Introduction and Background

This article is the third in our series on the publicly traded health insurance (HI) industry and specifically focuses on Medicaid. We suggest a careful reading of the previous two articles entitled Single Payer Single Payer Medicare for All or Private Medicare Advantage? and Health Insurance an Industry in Transition to gain the background context for this article. For the reader who is unfamiliar with Medicaid we suggest first looking through the current official Medicaid Publication entitled Medicaid and CHIP, Strengthening Coverage and Improving Health.

Over a 40-year timeframe there has been a mega-shift underway in health insurance that sheds considerable light on our economy and society and yet seems to go largely ignored. The data in the table below shows the proportion of the population under age 65 that is covered by private, employer-based HI (PEBHI) vs. Medicaid. In 1972, Medicaid coverage of this population was miniscule. PEBHI coverage peaked in 1980 even as Medicaid coverage doubled. As of the latest datapoint, PEBHI coverage has been slowly but steadily shrinking for almost 20 years and reached a low point in 2015. Meanwhile, Medicaid continues to grow – even in the face of the refusal to implement Medicaid expansion by 19 states.

Share of population under age 65 covered by Year






Private employer-based












Here are some other hugely important but little-known facts that will serve to frame our Medicaid discussion:

  • Medicaid was originally enacted with little debate or fanfare, essentially an afterthought when compared to the fierce partisan debate over Medicare. Medicaid has subsequently emerged as the largest single insurance plan by enrollment in the USA with more than 72M beneficiaries and expenditures approaching $570B annually. The number of beneficiaries would likely be on the order of 80M if Medicaid expansion had not been blocked in numerous states. Medicaid was originally tightly coupled with Aid to Families with Dependent Children (AFDC) and thus carries welfare stigma, regardless of its actual benefits and beneficiaries. In fact, the majority of Medicaid spending is on the aged, blind and disabled and Medicaid expansion is focused on the working poor. Medicaid is the largest spender in the USA on long-term care, mental health services and substance abuse disorders (e.g. the opioid crises). Medicaid also covers an astounding 50% of births in the USA.
  • Medicaid covers beneficiaries at lower average cost than private/commercial insurance and Medicare. Medicaid has evolved into a largely managed care system as the majority of current enrollees are in managed care and served by private HI companies. In a manner analogous to the growth of Medicare Advantage, private companies are responsible for constraining costs while providing adequate access and quality of care. Some like to argue that Medicaid drives up costs or “crowds out” private employer health insurance, but the actual data speaks for itself. The demographics covered by Medicaid are (the figures that follow are read as Medicaid % vs. Employer Sponsored %): in poor health (26% vs. 6%); have functional limitations (46% vs. 23%); have 2 or more chronic conditions (35% vs. 24%); are disabled (29% vs. 7%) and have serious psychological distress (10% vs. 2%). In other words, Medicaid acts as a high risk pool, thus lowering the cost of private group health insurance.
  • A number of key changes to Medicaid, e.g. simplification of eligibility and streamlined enrollment, were enacted as part of the Affordable Care Act [ACA]. Thus, ACA repeal is likely automatically coupled with negative Medicaid impact – a fact perhaps underestimated by the millions of Medicaid beneficiaries in states with Congressional representatives voting for Repeal and Replace or structural Medicaid changes.

The Health Insurer Coverage Universe

Before we get into the specifics of Medicaid, let’s review our coverage universe and the associated stocks. The universe consists of UnitedHealth (UNH), Centene (CNC), Aetna (AET), Anthem (ANTM), Cigna (CI), Humana (HUM) and Molina (MOH). This year has provided an interesting test of stock price performance for our covered Universe. There have been high levels of uncertainty caused by the chaotic efforts at Repeal and Replace. There has been the “Trumpian” effect – e.g. cutting payments/subsidies and making specific mention of impacting HI share prices (“Trump Tweets Approval After Health Care Stocks “Plunged“). Given that the Republicans seem determined to implement Medicaid cuts either via a healthcare bill, a tax reform bill or some other mechanism – we might have also expected additional negative impact on stocks of “Medicaid-heavy” companies. But let’s look at the actual numbers.

1 Month

3 Month

Year To Date

1 Year










66.8 %


























What we can see is that it has actually been an excellent year for our HI universe. There were recent strong earnings reports from UNH, ANTM and CNC. There has been a remarkable recovery of MOH stock price. Last quarter, MOH announced layoffs, restructuring and management changes. But MOH reported reasonably strong results and restructuring progress on 11/2 and is now trading near 52-week highs. On top of this, we have the recent news of an apparent upcoming bid for AET by CVS Health (CVS). This has made for a major move in AET specifically but also buoyed the entire group’s share prices. Perhaps, the stage is once again set for large scale merger and acquisition activity after the previous mega-merger failures of the past 2 years.

Medicaid History

Medicaid was originally enacted in 1965 as Title XIX of the Social Security Act (SSA). The purpose of the program was to provide medical assistance for children, individuals and families with low incomes and low resources. Unlike Medicare, the program is designed to be a joint/cooperative effort between the federal government and state governments. The federal government establishes broad national guidelines and then each state government establishes its own program such as eligibility rules/restrictions, type and duration of medical services and reimbursement rates. Although we don’t have the space in this article, the state-by-state variation in Medicaid programs is rather remarkable.

