NCPA - National Center for Policy Analysis


November 16, 2006

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.  But it's also a lucrative business for some private companies that act as middlemen between the government and patients, says the Wall Street Journal.

Instead of directly paying the bills when a Medicaid patient goes to the doctor, state governments increasingly outsource the job to private contractors and the potential gains are big:

  • Four years ago, a private-equity fund took a 70 percent 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.
  • One of the biggest Medicaid HMOs, 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 and spending money with no obvious patient connection, while increasing their own executive compensation.

But others say the HMOs are helping to corral spending on the behemoth entitlement program.  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, which has indeed helped manage costs:

  • Florida, for instance, sets its HMO premium rates about 8 percent 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.
  • Overall, total Medicaid spending grew in fiscal 2006 by just 2.8 percent, according to a report last month by Kaiser; that was the lowest rate of growth since 1996, a figure many say HMOs helped produce.

Source: Barbara Martinez, "In Medicaid, Private HMOs Take a Big and Profitable Role," Wall Street Journal, November 15, 2006.

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