Insurers want Pa.’s Medicaid business so badly they keep suing the state

Medicaid payments are like starvation wages for doctors and hospitals.

But to insurers, the government-paid health insurance for low-income families is a feast worth fighting over.

Pennsylvania is trying for the third time since 2015 to replace its Medicaid contracts — worth a total of $65 billion over the last five years — with companies that manage physical health benefits for 2.6 million Pennsylvanians.

Each time, losing bidders have protested, alleging improprieties in the way the state picked winners. Twice, in 2016 and 2018, Commonwealth Court judges agreed. The current protests against the winners announced last summer are pending in the same court.

“The plans see this as really big business,” said Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation, the nation’s largest health philanthropy, in Princeton. That’s why they protest every loss nationwide, though the length of the protests in Pennsylvania may be extreme, she said. “By stalling it, they get a stay of execution.”

The losers’ protests underscore the importance of government backed insurance programs — Medicaid, Medicare, and individual Affordable Care Act plans often bought with the help of tax subsidies — as a source of growth for insurers, Hempstead and other experts said.

Medicaid rolls in particular have surged during the pandemic, driven by millions of people losing their jobs and their health insurance.

» READ MORE: Medicaid enrollment soars as Americans lose jobs to pandemic: ‘I never thought I’d experience this’

But dragging out the appeals for years has a potential downside for consumers because they need both stability and competition to benefit, said Patrick Keenan, director of consumer protections and policy at the Pennsylvania Health Access Network, a nonprofit advocacy group.

“Stability helps plans develop relationships with patients and implement long-term strategies to improve outcomes while at the same time competition is necessary to ensure plans remain responsive to patients’ needs and their strategies don’t stagnate,” he said.

The Pennsylvania Department of Human Services, which oversees the state’s Medicaid program, called HealthChoices, runs the bidding process, and said its hands are tied until the court rules.

Historically, states have chosen private insurers to manage Medicaid benefits to save money. “They were just getting killed in terms of their state budgets. Twenty-five or 30% of their state budgets were going for Medicaid,” recalled Michael McCue, a professor emeritus at Virginia Commonwealth University who has studied Medicaid managed care.

Despite a history of Medicaid managed care dating to the 1990s, Pennsylvania’s spending on Medicaid, accounted for 28% of general funds in 2019, according to the Kaiser Family Foundation. That’s among the highest ratios in the nation.

Medicaid profits as a percentage of revenue are not huge, experts said, but can still be substantial given the amount of money in the program. The average operating profit before taxes and investment income for Pennsylvania’s Medicaid managed care companies was 2.4% in 2017, said Allan Baumgarten, an independent analyst in Minneapolis.

“When you compare it to pharmaceutical companies, it doesn’t sound like much of anything, but for insurance companies an operating gain of 2.4% is very good,” said Baumgarten, who last year authored a study of Medicaid managed care for the Robert Wood Johnson Foundation.

Over the last five years, AmeriHealth Caritas, a sister company to Independence Blue Cross, has averaged a smaller net profit of 0.55%, but that added up to a five-year total of $300 million. Medicaid has accounted for a significant portion of Independence’s growth over the last three years.

That trend will continue, with AmeriHealth Caritas about to start providing services in North Carolina and being selected a winner in Ohio last month.

With so much money at stake, Aetna Better Health of Pennsylvania, UnitedHealthcare of Pennsylvania, and others have refused to walk away without a fight.

Aetna, which now operates statewide, has been shut out twice in a row, winning none of the state’s five geographic zones. Thanks to protests, which prevent the state from completing the process, Aetna has collected a total of $3.9 billion in Pennsylvania Medicaid revenue since 2017 when new contracts were originally supposed to go into effect.

Asked for comment on its current protest, an Aetna spokesperson sent a link to the Commonwealth Court website. Aetna is fighting in that appeals court to obtain records of last year’s selection process using the state’s Right-to-Know Law.

UnitedHealthcare initially did better, getting picked in 2016 for Medicaid contracts in all five zones. But since then its fortunes have dwindled, getting the nod for just one zone, the Southeast, last summer. In the last four years, UnitedHealth has collected $4.7 billion in Medicaid revenue in Pennsylvania by providing services in three zones.

“While we are pleased to continue 30 years of service to our HealthChoices members in Southeastern Pennsylvania, we are disappointed about the overall decisions,” a UnitedHealthcare spokesperson said. “We are actively pursuing all available remedies.”

Two other bidders also protested the latest picks.

Gateway Health Plan Inc., a joint venture of Pittsburgh-based Blue Cross Blue Shield insurer Highmark Inc. and Trinity Health, a national Catholic hospital system, was dropped to one zone last summer — after being picked for five zones in 2017. The company did not respond to a request for information about its protest.

Centene Corp., which operates here as Pennsylvania Health & Wellness, is the fourth protester. The St. Louis company, by far the largest Medicaid insurer in the country, is a relative newcomer to Pennsylvania, having won a contract in 2016 to manage long-term services, such as home care and nursing homes. It has the smallest market share in the business, behind Independence unit AmeriHealth Caritas and UPMC.

Some in the industry expected Centene to win a large chunk of the Pennsylvania business. It did at first, winning three zones with the largest number of Medicaid beneficiaries, the Southeast, the Southwest, and one that stretched from the Lehigh Valley to Fulton County.

But in the most recent bidding round, it was shut out. The company declined comment.

The big winners last year, selected to offer services statewide but held up by their competitors’ protests, were AmeriHealth Caritas, Health Partners Plans, Geisinger, and UPMC for You.

What went wrong with the state’s process? The Human Services Department was tripped up during the protests in 2016 and 2017 by its use of a secret criteria in the selection process, favoring legacy operators to avoid disruption in the marketplace, and making improper communications with Centene executives.

The current protests include allegations that state officials took an idea from UnitedHealth’s application and shared it with other bidders. Aetna alleged that UPMC should not have been eligible because it had a work stoppage within the last five years at one of its hospitals.

The biggest winner last summer was Health Partners Plans Inc., a nonprofit in Philadelphia that was selected for all five zones, up from one zone now, the Southeast, which covers Bucks, Chester, Delaware, Montgomery, and Philadelphia Counties.

Health Partners, which is expected to be acquired by Thomas Jefferson University in December, had little to say about the protests that could upend its chance to expand statewide. The company had a profit of $23.5 million on revenue of $1.78 billion in 2019, according to its audited financial statement.

It’s unclear how long Commonwealth Court will take to work though the appeals.

The new contracts have a long term — five years — with the possibility of three one-year extensions.

“That raises the stakes, too,” said Hempstead, the Robert Wood Johnson expert. “If you lose, you might not get another bite at the apple for a while.”