An excellent way to understand Medicaid is to look back at the history and evolution of the program. Medicaid was originally enacted under the official title of the Medical Assistance Program. Medicaid had roots that reached back to 1942, when the state of Rhode Island first tried to utilize public assistance funds to pay providers of medical care. This approach was formalized in 1950 when the Public Assistance Amendments to the SSA were enacted. These amendments provided federal matching funds to states making medical payments to healthcare providers on behalf of beneficiaries receiving cash welfare payments. Readers interested in delving into the historical record can read the document Social Security Act Amendments of 1950: A Summary and Legislative History.

Persistent efforts by Wilbur Cohen and Nelson Rockefeller led to the 1956 and 1958 amendments to the SSA which set in place the basis for a federal/state matching funds formula which has subsequently evolved into the Federal Medical Assistance Percentage (FMAP). The FMAP formula is critically important as it determines the federal government’s share of Medicaid service costs and thus state reimbursement levels. Readers interested in delving into the current details of FMAP should read Medicaid’s Federal Medical Assistance Percentage. This in turn led to the Medical Assistance for the Aged provisions in the 1960 Kerr-Mills legislation, which provided federal matching funds for states covering the Medical costs of the indigent elderly. For better or worse, this legislative path created a strong association in mind of the public between welfare programs and medical care. This linkage plagues the Medicaid program even today in terms of social stigma and political weakness. (Kerr-Mills actually broke the linkage between welfare recipients and healthcare beneficiaries – the newly covered population was not receiving welfare payments.)

It should not surprise anyone that Kerr-Mills did not resolve the underlying problems, namely elderly population growth, rapidly rising medical costs and the absence of affordable health care/insurance options for many people with low incomes. Note that Kerr-Mills left program specifics such as coverage and eligibility details almost entirely in the hands of the individual states. Although Kerr had estimated that up to 10 million people would be covered under Kerr-Mills, the actual coverage was approximately 265,000 people as of 1965 with 45% of the recipients clustered in just three states: California, New York and Massachusetts. It was clear that programs for the elderly were not enough. This approach left large numbers of the blind, disabled and mothers and children receiving AFDC without adequate or affordable healthcare options. Kerr and Mills were also convinced that the populations would need to be divided in order to avoid over-expansion of Medicare. Thus, Medicaid and Medicare were split into separate provisions – Title XVIII and Title XIX. Ironically, in the House and Senate debates that led to the passage of both of the programs, there was practically no attention, commentary or debate on Medicaid. Instead, fierce discussion and debate focused on the Medicare program, which of course was passed over the strenuous objections of the American Medical Association and various conservative politicians. It seems that at the time, Medicaid was seen as merely an “add-on.”

The Epochs of Medicaid History

Medicaid is strongly influenced by cross-currents of often conflicting political, economic, social and health care/public health considerations. The situation is made even more complicated by misaligned state level and federal level priorities. We’ll start by looking back at the early history and evolution of Medicaid. We divide the time between 1966 and 1999 into distinct periods/epochs and examine the unique set of political and economic circumstances in each period. We then examine the changes in enrollment and in expenditures during that period. The epochs and their associated data set are summarized in the table below:

Time Period


Total Expenditures


Price Inflation (PI)

Growth in Spending Per Enrollee


Program startup






Early amendments






Medical inflation












Program expansion






Taxes, donation, DSH












PRWORA, BBA aka welfare reform





Source: Klemm – Medicaid Spending: Brief History

[Note to the reader – Each number in the table above is an annual compound growth rate – e.g. in the period 1966-71, the 52.3 represents in annual compound growth rate of 52.3% in expenditures and the 10.7 represents annual compound expenditures/enrollee exceeds regular price inflation by 10.3%]

Program startup – Medicaid rampup was impacted by the need for each individual state to implement and rollout their programs. As of 1971, enrollment was over 16M, expenditures exceeded $6.5B and growth rates for both considerably exceeded the forecast levels. Much of this was the result of states choosing to cover optional eligibility groups (largely the “medically needy”) and choosing to offer optional services. In this epoch, enrollment grew rapidly. Growth in per capita expenditure was a stunning 10% over the official inflation rate for the period, largely driven by growth in covered services.

Early amendments – Activities of this epoch were largely driven by two key amendments to the Social Security Act: [1] the Supplemental Security Income (SSI) cash assistance program for the aged and disabled and [2] optional service coverage for Intermediate Care Facilities for the mentally retarded and inpatient psychiatric services. As we will see, these groups are among the most expensive in terms of driving total Medicaid expenditures. The impact was expenditure growth averaging 18%/year and enrollment growth of 5%/year. Interestingly, total enrollment at the end of this period was not to be exceeded for the next decade.

Medical Inflation – The next epoch is best characterized as a period of skyrocketing price inflation (8.4%/year) in the economy as a whole and (of course) additional medical inflation (excess rate of 6.7%/year). This epoch had no major legislative initiatives in terms of eligibility or service coverage. In the macro-picture, welfare and Medicaid caseloads were stable or even slightly declining. This period set a unique disconnect between enrollment growth which was actually negative and expenditures, which were still growing rapidly.

Retrenchment – During the Reagan era, the search for methods to constrain the spending growth that had characterized the previous periods intensified. A major piece of legislation, namely the Omnibus Budget Reconciliation Act (OBRA), was passed, which reduced federal matching rates and also tightened welfare eligibility rules. Many states were battling budget problems and began to look for ways to actively manage costs. This led to the rise of HMO-style alternatives with per-member capitation and home- and community-based services (HCBS) aimed at lowering costs associated with institutional long-term care services. Medicaid began to evolve from merely a passive claims payor to an active cost and service manager – thus the emergence of the managed care organization (MCO), which we will discuss further below. During this epoch, enrollment remained stable or even slightly shrinking, and costs grew at their slowest rate since program startup.

