans?
Bohan Li:The second dimension that we look at is we look at the parent firm's geographic footprint. So what we mean by this is we look at parent firms that are national, so who operate, health insurance plans in multiple states versus local parents who are more often than not single state plans. So beyond enrollment, we were also really curious about, okay, how many total parents were in this market? How many total issuers were there? And how did their market share kind of change over time?
Bohan Li:So that was the first part. And what we found there was that, there was a huge increase in enrollment during our study period. So enrollment nearly tripled. But despite this increase in enrollment, we saw a pretty significant decrease in number of total parent firms. So the total number of parent firms actually decreased by about 25% from a 155 in 2006 to a 120 in 2020.
Bohan Li:We also found that there was a pretty significant shift in enrollment from local firms to national firms. So the split in 2006 was roughly about sixty forty local to national, and that completely reversed by 2020. So the important takeaway from this part of the study is that despite this decline in number of parent firms, the number of choices available to beneficiaries didn't actually change all that much, but the types of plans that beneficiaries were choosing from really shifted. Specifically, beneficiaries have a lot more national choices today and a lot fewer local choices.
Rob Lott:Wow. Okay. A lot to unpack there. Really interesting stuff. I wanna start with the, your your basic finding that the enrollment really increased.
Rob Lott:Is that tracking general growth in Medicaid writ large, or was there something else going on? Sort of what do you attribute that growth to?
Bohan Li:Yeah. It's a it's a great it's a great question. Specifically into this in the paper, but you can think of it as, you know, one of the big drivers of this growth is Medicaid expansion, part of the Affordable Care Act that was enacted in 2014. And then the second is that states actually get to choose whether to provide Medicaid benefits themselves directly or through managed care. So we attribute this growth to an increase in eligibility as well as an increase in penetration of managed care.
Rob Lott:Okay. And subsequent finding you mentioned was that there was this shift from local parents, if you will, to national parents, perhaps a decrease in the number of parents even as the choices stayed about the same. How do you explain that shift? Is it just sort of part of these these national trends that we're seeing in everything from grocery stores to to banks of sort of general consolidation, or is there something more nuanced going on in this landscape?
Bohan Li:Yeah. So something interesting that we found when we kind of broke down the enrollment by ownership is we we found that this kind of huge growth in national firm market share was almost entirely driven by the growth of a single payer. It was it was Centene. And Centene is a Medicaid focused insurer that has been, you know, incredibly active in this space and very innovative over the last couple of decades. But I did pull these numbers for today's podcast.
Bohan Li:Their market share was only about four percent in 2006 at the start of our study period. In 2020, it was 21%. So that means that one in five beneficiaries were actually enrolled in a Centene owned plant based on our calculations. So we can't definitively say that that this one firm's growth in acquisitions kind of caused the shift from local to national, but the evidence does seem to point in that direction. And one of the things that I wanted to mention too is the second part of our study really looked at M and A activity in the Medicaid managed care market, and we found a huge volume of acquisitions.
Bohan Li:So we found a 123 plan acquisitions during our study period. That means that one in four plans during our study period was involved in at least one acquisition, which was very surprising. So Centene was no exception. They were our most prolific acquirer during this time period. They made many acquisitions.
Bohan Li:They acquired both local and national plans. And so that could also be one of the drivers that shifted kind of enrollment from local to national payers.
Rob Lott:Wow. What's I'm gonna mess up the quote here, but I was it Margaret Mead who said never underestimate the power of one individual to change the world, something like that. I guess you should never underestimate the power of one parent company to change the balance of the Medicaid managed care marketplace. Right? In a moment, I want to ask you a little more about the role that competition plays in in all of these dynamics.
Rob Lott:But before we do, let's take a quick break. And we're back. I'm here with Bohan Lee talking about her paper and the Medicaid managed care market landscape. So just a few minutes ago you described a lot of the shifts in that landscape. And I'm wondering if you can tell us a little bit about how you see competition through the lens of all these changes.
Rob Lott:How does competition function in these markets? Is it sort of a healthy competitive market? And if so, what is the impact on beneficiaries' sort of everyday experiences of Medicaid?
Bohan Li:This is an incredibly important question, and it's actually at the heart of where we want this strand of work to go next. So thank you so much for asking that. First, I wanted to set the stage and say that like many other parts of the health care industry, the MMC market is quite consolidated. According to data from the Kaiser Family Foundation, you know, five national firms, Centene being one of them, have about half of all MMC enrollment. But what I wanted to kind of clarify is that the competitive dynamics play out very differently in this market because of a couple of the institutional details.
