Mahattan-based Citadel Securities LLC healthcare services analyst Brian Wright recently published a note to clients citing evidence from Georgia that “winning” bidders in Kentucky’s switch to managed care from fees-for-services may face a tough first year.
Which seems counterintuitive at first blush.
When the winners were announced July 7 for Kentucky’s Medicaid managed-care contracts, the stock of the winning companies went up.
Why wouldn’t they?
The winners claim a piece of at least $4 billion in Medicaid reimbursements flowing into the state, mostly from the federal government.
Shares of Tampa-based WellCare Health Plans rose about 7 percent to an intraday July 7 peak of almost $56 per share from $52.39 on July 6.
But in a July 11 note titled “GA Medicaid Insights Suggest Likely Difficult First Year in KY”, Wright suggests the managed-care contracts handed out in Kentucky may be a drag on some of the companies that won them, at least initially.
And they could be particularly unpredictable because in Kentucky, unlike in Georgia, the bids locked in reimbursement rates for the first year, then base rates on cost-trend assumptions/predictions built into the respective company’s bid.
Wright compares Kentucky’s ongoing move to managed care to Georgia’s 2005 roll out: “We believe the best comparable Medicaid contract to KY is GA as both were large in scale, involve unmanaged populations, and were significantly price competitive.”
He notes in the first year of its Georgia contract, AmeriGroup took about a $17.2 million net loss.
AmeriGroup, based in Nashville, was a bidder in Kentucky, but was not awarded a contract.
In year one of the Georgia contract, WellCare Health Plans – which won contracts in seven of eight Kentucky Medicaid regions – took a $15.2 million net loss, according to the Wright.
Centene Corp., which also won Kentucky contracts, had the smallest first-year loss in Georgia at $7.5 million.
Wright’s letter states Centene didn’t book new business at the contract’s initial 90-percent medical loss ratio, the difference between the premiums coming in and claims paid out. In fact, for the first six months, Centene executives estimated an MLR about 10 percentage points lower than WellCare and about 4 percentage points lower than AmeriGroup, according to Wright.
In 2007, WellCare earned an estimated $16.8 million, AmeriGroup lost $2.2 million, and Centene lost $17.4 million, according to Wright’s report.
But here’s the astounding part of the report: Centene just turned a profit in Georgia in 2010, running an estimated $53 million cumulative annual loss since the Georgia contract commenced!
Wright concludes: “We would expect investors to query plans’ cost trend assumptions in KY as we believe GA reimbursement in the out-years was quite favorably impacted by mid-single digit rate increases in some cases.”
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