Preparing for 2022: Considerations for managed Medicaid programs

In 2020, the COVID-19 pandemic created substantial shifts across the US healthcare ecosystem. Medicaid was no exception. As Medicaid enrollment grew rapidly, communities with high socioeconomic need also suffered disproportionate impact from the pandemic¹Erica Coe, Kana Enomoto, Alex Mandel, Seema Parmar, and Samuel Yamoah, “Insights on racial and ethnic health inequity in the context of COVID-19,” July 31, 2020, McKinsey.com.

Medicaid faces some unique factors that further expand near-term uncertainty. These include changes in member mix resulting from economic recovery and reduced unemployment, federal and state policies that change with the end of the public health emergency, patterns of care use, and the health impact of the pandemic itself within this highly heterogenous segment of approximately 80 million Americans.²Center for Medicaid & CHIP Services, “February 2021 Medicaid and CHIP enrollment trends snapshot,” Centers for Medicare & Medicaid Services, February 2021, medicaid.gov.

This brief describes the four trends that capture the evolution of the managed Medicaid landscape through the pandemic, followed by actions stakeholders can consider as they prepare for 2022 and beyond.

Major trends in Medicaid in 2020–21

Growth in enrollment in Medicaid and in managed Medicaid

Total Medicaid enrollment grew by around ten million³Center for Medicaid & CHIP Services, “February 2021 Medicaid and CHIP enrollment trends snapshot,” Centers for Medicare & Medicaid Services, February 2021, medicaid.gov. between Q1 2020 and Q1 2021. Drivers of Medicaid enrollment include:

1. Suspension of eligibility redetermination during the public health emergency (PHE) period that began January 31, 2020.⁴Xavier Becerra, “Renewal of determination that a public health emergency exists,” Office of the Assistant Secretary for Preparedness and Response, July 19, 2021, phe.gov.
2. Coverage transition from Commercial and other lines of business due to decreases in individual income and/or loss of employer-sponsored coverage. Although the impact from these transitions was limited by extensions to COBRA, we estimate, based on recent health plan filings, that approximately three million people lost employer-sponsored insurance in 2020. Many transitioned into Medicaid programs.⁵McKinsey Payor Financial Database; McKinsey COVID-19 payer economics model.
3. Additional states adopting Medicaid expansion under the Affordable Care Act, including Utah, Idaho, Oklahoma, and Nebraska, in 2020. Nationally, 39 states and DC have now expanded Medicaid.⁶“Status of state Medicaid expansion decisions: Interactive map,” Kaiser Family Foundation, October 8, 2021, kff.org.
4. Continued shift from fee-for-service into Medicaid managed care. Seven states expanded managed Medicaid into new populations during state fiscal year 2020.⁷Kathleen Gifford et al., “A View from the states: Key Medicaid policy changes: Results from a 50-State Medicaid budget survey for state fiscal years 2019 and 2020,” Kaiser Family Foundation, October 18, 2019, kff.org.

During the same period, managed Medicaid enrollment grew by approximately 11 million (a 20 percent increase), driven by an increase in Medicaid enrollment and a shift from fee-for-service to managed Medicaid.⁸NAIC filings; McKinsey Payor Financial Database.

Large health plans continue to grow at a faster pace than the rest of the market

The top ten Medicaid health plans in 2020 grew 12 percent per year between 2010 and 2020, compared with 2 percent for the rest of the market during the same period (Exhibit 1). The faster growth among the top ten plans may be attributed to both organic growth (for example, greater success in Medicaid RFPs by offering a strong value proposition for beneficiaries) and investment in inorganic growth opportunities.

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Continued variability in financial performance

Pre-tax operating margin for the managed Medicaid market consistently declined from 2015 to 2019 (from 3.9 percent to 0.1 percent of premium), and rebounded in 2020 to 2.3 percent of premium (Exhibit 2).⁹NAIC filings; McKinsey Payor Financial Database. The margin improvement of 2.2 percentage points observed in Medicaid (2020 compared with 2019) was higher than in other lines of business (around 1.5 percentage points for Medicare Advantage and Commercial fully insured).¹⁰NAIC filings; McKinsey Payor Financial Database. Medical costs were lowered by factors including reduced utilization of care and lowered acuity mix (partially driven by the pause on eligibility redeterminations). These factors were partially offset by direct COVID-19-related costs (for example, cost of COVID-19 testing, cost of COVID-19-related hospitalizations).¹¹SEC 10-K reports; McKinsey COVID-19 payer economics model.

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Margins varied across Medicaid plan types in the managed Medicaid market

Margin for Medicaid plans with more than ten million member months (around 800,000 members) was, on average, 2.7 percent (Exhibit 3). Average margin for midsize plans, with between 500,000 and two million member months, was at 0.8 percent. Finally, plans with fewer than 500,000 member months, which are typically local and focus on complex, high-needs populations, achieved an average margin of 1.6 percent.¹²Kathleen Gifford et al., “A View from the states: Key Medicaid policy changes: Results from a 50-State Medicaid budget survey for state fiscal years 2019 and 2020,” Kaiser Family Foundation, October 18, 2019, kff.org.

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Actions managed care organizations can consider to better serve beneficiaries

1. Take early action to ensure continuity of coverage for eligible individuals. As we continue to navigate the pandemic, Medicaid enrollees may experience coverage shifts due to change in employment status or resumption of redeterminations after the PHE period. Health plans can consider ramping up analytics to identify members at risk of coverage disruptions, launch an agile command center to orchestrate outreach, support seamless transition across programs (for example, members moving from Medicaid to the Individual exchange), and work to limit preventable disruptions in Medicaid coverage for eligible members.
2. Develop more granular financial scenarios and closely track leading indicators. There is increased financial uncertainty for Medicaid plans, driven by both unpredictable cost factors (for example, the impact of COVID-19 cases and testing costs, return of deferred care, and member disenrollment patterns after the end of the PHE period) as well as the potential range of state rate-setting methodologies. To navigate this uncertainty, managed care organization (MCO) leaders can consider developing robust forecasting scenarios that factor in state employment outlook, likely impact of future COVID-19 variants based on vaccine adoption, impact on testing and vaccinations costs, changes in population morbidity, and so on. Health plans could identify and closely track leading indicators (for example, every month) in order to update forecasts and operating plans in this highly dynamic market environment.
3. Partner with states to navigate the uncertainty. Similar to MCOs, states face uncertainty in setting managed care rates for 2022 and beyond. MCOs may be well-positioned to be thought partners with states to ensure actuarially sound rates are set. Medicaid health plans could consider supporting their state plans by collaborating to assemble and review the fact base on care utilization, acuity, and medical costs for 2022, for example. Dialogue at a more granular level than in the past may be beneficial to ensure appropriate methodologies and assumptions are used.
4. Strengthen program integrity and care management to manage the “next normal” in care use patterns. Health plans can consider integration and coordination of care across modalities (for example, virtual care, remote monitoring, in-person services, social services), as well as potential updates to medical policies that could prevent inadvertent fragmentation, excessive or wasteful services, and suboptimal member experience.

Beyond the impact of the pandemic, federal and state actions to modify program design can have substantial impact on the future of Medicaid. Medicaid stakeholders who effectively navi­gate both medium-term volatility and program shifts would be well positioned to define a better “next normal” for beneficiaries.