Program expansion – Improvement in the general economy led to a re-look at what many people felt were harsh limitations placed on Medicaid during the previous period. Congress enacted a series of expansions that impacted every Medicaid group, including infants, children, pregnant women, low income, aged and disabled. This was often done in a two-stage process – states were first offered the option to expand coverage and then subsequent legislation converted the options into mandates. The legislation also took the initial steps of weakening the linkage between AFDC cash assistance and Medicaid eligibility – which became increasingly specified in terms of Federal Poverty Level (FPL). This period resulted in a turnaround of Medicaid enrollment shrinkage and a spurt in both total and per-capita expenditures.

Taxes, Donations and Disproportionate Share Hospitals (DSH) – The expansionary epoch came to an abrupt halt in the early 1990s as rapidly growing enrollments and expenditures made their full impact on state budgets which were under significant pressure due to economic recession. Many states attempted to become “creative” in finding alternate/unusual sources of revenues to enable state payments. Many of these approaches essentially shifted costs meant to be borne by the states back to the Federal government or utilized sources such as taxes on healthcare providers or even “donations” from healthcare providers. New laws such as the Medicaid Voluntary Contribution and Provider Specific Tax Amendments were passed to specifically restrict these approaches. Spending growth then slowed considerably following the passage of these laws.

Experimentation and Reform – The damage in the early 1990s led to states seeking new and better methods to provide services while controlling costs. This in turn led to steady growth of Managed Care options under section 1115 demonstration waivers allowing states to test new methods that were substantially different than the Medicaid program as currently designed. During this period, enrollment growth slowed considerably as did per-capita spending.

Welfare Reform and the Balanced Budget Act – During this period, two hugely significant pieces of legislation were passed: [1] the Personal Responsibility and Work Opportunity Reconciliation Act [PRWORA] and [2] the Balanced Budget Act [BBA]. PRWORA replaced AFDC with a block grant program entitled the Temporary Assistance for Needy Families (TANF). This served to decouple Medicaid eligibility from federal cash assistance programs. The BBA enabled the states to establish and expand managed care programs without requiring federal waivers and tightened DSH spending restrictions. But perhaps most importantly, the BBA established the State Children’s Health Insurance program [CHIP], providing health insurance coverage to low income children who were not otherwise eligible for Medicaid. This was a period of economic growth in the USA, and Medicaid enrollment actually decreased and expenditure growth reached the lowest levels since program startup.

A number of other significant laws and regulations have been passed/enacted in the period between 2000 and 2016, but we won’t cover them for now due to space limitations in this article. They are summarized in the table below:


Laws and Regulations


Ticket to Work and Work Incentives Improvement Act


Benefits Improvement and Protection Act (BIPA)


Children’s Health Insurance Program Reauthorization Act (CHIPRA)


Affordable Care Act [ACA] Medicaid Expansion


Medicare Access and CHIP Reauthorization Act (MACRA)

Modern Medicaid

As we can discern from the above discussion, there have been substantial changes in the Medicaid program over its 50+ year lifespan. The key changes and evolution that we will focus on below are: determination of eligibility, services coverage, the TANF program, the CHIP program, Medicaid expansion under the ACA and the emergence of the Managed Care model.

Eligibility for Medicaid

Medicaid eligibility is quite complicated because it is determined by a combination of categorical eligibility (i.e. only certain populations are covered) and financial eligibility (income levels/thresholds that allow members of the population to be covered). When Medicaid was first enacted, coverage was limited to three groups of low income people: families (e.g. children and pregnant women), the aged (over 65) and people with disabilities. Medicaid eligibility for these groups was tightly coupled with Federal Cash Assistance programs such as AFDC. States could then choose the option of covering the so-called medically needy – those who were part of the target population but whose income made them ineligible. The “neediness” was determined by the scope/scale of their medical expenses. Subsequently, the linkage to federal cash assistance has been eliminated for many of the eligibility pathways. Exceptions include recipients of SSI benefits and foster care children. For the rest, eligibility is now largely based on federal poverty level (FPL) as a result of PRWORA. As we mentioned above in the History of Medicaid section, federal policy has often focused on Medicaid expansion, first by defining new optional pathways and then subsequently making them mandatory. The current mandatory and optional eligibility groups are summarized in the table below:

Mandatory Eligibility

Optional Eligibility

Low income infants and children

Low income children, pregnant women and parents above FPL standards

Pregnant women

Elderly and disabled with income above minimum standards

Low income families below 1996 AFDC levels

Medically needy

Families with transitional medical assistance

Adults without dependent children

Adopted or foster care children

HCBS and 1115 waiver enrollees

SSI aged, blind and disabled

Enrollees covered for specific diseases or services e.g. breast cancer, cervical cancer or family planning

Nursing home and home healthcare for those eligible for nursing home

Hospice care and home nursing and personal care

Disabled working individuals

Case management and Primary Care case management

Low income Medicare enrollees

Speech, hearing and language disorder

Services Provided by Medicaid

The structure of Medicaid gives each state considerable flexibility as to its program implementation. However, there is a minimum set of mandatory services that must be provided in order for the state to receive federal matching funds. In addition, the state must follow the comparability rule (same amount, duration and scope of services for all), the statewideness rule (same throughout the state) and provide freedom of choice for beneficiaries to select among participating providers or managed care plans. There are also a number of optional services that the state may choose to provide and which are encouraged by additional federal matching funds. The table below enumerates both categories of services.

