HMO Medicaid
Wall Street Journal - November 15, 2006
Healthy Industry
In Medicaid, Private HMOs Take a Big, and Profitable, Role Managing Care for the Poor, They Prosper by Cutting Beleaguered States’ Costs
Dr. Polack Seeks an Antibiotic
By BARBARA MARTINEZ
Some 55 million poor and disabled Americans are covered by Medicaid.
With an annual price tag topping $300 billion, it’s among the biggest
government programs around.
It’s also a lucrative business for some private companies that act as
middlemen between the government and patients. Instead of directly
paying the bills when a Medicaid patient goes to the doctor, state
governments increasingly outsource the job to private contractors.
More than one in three Medicaid beneficiaries now receive care
through a private insurer.
The potential gains are big. Four years ago, a private-equity fund in
which George Soros was the largest investor took a 70% stake in
WellCare Health Plans Inc., a leading Medicaid health-maintenance
organization. The fund finished cashing out the stake this August,
bringing in a total of $870 million for an investment that originally
cost $220 million.
Four of the biggest Medicaid HMOs — WellCare, Centene Corp., Molina
Healthcare Inc. and Amerigroup Corp. — have seen their shares surge
on the New York Stock Exchange over the past few years, although
prices of the latter three have been volatile. WellCare’s stock price
has tripled since it began trading in July 2004, bringing the value
of stock and options held by its chief executive, Todd S. Farha, to
$77 million.
The companies are growing fast. Centene boasts nearly 1.2 million
members and posted $1.5 billion in revenue last year. That compares
with 142,000 members and $200 million in revenue six years earlier.
With the growth has come criticism from some doctors and patients who
accuse Medicaid HMOs of scrimping on care. Even as they restrict
medical tests and use of prescription drugs, the companies spend the
money they get from states on items that don’t have an obvious
connection to patients. Centene has funded a multimillion-dollar arts
center in St. Louis and paid to put its name on stadiums in Montana
and Missouri. The HMOs are also big donors to political campaigns.
Executives say their profits are justly earned and don’t come at
patients’ expense. Traditional Medicaid is a fee-for-service program:
The government pays each medical bill the patient racks up, with
little or no effort to manage the costs. Medicaid HMOs, like other
HMOs, seek to save money by eliminating unnecessary care and paying
for preventive treatments. Centene Chief Executive Michael Neidorff
says the company sometimes gives free child-safety car seats to
pregnant women who attend all of their prenatal exams. “We save
millions” by preventing premature births, he says.
Mr. Neidorff earned $1.85 million in salary and bonus last year and
as of the end of last year held restricted stock valued at $26
million. The company also recorded $135,547 last year in compensation
for Mr. Neidorff representing the value of personal trips he took on
the corporate jet, a Bombardier Challenger that features an espresso
machine on board, according to the lease agreement.
Centene spokesman Robert Schenk declined to say how much the company
pays to lease the jet. He said the jet is needed because many of
Centene’s operations are hard to reach by commercial carriers, and
the company’s board requires Mr. Neidorff to use corporate
transportation even on personal travel to ensure that he is secure
and accessible.
Centene’s business is managing the care of patients such as Melissa
Bishop, 39 years old, of Phillipsburg, N.J. When she needed radiation
for cancer near her pancreas this summer, she called Centene, her
Medicaid HMO. She says she tried three facilities suggested by the
company, but none of them were part of Centene’s plan. “I was going
round and round and round,” says Ms. Bishop. “I was getting so
aggravated.”
After she got an appointment at a fourth place, an administrator
there told her it didn’t accept her plan either. The administrator,
Barbara Tofani of Hunterdon Regional Cancer Center in Flemington,
N.J., says she called a dozen other centers in the region and struck
out every time. Finally, Ms. Tofani called Centene and negotiated an
ad-hoc deal to cover Ms. Bishop’s treatment, although Ms. Tofani says
the center will be lucky to break even.
Andrew Greenberg, Ms. Bishop’s radiation oncologist, says that if it
hadn’t been for the special effort, “Melissa would have gotten lost
in the system.” Centene didn’t provide comment on Ms. Bishop’s case.
Each state runs its own Medicaid program but the majority of funding
generally comes from the federal government. When states sign up HMOs
to manage care, they often calculate what they would spend on
Medicaid patients directly and pay the HMOs a per-patient premium
below that amount. Florida, for instance, sets its HMO premium rates
about 8% below what it would cost the state. WellCare, a big operator
in Florida, says it saves the state $75 million a year. HMOs have an
incentive to keep their costs under the premium because they keep the
difference as profit.
