Let's Get Real: Medicaid HMOs Are Not Going to Save Big Bucks

UnitedHealth Group (UNH), which operates the largest Medicaid managed-care outfit in the country, estimates that increased use of Medicaid HMOs will save $366 billion over 10 years. But this self-interested projection overlooks some basic facts about the Medicaid population and the program provisions in the Affordable Care Act.

The share of Medicaid recipients in managed care plans has risen from 56 percent to 71 percent in the past decade. That suggests states are seeing financial benefits from Medicaid HMOs. But the real attraction to states is that managed care helps them budget their Medicaid expenditures. If that budgeting was working so well -- in other words, if it meant the states could drive hard bargains with private insurers -- they wouldn't be complaining that Medicaid is eating up more and more of their revenues. And insurance companies wouldn't be seeing Medicaid as the goose that promises to lay golden eggs.

The big golden egg, of course, is healthcare reform, which is expected to boost Medicaid rolls by 30 percent nationwide starting in 2014. That windfall isn't evenly distributed: Texas and California are expected to add about 2 million new Medicaid enrollees each, while Florida anticipates adding 1 million new Medicaid recipients as a result of the federal law. Overall, ten states will increase their Medicaid populations by at least 50 percent.

United argues that moving most of these patients -- as well as more of the current Medicaid recipients -- into managed care will save about $90 billion. A larger share of the projected savings, United contends, will come from applying managed-care techniques to long-term care. Much of United's argument rests on the theory that better care coordination reduces costs. Which is a fine argument so far as it goes.

So far, however, commercial managed care plans mainly save money by paying doctors and hospitals less than they could earn from fee-for-service plans or Medicare. As a 2003 study of Medicaid managed care points out, Medicaid is already the lowest payer around, so it's difficult to undercut it -- especially since many providers won't take Medicaid for that reason. Moreover, there's little to be gained from cost-sharing features such as deductibles, copayments, or multiple-tier drug copays, because most Medicaid patients can't afford to pay them. Other managed-care cost control ploys, such as narrow networks and harsh utilization management, are unpopular with the public.

Medicaid HMOs, like other plans, are also finding it difficult to negotiate favorable rates with increasingly large, powerful health systems. And the Affordable Care Act will raise the payments of primary-care physicians who care for Medicaid patients to Medicare levels, so it's unlikely that Medicaid plans will be able to pay them less than that.

It's unclear how managed care plans would work in long-term care, where most patients are very old and sick and subject to Medicare rules. But it's a good bet that if they start putting Grandma out to pasture, they'll be hearing from the Tea Party.

None of this is to say that Medicaid HMOs don't have their place, or that they haven't contributed to better, more coordinated care for many Medicaid patients. It's highly likely, in fact, that a majority of the new Medicaid recipients will go into managed care. But let's not be unrealistic about how much Medicaid HMOs can save.

Image supplied courtesy of LSU Health System.