Mandatory Services

Optional Services

Inpatient and outpatient hospital

Diagnostic services

Pregnancy-related prenatal + postpartum; family planning services

Intermediate care facilities or mental disease

Laboratory and x-ray

Prescription drugs and prosthetics

Early periodic screening, diagnostic and treatment (EPSDT)

Optometrist and eye glasses

Child vaccines

Inpatient psychiatric

Physician services

Rehabilitation and physical therapy

Nursing home and home healthcare for those eligible for nursing home

Hospice care and home nursing and personal care

Rural health clinic services

Case management and Primary Care case management

Pediatric and family nurse practitioner NP

Speech, hearing and language disorder

Federal qualified health center

Dental and dentures

Non-emergency Transportation to medical care

Home health for chronic conditions

Smoking cessation for pregnant women

Respiratory care

Nurse/midwife services

Other diagnostic, screening and preventative

Targeted disease e.g. Tuberculosis related services and sickle cell

Program for all-inclusive Care for Elders [PACE] and Home & Community Based Services (HCBS) under 1915

Temporary Assistance for Needy Families (TANF)

A brief discussion of TANF is in order for two reasons: [1] TANF replaced AFDC and is thus closely linked with Medicaid and Medicaid beneficiaries, and [2] TANF operates as a Block Grant program to states. We should note carefully that the Republican proposals for ACA Repeal and Replace often contain aspects of Medicaid reform. One of the key aspects is replacing the current Medicaid program structure with a Block Grant approach. Lessons have been learned (or should have been learned) from 20 years of TANF block grant-based welfare reform, so we need to understand how this approach might impact Medicaid.

TANF provides a block grant to the states, which they can then use on a variety of services and benefits for low income families with children. TANF places two requirements on the State: [1] that TANF funds are used to meet one of the specified goals, and [2] that the states spend their own money known as Maintenance of Effort (MOE) as a source of matching funds. PRWORA only authorized the TANF program through 2002. Several short-term extensions later, the program was authorized for an additional 5 years under the Deficit Reduction Act (DRA) of 2005. The American Recovery and Reinvestment Act of 2009 established an emergency contingency fund for TANF. However, the DRA authorization expired in 2010 and TANF has subsequently been funded under a series of short extensions often included as part of the stop gap continuing resolutions that have evolved as part of the continuing failures to pass comprehensive federal budgets. As with the CHIP program discussed below, the failure to pass re-authorization bills and the desire to co-mingle TANF legislation with broader political “horse trading” has left the program with high levels of uncertainty.

The results of the switch from AFDC to TANF are rather striking. First, the proportion of families in poverty with children receiving assistance has fallen from 68 per 100 in 1996 to 23 per 100 in 2014. Thus, the TANF caseload has fallen substantially, but the number of families with children in poverty has continued to rise. Secondly, the TANF caseload has continued to shrink, even though the numbers of unemployed single mothers continued to rise. Indeed, even during the Great Recession of 2008-2009, the TANF caseload increase was minimal. Finally, over time, the TANF block grant has remained static and the states have chosen to spend a significant portion of the money (34%) on “other areas” instead of either basic assistance or employment-related activity. The potential impact should be clear to the reader – given the “flexibility” of Block grants, certain states may choose to spend the money in ways which are not compatible with the key goals of the funding program.

State Children’s Health Insurance Program [CHIP]

CHIP is a Joint federal-state program designed to provide coverage for uninsured Children with family incomes exceeding the Medicaid eligibility limits. CHIP was originally authorized by the Balanced Budget Act of 1997 with strong bipartisan support as Title XXI of the Social Security Act. Significant incentives were provided to States to launch CHIP programs, including:

  • Money – Federal matching funds exceed Medicaid levels, which are determined by FMAP. CHIP uses Enhanced Matching Assistance Percentage (EMAP) and EMAPs were increased by 23% under the Affordable Care Act
  • Flexibility – The states had more control and options for CHIP program design and implementation than under regular Medicaid. For example, States have 3 fundamental options for CHIP implementation: [1] as Medicaid expansion; [2] standalone – entirely separate from Medicaid, and [3] as a hybrid of options [1] and [2]. Fourteen states implemented CHIP as a Medicaid expansion whereas 34 states implanted the hybrid option.

CHIP operates as a block grant which must be matched by State funding. The original CHIP authorization had limited duration and the program has been re-authorized, strengthened, expanded and clarified by a series of legislative acts subsequent to the BBA. These include: the SCHIP Extension Act of 2007; the Children’s Health Insurance Reauthorization Act of 2009 (CHIPRA); the Affordable Care Act and the Medicare Access and CHIP Re-authorization Act of 2015 (MACRA).

The nature of the CHIP demographics are highly indicative of the need to expand coverage to the poor: 97% of CHIP enrollees are in families with incomes < 250% of FPL; 20% live in rural areas and 25% have a significant chronic conditions. CHIP children are also highly diverse – 42% white, 29% Hispanic and 23% African American. It is rather critical to note that the current CHIP funding authorization expired in September 2017.