After several years of spiraling growth in Medicaid costs, there’s
some evidence that the tide is turning, although it’s unclear how
much HMOs have contributed. Total Medicaid spending grew in fiscal
2006 by just 2.8%, according to a report last month by the Kaiser
Commission on Medicaid and the Uninsured. That was the lowest rate of
growth since 1996. The commission said that for the first time in
years many states aren’t feeling pressure to cut people off Medicaid
rolls.
Are Medicaid HMOs slashing necessary care to achieve cost savings and
raise profits? Yes, says Jerry Flanagan, health-care policy director
of a California group that wants to stop state governments from
moving Medicaid beneficiaries into private managed care. “What’s good
for shareholders is bad for patients,” he says. “What’s really
happening is we’re giving less money for far, far fewer services.”
Private companies “deliver a good-quality product at a reasonable
price,” counters Ruben Jose King-Shaw Jr., a former top federal
Medicaid and Medicare official who joined WellCare’s board in 2003.
He notes that states often require private HMOs to achieve high rates
of vaccination and other quality standards that weren’t met when
bureaucrats did all the work. Mr. King-Shaw, whose final annual
salary in government was $142,500, has sold WellCare shares for $1.8
million. He owns shares and options valued at an additional $1.5
million. “You only do well in health care if you deliver value,” he
says.
States began experimenting with using managed care for Medicaid
patients in the early 1980s, and the idea took off in the 1990s. Now
many states are moving aggressively to put more Medicaid patients in
HMOs. Last month, Ohio chose the winning bidders to provide Medicaid
HMO services to 120,000 of the state’s aged, blind and disabled
population — a group that traditionally hasn’t been placed in HMOs.
When states run their own Medicaid programs, they spend on average 4%
to 6% on administrative costs, according to Martha Roherty, director
of the National Association of State Medicaid Directors. The rest –
94% to 96% — goes to paying for medical care. At Medicaid HMOs, only
80% to 85% of premium dollars generally go for medical costs. The
rest covers other costs — including executive compensation,
entertainment and political contributions — or becomes profit for
shareholders.
States monitor the profit margins of Medicaid HMOs, which are
generally reported as 5% or less. State officials say that with such
a thin margin there’s little room for further savings, although a
review in New Jersey questioned whether one HMO was overcharging its
subsidiary in the state for services. That could make the
subsidiary’s profits look lower.
While they spend fewer dollars on medical care, companies say they
are more efficient and improve the health of patients. Elizabeth
Douglas of Chicago says her 11-year-old son has kept up on his
immunizations thanks to a WellCare program that gives her a free ride
to the doctor’s office.
Some patients and doctors have a different view. Kuldeep Singh, an
internist in Valdosta, Ga., says that when Georgia began to move more
than a million Medicaid recipients into HMOs this year, he suddenly
faced hurdles not imposed by regular Medicaid. Recently, he says, one
of his assistants had to wait on hold to get approval from WellCare
for a hospital chest X-ray on a patient suspected of having
pneumonia. “It was ridiculous,” says Dr. Singh. A spokesman for
WellCare says it sometimes requires such approval because hospital-
based X-rays cost two to three times as much as those done in a
doctor’s office or imaging center.
Many doctors refuse to take patients in Medicaid HMOs because
reimbursements are so low. (The same problem occurs in traditional
Medicaid.) Noha Polack, a pediatrician in Union City, N.J., has an
arrangement under which Centene pays her a fixed monthly sum per
child to handle basic medical needs. Until a few months ago, that sum
was $11.50 per month, equal to $138 a year — about half of what
other Medicaid insurers pay, says Dr. Polack. A child who had a few
colds or scrapes during a year would quickly put her in the red.
Dr. Polack threatened to drop all her Centene patients and recently
got a raise — the amount of which is confidential, she says — but
she still stopped accepting new Centene patients.
The HMO is stingy about drugs that others approve with little
question, says Dr. Polack, naming the antibiotic Ceftin as an
example. “Many times we have to make treatment decisions not
depending on what would be best for the patient but what the patient
can afford,” she says. While she could ask for an exception to use
Ceftin, “they are so notorious for not getting back to you” and
there’s little time when a child has an infection, she says.
Vickie Vickers, a 39-year-old Trenton, N.J., single mother on
disability and Medicaid, learned about the difficulty of finding a
doctor this year. She hurt her hand on Mother’s Day while stooping to
pick up playing cards that fell on the floor. She went to the
hospital for a temporary cast but spent weeks with Centene trying to
find an orthopedic doctor.
She finally found one an hour away. She says the orthopedist told her
she needed an MRI or CT scan, but Centene wouldn’t approve it. It
took until late June for an orthopedist to fit her with a splint with
metal bars.
