Medicaid benefit loss not expected to impact health insurers

An estimated 15 million people will lose their Medicaid benefits this month as a result of the expiration of U.S. government’s emergency pandemic measures. While there’s little doubt the Medicaid benefits loss – what health care industry nerds call “disenrollment” and “redeterminations” – will negatively impact health insurance company revenues, the effect won’t be substantial thanks to a corresponding reduction in claims expenses, according to credit analysts and other industry watchers.

In announcing better-than-expected first quarter earnings on Tuesday, the nation’s largest Medicaid insurer, Centene, said its Medicaid premium revenue would drop to $77 billion in 2024, compared to $84 billion in 2023, and its earnings per share estimates were trimmed to $6.60, down from $7.15 in previous forecasts.

The company squarely put the blame on “redeterminations” of the Medicaid enrollments but said it does not expect a long-term impact. However, it said that the average cost per member of the those retaining Medicaid coverage after redetermination will be somewhat higher than before – what the company called “acuity.” This is likely due to the setting of state payment rates under cost trends of the current Medicaid population.

Rate adjustments anticipated

“We now believe it is prudent to build in a more conservative view of the potential disconnect between rates and acuity that could manifest in some of our states in 2024,” said Centene’s CEO Sarah London. “We view any disconnect as a temporary one. We fully expect that states will ultimately provide sufficient rate adjustments to reflect any changes in acuity of the Medicaid population, but we are building a provision in our 2024 target in case there is a gap in timing in some of our states. In the long term, rate has always equaled acuity in Medicaid.”

Fitch Ratings, the leading provider of credit ratings for global capital markets, agreed that the  Medicaid benefits loss due to enrollment expiration will put pressure on health insurance company revenues, but will be largely offset by falling claims costs.

”We don't expect any sort of impact on [credit] ratings from the redetermination process,” said Bradley S. Ellis, senior director of North American insurance ratings at Fitch Ratings. “There are headwinds on revenue from losing enrollment especially for companies that are proportionally weighted in Medicaid. But since those people will no longer be contributing to claim costs, the result is going to be neutral.”

Alternatives for Medicaid benefits loss

Some of those suffering a Medicaid benefits loss will be able to find coverage in state health care exchanges, Ellis said, somewhat negating the impact from becoming unenrolled.

“The additional subsidies and extensions of the subsidies that were passed last year, provides a lot of support for these people who typically couldn’t afford exchange coverage,” said Ellis. “We don't expect a one-to-one offset. But there will be sort of a mitigation of the enrollment loss.”

Under the Families First Coronavirus Response Act enacted by Congress at the onset of the pandemic, state Medicaid programs were required to maintain continuous enrollment for beneficiaries during the designated COVID-19 public health emergency in exchange for enhanced federal funding. The Consolidated Appropriations Act passed by Congress at the end of 2022 set a March 31, 2023 sunset of the Medicaid continuous enrollment provision, phasing out the enhanced federal Medicaid matching funds by 2023.

States were permitted to resume disenrollments beginning this month but must meet certain reporting and other requirements during the unwinding process. States will have 12 months to determine current eligibility and two months to complete outstanding actions.

Total Medicaid enrollment grew to 92.3 million in 2022, a 30% increase from 2020, at the beginning of the pandemic, and is estimated to reach 95 million by now despite the 15 million losing coverage.

“Over the past decade the enrollment composition of many health insurers has become more balanced, with improved diversification between commercial and recession-resistant government-funded business, such as Medicare Advantage and Medicaid,” Fitch said in a recent report. “Commercial enrollment remains the largest segment for most large health insurers. This enrollment diversification could have a stabilizing effect on overall earnings over time. However, Fitch sees a growing risk of a mild recession in the U.S. in the second and third quarters of 2023. The rise in unemployment that typically accompanies a recession is likely to result in slower growth or modest declines in reported enrollment within the commercial segments of health insurers.”

Most attractive profit margins

Fitch estimates that commercial insurance has the most attractive profit margins, followed by Medicare Advantage and Medicaid.

“However, the Medicare Advantage business has the strongest absolute gross margin per member, as seniors generate high medical costs that necessitate higher premium payments to cover the costs,” Fitch said. “Despite a more modest average Medicare Advantage rate increase in 2024, MA growth is expected to partially offset reduced earnings from Medicaid. Downside risk from the redetermination process to margins for insurers with outsized Medicaid exposure, including Centene and Molina, may also be mitigated by shifting individuals who lose Medicaid coverage to exchange products, increased enrollment from expanding state contracts, and efforts to reduce administrative expenses related to Medicaid.”

Despite some serious challenges in the Medicaid and exchange programs, Ellis believes the industry can adjust.

“The Medicare Advantage businesses especially is going to face some headwinds in the next couple years,” he said. “But it’s nothing that the the industry can't work through as the largest publicly held health insurers have been remarkably stable. I think it says a lot about their ability to adjust.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].