There are several key learning points that we should observe: [1] the names of these programs really matter. CHIP is of course really Medicaid expansion under another name. Many oppose Medicaid expansion, but who can oppose proving health insurance to children who don’t have it? The name Medicaid carries welfare stigma; [2] the combination of CHIP + Medicaid have been highly successful in meeting the stated goal of reducing the uninsurance rate of children – the rate has declined from over 14% in 1997 to 4.8% as of 2016; [3] despite bipartisan support, the need to continually re-authorize CHIP has led to a number of high stakes legislative battles as attempts are made to co-mingle CHIP authorization with various other political issues or stealth attempts are made to cut CHIP funding or tighten eligibility. We are in the midst of such a situation right now as CHIP authorization has expired. At the time of this writing, a CHIP bill has just been passed by the House and sent to the Senate.

Medicaid Expansion

The Affordable Care Act provided the opportunity for Medicaid Expansion by offering enhanced federal funding to states that implemented expansions. In this case, expansion means offering Medicaid to those who were previously ineligible – up to 138% of FPL for both parents and childless adults. As of the date of this writing, 33 states (including Washington DC and we are also including Maine) are implementing expansion, seven are doing so via section 1115 demonstration waivers and 18 declined expansion. It is fascinating to look at the expansion map so here is a link to a colorful view. The table below summarizes the situation.

Expansion Status


Medicaid Expansion

Alaska, California, Colorado, Connecticut, Delaware, Washington DC, Hawaii, Illinois, Kentucky, Louisiana, Maine*, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, West Virginia

Expand via Section 1115 Waiver

Arizona, Arkansas, Michigan, Montana, Indiana, Iowa, New Hampshire

Decline to Expand

Alabama, Florida, Georgia, Idaho, Kansas, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, Wyoming

We should not underestimate the importance and ongoing controversy associated with Medicaid expansion. Maine provides an excellent example – the Republican governor has vetoed expansion five times. The voters have chosen to take the referendum path and they voted on 11/7/17. The vote was 59% in favor of expansion, so the referendum passed. However, the Governor continues to raise objections. It is estimated that 80K people in Maine will be newly eligible and Maine is in the midst of high profile fight against opioid addiction. Presumably, people have noticed that treatment is covered under Medicaid programs.

It is worthwhile to look carefully at the programs designed by the waiver states as the nature of these programs may be highly indicative of the shape of things to come under Republican majorities in the House, Senate, governorships and the presidency. We would suggest that a likely approach would be to attempt to make substantial alterations in the structure of Medicaid via 1115 approvals that would receive little discussion or attention. The result will no doubt be increasing premiums and copays, more eligibility restrictions, easier to be dis-enrolled, and shrinkage or elimination of various provider services or choices.


Current Waiver Provisions

Proposed Provisions Rejected or Not Yet Approved

Arkansas, Indiana, Iowa, Kentucky, Michigan, Montana,

Premium Assistance, Monthly Premiums, Healthy Behavior Incentives, Health Savings accounts, Waive Required Benefits e.g. Transportation, higher Co-payments

Work requirements, time limit on coverage, beneficiary lockouts, tobacco surcharges, elimination of early screening, rescind family planning choices, waive retroactive eligibility, disenrollment for unpaid bills, drug screening/testing, closed drug formularies

One of the most important questions at hand under Medicaid expansion is the impact on medical services availability, especially primary care. In other words, it’s certainly better to be insured than uninsured, but you actually need to be able to get an appointment in a reasonable timeframe with a provider of reasonable quality care in an accessible location. As we have heard numerous times, many people have a strong opinion on this issue, but what does the data show? The best study that we are aware of is entitled Primary Care Appointment Availability and the ACA Insurance Expansions. The subtitle of the study nicely summarizes the findings – “Surprising gains for Medicaid Patients in Expansion States.” The good news from the study was that between the years 2012 and 2016 the following results were observed:

  • primary care appointment availability for new Medicaid patients increased by 5.4%;
  • the gap between appointment availability for private vs. Medicaid patients fell by 7%; and
  • the availability gains were entirely attributable to expansion states.

The cost of this good news was a one-day increase in average wait times for both Medicaid and private patients. Several factors contributed to these results ranging from increased traffic at Federally Qualified Health Clinics and retail clinics to rapid managed care expansion to primary care practice restructuring; e.g., patient-centered medical homes.

Managed Care under Medicaid

There has been huge growth in managed care organizations in terms of both proportionate Medicaid enrollment and spending. The speed and scale of the managed care transition are summarized by the tables below:







Any Managed Care






Comprehensive Managed Care











Capitation Payments and Premiums Proportion of Medicaid Spending





The key legislative action in this arena is both recent and pathbreaking, namely the Medicaid and CHIP Managed Care Final Rule issued in April of 2016. In a nutshell, the Final Rule aims to provide close alignment between Medicaid MCOs and other managed care programs such as Medicare Advantage and Group HMOs. Medicaid MCOs are rapidly implementing quality initiatives, payment “reforms” such as value-based pricing and episodes of care, medical loss ratio targets, drug cost management programs and expanding to new populations e.g. managed long-term care. The evolution of Medicaid MCOs is an extremely important topic that requires a standalone article but suffice to say that effective implementation will be the basis of Medicaid profitability for our covered Universe going forward.