Bohan Li:So most states use a competitive procurement process to award MCO contracts as part of the way that they outsource the provision of Medicaid benefits. So this means that, MCOs don't have free entry into state markets. So this is what's called managed or regulated competition. The way it works is, you know, these private insurance companies will bid competitively for contracts awarded by the state government. And then the state government will choose the number and which contracts to offer.
Bohan Li:And then patients will then choose from this menu of state contracted options. And I will mention here again, like everything else in Medicaid, procurement timelines, rubrics, the selection process varies a lot across states. So from what I just described, you can see that there's two layers of competition. The first layer is plans are competing against each other to obtain a contract. And then the second layer is perhaps the type of competition that we're more familiar with, which is members are choosing in between plans.
Bohan Li:So plans are competing against each other conditional on having a contract to attract memberships. And here, what I wanna point out is that, in some states, enrollees are more active at choosing plans than in others. So in some states, auto assignment rates or the proportion of members who don't actually make an active choice in terms of which plan they wanna enroll in and instead are assigned a plan by the state, that that varies a lot. And so to us, this first layer, this competition for contracts is probably the most important level of competition to understand. So to kind of, play this out a little bit more, we don't explore this directly in the paper, but you could imagine that a decrease in competition in terms of the number of bidders for these state contracts could lead potentially to lower quality contracts.
Bohan Li:So imagine there's a unnamed national insurer. Right? They're competing for a state Medicaid, contract with the local or it can be a nationally owned plan that it will acquire in the future. So when they're competing, perhaps they have more incentive to promise better products. Right?
Bohan Li:Wider provider networks, better ancillary services for enrollees. However, after this acquisition, this, you know, acquiring National Insure no longer has to compete with the insurer that it acquired. So perhaps there's kind of less incentive to promise these higher quality products.
Rob Lott:You also hinted at the sort of variation from state to state, and I'm wondering if you can talk a little bit about just how extreme or or not that variation is and how you dealt with that in your paper.
Bohan Li:Absolutely. So since our goal was to kind of cast this wide net and paint a very broad picture, we don't spend too much time looking at the state by state variation. But as you pointed out, we did find some kind of interesting differences across states in terms of, where national pairs dominate, versus where local plans tend to dominate even towards the end of our sample period. So we found that nationals really dominated in the Midwest and the Southwest, whereas local plans were more prevalent in terms of their market share in states like Massachusetts, Minnesota, and Oregon.
Rob Lott:So we're approaching the sixtieth anniversary of Medicaid being enacted, and we're doing a lot of reflection here at Health Affairs and I'm sure across the health policy universe. I'm wondering if we start with the basic mission of Medicaid to provide coverage, a safety net to low income Americans, and for that coverage to be jointly funded by the states and the federal government, how should we think about managed care in that sort of most fundamental kind of baseline definition? Should we look at it as an important tool advancing Medicaid's mission? Or is it sort of the creep of, you know, for profit interests over time? Is it a good thing or is it a hindrance?
Rob Lott:And what factors do you think we should be considering as we make that assessment?
Bohan Li:This is a wonderful question, but also an incredibly complex one. The first thing that I will say here is that the reality is most Medicaid beneficiaries are already in managed care. Managed managed care penetration has been increasing over time, and it's definitely here to stay. So I think the real question is how can we do managed care better in the Medicaid context in a way that advances Medicaid's mission that you very aptly, discussed? So for example, I think it's really important to understand the fundamentals of how this market works, which we talked about a little bit previously, how it's changing, which I hope that our paper starts to kind of get at, and then how the design of these managed care programs and contracts might need to change in response to what we now know about this market.
Bohan Li:Because at the end of the day, we want this program to deliver maximum value for beneficiaries, but also for states. Lastly, one thing that I've been thinking a lot about is we should be thinking about these private firms that operate these plans, their objective function. And that objective function might differ, across the for profit, versus non for profit plans for the national plans or the local plans. It's really important to understand how that how they're responding to different incentives put together by the government and policymakers. And so so lastly, I would say that another another key takeaway from our work is that perhaps policymakers should no longer be thinking of Medicaid as purely a state by state program since there are common large national firms operating across them.
Rob Lott:That's great. Well, that's perhaps a good spot for us to wrap up. Thank you so much for your work on this issue and for taking the time to talk with us here today.
Bohan Li:Absolutely. You so much for having me.
Rob Lott:And with that, I'll encourage our listeners to recommend the podcast to a friend. Leave a review. Subscribe if you enjoyed this episode. Tune in next week. Thanks, everyone.
Rob Lott:Bye. Thanks for listening. If you enjoyed today's episode, I hope you'll tell a friend about a health policy.