Ms. Vickers rents a house in a run-down part of Trenton with a rusty
fence outside and a leaky roof that has caused big water stains in
the attic, bedroom, bathroom and kitchen. She wishes the old Medicaid
were back because in the 1990s “you didn’t have to call 50 doctors”
to get an appointment.
Centene didn’t provide comment on the complaints by Dr. Polack and
Ms. Vickers.
Research on the quality of care in Medicaid HMOs is thin. A study of
infant health last year by researchers at the University of Illinois-
Chicago and the Urban Institute found that Medicaid managed care was
correlated with a slight increase in inadequate prenatal care in some
women but in general showed little difference from traditional Medicaid.
While some doctors and patients complain of Centene’s stinginess, the
company has been generous in regions where it has offices. Centene
last year was the biggest donor for a $9.5 million renovation of an
arts building in St. Louis, now called the Centene Center for Arts
and Education, according to a spokeswoman for the center. The company
paid $200,000 last year for the naming rights of a minor-league
baseball stadium in Montana, where Centene employs 100 claims
processors but doesn’t have Medicaid clients. Centene also pledged
$400,000 this year to the school district in Clayton, Mo., where the
company has its headquarters, to rename the district’s stadium.
Cynthia Schultz, director of the Great Falls International Airport in
Montana, says Mr. Neidorff, the Centene CEO, once walked through the
airport and heard that it couldn’t afford artwork. Centene then
commissioned and donated a $7,000 welded-metal sculpture of an eagle
with a 16-foot wingspan that now hangs prominently in the airport,
she says. The company confirmed the donation. “It’s a great gift from
someone who doesn’t even live here,” says Ms. Schultz.
Mr. Schenk, the Centene spokesman, said the donations show Centene is
a “responsible and publicly focused corporation” and they help make
the communities better places to live.
A few big U.S. insurers that serve large employers, including
UnitedHealth Group and WellPoint Inc., also compete in the Medicaid
HMO market. Many others don’t. Medicaid HMOs assemble doctor networks
in places with many people on Medicaid — such as big cities and poor
rural areas — and deal with a single kind of customer, state
governments. Those skills “are importantly different than what most
commercial insurers have,” says John W. Rowe, the former chief
executive at Aetna Inc. and now a professor at Columbia University.
Medicaid HMOs have donated to candidates in state political races who
support their existence. In 2005, five WellCare subsidiaries together
donated $125,000 to Illinois Gov. Rod Blagojevich, a Democrat who won
re-election this month. WellCare has 92,000 members in Illinois.
This year, 20 WellCare subsidiaries each donated the legal maximum of
$500 to the campaign of Republican Tom Lee, who was narrowly defeated
in his bid to become chief financial officer of Florida, WellCare’s
biggest market. WellCare donated $34,000 to the Republican Governors
Association this year and contributed $100,000 to President Bush’s
second inaugural festivities in 2005.
“I call a governor, I usually get a call back within 24 to 48 hours,”
says Centene’s Mr. Neidorff.
States keep track of the finances of Medicaid HMOs to ensure that the
HMOs are spending a sufficient part of their revenue on medical
costs. However, the numbers are subject to interpretation. A review
of Centene’s New Jersey subsidiary in 2004, by a unit of Marsh &
McLennan Cos., said hundreds of thousands of dollars that Centene
counted as medical costs should have been considered administrative
costs.
The report also questioned cases where Centene’s New Jersey
subsidiary pays a national Centene subsidiary for specialized
services such as mental-health or a nurse hotline. It said the New
Jersey subsidiary was paying an above-market rate for some of these
services. That would tend to increase the state subsidiary’s medical
costs and reduce its profit, without affecting the bottom line of
Centene as a whole. Mr. Schenk of Centene declined to discuss the
report in detail but said Centene has used the findings “to
strengthen its operational efficiencies.”
In Illinois, the state and the Justice Department asserted in a
lawsuit that Amerigroup spent only $131 million on medical care from
2000 to 2004 despite taking in $243 million from the state. The
lawsuit accused Amerigroup of fraudulently trying to exclude pregnant
and sick patients to reduce its medical costs. A jury in Illinois
state court agreed last month, finding Amerigroup liable to the
government for $144 million. Internal Amerigroup emails filed in
court show managers contemplated disciplinary action for employees
who signed up women in the third trimester.
Amerigroup said it will appeal. The company says it discouraged
transfers by pregnant women so their care wouldn’t be disrupted. A
spokesman said the figures in the suit are “extremely misleading,” in
part because they don’t account for preventive health programs.
—- Raymund Flandez contributed to this article.