The Business of Medicaid

We will now turn our attention towards the Business of Medicaid and in particular how our coverage Universe can drive profitable revenue and stock price growth by effectively implementing and/or acquiring Medicaid programs in general but managed care programs in particular.

The Big Picture on Medicaid Enrollment and Spending

We first need to examine key questions such as:

  • How many people are enrolled in Medicaid?
  • How much money is being spent on Medicaid?
  • What is the money being spent on? and
  • How much money is being spent on specific categories of beneficiaries?

These types of questions are best answered by analyzing the data provided in the Actuarial Report on the Financial Outlook for Medicaid, which is published annually by the Office of the Actuary at the Centers for Medicare and Medicaid Services. We examined data from the four most recent reports dated 2013 – 2016. Medicaid spending statistics are broken down into four major areas: Acute Care Benefits, Long Term Care Benefits, Capitation Payments, Disproportionate Share Hospital (DSH) Payments. The statistics are consolidated and summarized in the table below:





Acute Care Benefits





Long Term Care Benefits





Capitation Payments & Premiums





Disproportionate Share Hospitals





Gross Spending





Several key points can be derived from the data in this table:

  1. the proportion of acute care benefits are stable and declining slightly;
  2. the rapid rise of capitation payments and premiums which of course goes hand-in-hand with the rise of managed care in Medicaid;
  3. the high (but stable) level of spending on long-term care; and finally
  4. the continual rise of aggregate Medicaid spending, which has grown by $122B in a 4-year time period.

We then examined questions concerning the demographic categories of enrollees and how much money is being spent on which category on an individual and aggregate basis. The major categories are: Children, Adults, Expansion Adults, the Aged and the Disabled. We consolidated the data from the last four actuarial reports and derived the table below. Note that the table entries are interpreted as follows – total beneficiaries/total spending/spending per individual

Eligibility Group







27.9M/$78B/ $2.8K








Expansion Adults



People with Disabilities










Total Enrollees





Notable observations from this data include:

  1. the stability of the enrollment figures for children and non-expansion adults in the last 4 years;
  2. the rapid growth of expansion adult enrollees and spending and the higher per-capita spending on this class of adults;
  3. the extraordinarily high total spending and per-capita spending levels associated with the aged and the disabled.

Our analysis of this data led us to examine the data in a different dimension – namely the proportion of enrollees vs. expenditure levels. The data is compiled in the table below:

























Newly eligible adults



An entry in this table should be interpreted as follows – in 2012 the Aged were 9% of the beneficiaries but account for 21% of the spending. This table shows two very important details namely:

  1. that despite the close association and stigmatization of Medicaid as a welfare medical program for single mothers and children – the majority of the spending is actually on the aged and disabled and
  2. that expansion adults are considerably more expensive (at least initially) which we might have expected due to pent-up demand for healthcare services among a population that previously lacked stable health insurance.

Medicaid Marketshare Snapshot

The Medicaid market is highly fragmented and BlueCross/Blue Shield and various other non-profit entities account for the majority of market share. A recent summary of national Medicaid Managed Care Enrollment marketshare resulted in the following table:

























The Medicaid Specific Impact on our Coverage Universe

How are Medicaid-specific matters likely to contribute to (or damage) the overall strategic position and stock price performance of our coverage Universe? Let’s examine the summarized results from the most recent earnings reports.


UHC reported quarterly results on 10/17/17. UHC contains a reporting segment known as UnitedHealthcare Community and State which contains its Medicaid business. Although several useful granular details are not broken out (e.g. Medical Loss Ratio and margins), what UHC does report for this segment is total revenues and the number of Medicaid beneficiaries.

September 2017

June 2017

December 2016

September 2016











UHC provided a brief discussion about the Community and State segment during the earnings call and the emphasis was placed on the following points:

  • strong revenue growth of 12.8% over the past year as well as the addition of approximately 600K beneficiaries which constitutes 10% growth
  • new UHC Medicaid programs were implemented in Virginia and California (Medical contracts)
  • the continual shift towards managed care both for existing as well as newly served populations. UHC characterized an unserved opportunity of 85M potential beneficiaries with on the order of $1T of Healthcare spending for the combination of Medicaid and Medicare managed care
  • UHC made an important and highly targeted acquisition of Rocky Mountain Healthcare in Colorado. Interestingly, this was characterized as a “partnership” as Rocky Mountain is a non-profit. Rocky Mountain has approximately 138K Medicaid members and 11K CHIP members


ANTM has a reporting segment called Government Business that combines the Medicaid numbers with Medicare. Thus, we don’t get dis-aggregated numbers on the revenue, cost and margins. We do, however, get standalone Medicaid membership numbers, which tells us that Medicaid members outnumber Medicare members at ANTM by a ratio of 4:1, so we will sometimes use the aggregate numbers to analyze the Medicaid business. ANTM provides Medicaid services in 20 states and serves TANF, SPD Seniors, the disabled, Long Term Care Services and Supports, CHIP and Medicaid expansion enrollees. One strategy that ANTM has put to good use in the Medicaid arena is acquisition – e.g. ANTM acquired Simply Healthcare in 2015 as a way to buttress their Medicaid business in the state of Florida. This acquisition contributed 177K new Medicaid members as well as considerable expertise in certain special needs areas such as HIV/AIDS. Medicaid member numbers and approximations of revenues, costs and margins are provided in the table below. Medicaid members are also a steadily growing portion of ANTMs overall membership having grown from 13.8% in 2014 to 16.4% in 2016. ANTM’s potential Medicaid-related weakness is their overweight presence in seven States that declined to pursue Medicaid expansion – a key source of potentially higher margin beneficiary growth.

