But it’s not entirely clear what would happen in the three non-expansion states that don’t have any MCOs, though the legislation gives HHS the option to contract with a “third party plan administrator.” North Carolina, another state that hasn’t expanded Medicaid, recently contracted with several MCOs, including Centene Corp. and UnitedHealth Group, to manage their program. Large national carriers Centene, UnitedHealthcare, Anthem, Molina Healthcare and Aetna have contracts to cover 60% of the Medicaid managed-care market, according to an analysis from KFF.

Hempstead said there have been many entries into the ACA markets in non-expansion states, with insurers that operate MCOs potentially anticipating those states will eventually expand Medicaid or Congress will act to close the coverage gap.

Insurers may feel it gives them an advantage to already be serving customers in the marketplace or in Medicaid when it comes time to submit bids, she said.

That’s what regional and local plans are worried about.

Regulators must ensure that community plans only operating in a certain area of the state are not disadvantaged through their bidding process, said Dan Jones, vice president of federal affairs at the Alliance of Community Health Plans. Local and regional MCOs control about 40% of the market, according to KFF.

“If you just had two bids across the whole non-expansion state, we have plans that operate within certain parts of the state,” Jones said. “So, it seems like they would be disadvantaged if that’s the route that they would go.” The legislation says the HHS secretary can contract with more than one MCO or plan administrator in each coverage gap geographic area.

While the idea of offering a federal Medicaid option has been debated since at least the creation of the Affordable Care Act, the proposal to privatize the service is new, Jones said.

Managed-care organizations in the past have been criticized for charging more for the administration of the plans than traditional, fee-for-service Medicaid. The ACA allows plans to keep 15% of the premiums collected on administration—the rest must be spent on members’ medical care, which insurers measure through their medical loss ratios. Some states have said local regulators operate the program more efficiently than private companies.

In the run-up to privatizing healthcare for the state’s most vulnerable population, the Oklahoma Health Care Authority, which supported moving to managed-care, said its administrative costs of running fee-for-service Medicare ran at just 5%, for example. The move to privatize Oklahoma’s Medicaid program, named SoonerSelect, ultimately failed.

“In terms of what they’re counting towards administrative costs, what benefits are included? What type of coordination of care is provided to improve health outcomes and save costs?” Jones said. “I just think that there’s a lot of variables that go into looking at the value that private companies provide.”

Medicaid managed-care organizations have also caught the attention of regulators recently. The federal government unsealed a whistleblower suit accusing Aetna of lying about its provider network to secure Medicaid contracts in Pennsylvania this week, although the Hartford, Connecticut-based insurer denies the claims. Aetna is owned by CVS Health.

The legislation gives the HHS secretary the power to set provider rates, network adequacy standards, quality requirements and any other standards he or she deems necessary. The contracts must also include a minimum MLR and a requirement for “timely” payments to providers.

“I don’t think it’s universally true that managed-care entities get it right,” said Dr. Vikram Bakhru, chief medical officer at Medicaid managed-care startup Circulo. “Certainly, you know, there are cases of failure.”

But he believed introducing private companies in the marketplace added a level of competition that would benefit the government and enrollees, and that managed-care companies’ experience managing costs and care would ultimately translate to lower costs across the program, compared with a traditional fee-for-service option. As an example, he pointed to the success of the lucrative and growing Medicare Advantage market, a private alternative to fee-for-service Medicare that covers 26.7 million seniors, or more than 42% of all eligible seniors, according to the most recent federal data from July.

In 2021, member satisfaction with their Medicare Advantage program increased for the third year in a row, according to a report from data analytics firm J.D. Powers. But as satisfaction grew, so did federal spending. The cost per beneficiary is growing faster for people on Medicare Advantage than it is for people on traditional Medicare and Part D prescription drug plans, according to MedPAC. Medicare Advantage also makes up a larger portion of the federal budget, or 46%, than the enrollee population it serves, according to KFF.

“Is the private option a guaranteed solution? No, of course not,” Bakhru said. “But it represents an option that brings competition to the landscape, and I think that is a healthy component to the ecosystem.”

While privatizing a federal Medicaid plan would offer a short-term bump to those companies chosen to manage the program, the long-term proposal could negatively impact insurers since it could lead to a small portion of commercial members switching to Medicaid, which offers lower profit margins, said Glenn Melnick, a health finance professor at the University of Southern California.

In 2020, Medicaid managed-care enrollees delivered insurers the lowest profit margin across all plan types, according to KFF.

“If you want to bid, and you only have one buyer, which is the federal government, they have the power in negotiating a contract,” Melnick said. “I’m guessing all other things equal, commercial companies would rather keep their members commercial.”

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