June 2017

December 2016

December 2015

December 2014






June 2017 3month

June 2016

3 month

December 2015 6 month

December 2014 6 month












AET has a reporting segment called Government that includes both Medicaid and Medicare. AET provides revenue and MLR numbers but does not break them out between the two programs. AET has a balanced split between Medicaid and Medicare and a significant number (over 2M) Medicaid members. However, AET’s Medicaid membership actually dropped over the past 12 months (due to a contract exit in Maryland) in a year where the market leaders showed stability or growth. AET is not currently focused on driving the Medicaid market growth. The impact of a potential acquisition by CVS and how this specifically impacts the Medicaid business is yet to be adequately determined or discussed.

Member numbers






Medicare Advantage




HUM has a reporting segment called Retail Segment which includes both its Medicare and Medicaid businesses. Various Medicaid entities including dual eligible and Long Term Support and Services are grouped together as State Based Contracts. In the case of HUM, the Medicare business dwarfs the Medicaid business e.g. $20B in revenue vs. $1.3B and 8.5m Medicare vs. 375K Medicaid members. HUM is not driving the Medicaid market, thus we won’t cover them further in this article.


Cigna has a reporting segment called Government, but the Medicare member number is much larger than the Medicaid number i.e. 430K vs. 61K and both are miniscule in terms of revenues and beneficiaries for a Mega-cap HI company. Thus, we can see why the idea of a merger with ANTM was so attractive and we will not cover CI further in this article.

Medicaid Specialists

At the other end of the spectrum are two “Medicaid-heavy” providers – Molina Healthcare and Centene.


The first “Medicaid-heavy” provider in our universe is CNC. CNC announced one blockbuster acquisition during the Quarter – namely Fidelis Care for $3.7B. This brings along 1.3M new Medicaid members and establishes a strong footprint in a very important and aggressive Medicaid state as Fidelis is the leading Managed Medicaid provider in New York. This is a highly strategic move for one other reason. As we discussed above, the Medicaid market is highly fragmented, and much of the market is held by non-profits such as Fidelis Care (originally known as Catholic Health Services). There had been some question as to how publicly traded HI companies might acquire these nonprofits, and CNC appears to have resolved the issue. If so, this may open the door for numerous other well targeted Medicaid nonprofit acquisitions by our Universe of companies (see UNH for example). The membership data from CNC’s recent financial report is depicted in the table below (Fidelis numbers are not included):


September 2017

September 2016

12 month delta

TANF, CHIP and Foster Care




ABD and Long Term Care




Behavioral health




Medicaid Expansion*












On October 25, CNC also announced a joint venture with Mercy Health that will be called Arkansas TotalCare [ATC]. ATC will focus on a highly targeted Medicaid Special needs population “comprised of people with high behavioral health needs and developmental/intellectual disabilities.” The reader should note carefully that while mega-mergers were blocked, CNC maneuvered carefully “under the radar” and is now well-positioned to add 3M new Medicaid beneficiaries via HealthNet (already closed) and FidelisCare (pending).


MOH had taken a series of missteps – e.g. its entry into ACA marketplaces and an overly aggressive strategy. This resulted in the announcement of a major restructuring complete with layoffs, cost cutting and top management changes in 2Q17. However, as we noted above, MOH reported stronger results and significant restructuring progress on 11/3 and is now trading near 52-week highs. Regardless, close examination of MOH financial statements has extensive value because it is the only company in our universe that provides granular, Medicaid-specific, numbers in its financial reports. MOH breaks out membership numbers by sub-program:


September 2017

September 2016

12 month delta





Medicaid Expansion




Aged, Blind and Disabled












MOH also breaks out the Per member/Per Month (PMPM) and Medical Cost Ratio (MCR) details by sub-program so that we can do real analysis of granular revenue and associated cost structure. Thus, we can see the vastly different PMPMs by category. Just as importantly, we can also see the associated costs. Looking at the quarter-over-quarter numbers we can see that PMPM premiums have improved and MCR is looking substantially better overall.


PMPM Premiums





Medicaid Expansion



Aged, blind and Disabled






MOH also breaks out the granular details by state, including PMPM and MCR:


PMPM Premiums











Puerto Rico



We can learn several important lessons from these numbers:

  1. Providers should think carefully about which states they want to do Medicaid business in – e.g. Illinois may be a place to avoid.
  2. There is incredibly wide variation of PMPM levels by sub-program. Providers can pursue high PMPM business IF they can keep the costs under control.
  3. It goes without saying that a provider with MCRs over 90% should be taking a close look at the business. MOH is certainly in that situation, but their efforts to get costs under control have at least taken a promising step. Providers in our universe should avoid pursuing pure growth; they need to focus on profitable growth.

The Future of Medicaid

Given the set of cross-currents at work, the future of Medicaid is, of course, hard to predict. Based on the analysis of this article we suggest the following considerations:

  • Medicaid is quite likely to be faced with a significant budget cut in the near future. Although in the immediate near term, the Republicans have failed to Repeal and Replace the ACA, they have made their intentions clear. We have no doubt that between Presidential executive orders, Tax Reform, Federal Budgeting and upcoming Health Care bills that a cut in the range of $500B or more over a 10-year period is quite likely. We also have no doubt that the cut will be reasonably well camouflaged under the guise of State Flexibility/Autonomy (e.g. Block Grants) or under tax reform legislation where the focus will be on business benefits. We would guess that many beneficiaries will be unaware of carefully crafted language buried in the fine print of the legislation. We suggest watching carefully for Medicaid to be sacrificed under the guise of deficit reduction or budget neutrality. Readers should also carefully note that even under budget-cutting scenarios, there will be winners and losers among our HI universe – will suggest our opinion of the likely winners at the end of this article.
  • There has been considerable recent attention about the idea of Medicare For All as a comprehensive health insurance solution and indeed it was partially the topic of our previous article. However, given the characteristics and the data about Medicaid which we have presented in this article, perhaps we should be looking in different directions. What we see is that Medicaid (and not Medicare) is the single largest HI program in the USA and provides coverage for conditions, populations and treatments that are not addressed by Medicare – e.g. low-income children and their parents, the blind, the disabled, long-term care, mental health, opioid addiction, etc. Thus, we should be taking a close look at the idea of Medicaid For All. The idea gained some momentum from the introduction and passage of Bill AB374 by the Nevada legislature. The bill was dubbed “Medicaid for All” and was subsequently vetoed by the Republican Governor, yet the idea began to “turn heads” in numerous places. It also generated curiously rapid opposition which is captured in an article by Sally Pipes in Forbes entitled The False Promise of Medicaid for All. The gist of the counter-arguments are as follows: [1] given that Medicaid provides low quality care for current enrollees, expansion would merely amplify the current set of problems; [2] Medicaid is not cost effective but merely generates false savings by providing low reimbursements to providers; [3] many providers refuse to serve Medicaid patients and Medicaid actually serves to drive up the costs of other insurance programs; [4] key lawsuits are already pending arguing that Medicaid is already separate and unequal and that people enrolled in Medicaid are actually less healthy than those who have no coverage; [5] expansion would only further encourage employers to jettison their existing higher quality plans and thus push more working people onto inferior Medicaid expansion programs. The reader should note that many of these points are well refuted by carefully done studies – some of which are discussed in the section above entitled Medicaid Expansion. An alternative proposal has been championed by Senator Brian Schatz from Hawaii that would create a Public Option by expanding Medicaid to anyone who chooses to buy in to the revised program. Among other features, Schatz’ proposal would allow states to set premiums, deductibles and co-pays and Medicaid reimbursements would be raised to closely shadow benchmark Medicare rates.
  • The incredibly rapid migration from fee-for-service Medicaid to Managed Care alternatives as discussed in the sections above will only continue. More populations such as long-term care and specialized chronic conditions will migrate to Managed care as will the growing population of dual-eligible (i.e. those eligible for both Medicaid and Medicare benefits). The beneficiaries of this trend will be our mega-cap HI universe as the benefits of scale and robust care coordination become increasingly evident. We believe that this will also create a wave of highly targeted acquisitions as mega-scale providers carve out key populations by acquiring carefully targeted non-Profits and smaller-scale HI providers. Readers should see Centene/Fidelis and UNH/Rocky Mountain as models of this coming wave
  • We would expect more and different types of providers to see Medicaid and Medicaid expansion as a major business opportunity and begin to offer managed Primary Care with a more accessible model – i.e. bringing the care to where the people are. This is partially done by the FQHCs and will presumably be done by the various emerging retail clinics (e.g. Wal-Mart (WMT), CVS, etc.). But we will be carefully watching the emerging innovators in this arena such as CityBlock, which is a Google/Alphabet (GOOG) (GOOGL) spinout. An article from FierceHealthcare provides an alternative viewpoint. CityBlock’s plan includes accessible Neighborhood Health Hubs, quick access to Primary Care team, personalized health plans and integrated services that include health, mental, social and educational aspects.

Provider Universe Medicaid Strength

We will close this article with a table that ranks the covered Universe based on Medicaid-specific factors.

Company Ticker





Well-targeted acquisition of RockyMountain underway. Well-balanced and vertically integrated, which can be brought to bear on optimizing Medicaid managed care. Expert at carving in and carving out specific populations to maximize margins. Well-located Medicaid states – e.g. expansion states. Best situated to handle any coming Medicaid headwinds because of superior diversification. Rank = Very Strong



Well-targeted acquisitions of FidelisCare after HealthNet. Very stealthy large scale moves while MegaHI players got blocked. Well-located states and strong at driving growth. Vulnerable to Medicaid headwinds due to concentrated lack of diversity. Lacks vertical integration capabilities and benefits of the mega players. Rank = Strong



Major Medicaid player. In many states that declined Medicaid expansion hence capping source of profitable growth. Strategic acquisition of Simply Healthcare. Lacks overall diversification and vertical integration of UNH. Rank = Strong



Good enrollee base but shrank while industry leaders were growing. Rank = Medium



Overexpansion and out-of-control costs. Layoffs and management changes. Announced good start of restructuring but to many enrollees in wrong states with weak margins and high costs. Restructure will take time. Needs examination of carving up and selling off pieces. Rank = Medium- speculating on turnaround.



A minor Medicaid player at this time.



Not really a Medicaid player at this time.

Disclosure: I am/we are long QQQ, HQL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial advisor. I am not offering you financial advice. I strongly suggest that you do your own due diligence.

Go to Source

Medicaid For All Or Business As Usual?