It’s no secret the brand name prescription drug costs are high. The rising costs have been blamed by health care analysts on kickbacks within the drug supply chain demanded by the federal government, drug distributors (wholesalers), health insurance companies and pharmacy benefit managers (PBMs).
How about $356 billion worth of pure glut in the prescription drug supply chain, according to the analysis by DCI. Simply put, the market price established for these drugs by manufacturers has $356 billion worth of markups that mainly accommodate the financial demands (i.e. kickbacks or rebates) of groups that profit off the prescription drug system in the United States, health insurers and their PBMs in particular.
And that’s an all-time record.
Why?
Get ready to choke on your popcorn.
In the 1990s the federal government mandated in the Medicaid program that drug manufacturers offer a minimum rebate of 23% off the purchase price of brand name drugs. The feds also mandated that if drug manufacturers offer a better rebate on those drugs to someone else, the government also gets that same rebate.
The thought was no one gets a better deal than the federal government.
Rebates expanded again as PBMs continued to gain more control over the drug supply chain. The PBMs now force drug manufacturers to offer significant concessions in order to get on the list of approved medications – known as a formulary – available to patients with health insurance.
To account for these demands, drug manufacturers set the list price for their brand name drugs with these price concessions baked into the number.
DCI’s analysis found that baking is $356 billion of goodies for health care companies paid for by the government and you.
It’s the same kind of concept as a U.S. popular clothing retailer that displays inflated retail costs on the tags of goods and then right below displaying a lower “sale” price to make the consumer think they got a deal.
Here’s another way of thinking of it: Just like Congress has a lot of “pork” in its spending bills, there’s also a lot of pork in prescription drug costs that have very little to do with anything, other than increase profits for the health care industry.
Though the federal government intended to create a better system for taxpayers back in the 1990s when it demanded rebates in the Medicaid system, it instead created a feeding frenzy for companies in the drug supply chain.
In the year 2000 just a handful of companies in the drug supply chain dotted the Fortune 100 list of most financially successful companies. Today there are four such companies in the top 10.
The Minnesota-based health care conglomerate UnitedHealth leads that pack. The company’s profits have soared in the last two decades largely due to increasing medical costs and prescription drug costs paid by Americans. It has leaped over companies like Exxon Mobile and Apple to become the third largest company in America. Only Walmart and Amazon take in more revenue.
The company employs more than 400,000, including doctors and clinicians and has its own pharmacy benefits manager called Optum Rx.
We reported last month that Americans spent $464 billion last year on prescription drugs. That was also an all-time record, which will likely be set again and again and again until reforms are enacted.
Elevance, which owns Blue Cross plans, is now reeling from Wall Street losses thanks to its Medicare Advantage business.
The company now known as Elevance, which owns Blue Cross plans in 14 states, took a drubbing on Wall Street yesterday after executives told shareholders that it had to pay out way more in medical claims during the second quarter than expected, especially in its Medicare Advantage business. As a reminder, Wall Street hates to hear such news, so much so that investors rushed to sell their shares in the company, sending the stock price to $296.39 – a 52-week low – before closing at $302.45 yesterday afternoon. That’s down 47% from the all-time high of $567.36 it reached last September.
The news was so distressing for people who still have investments in for-profit health insurers that many of them finally bailed, getting the message that the entire sector is likely not the best place to make money these days. All seven of the companies (Centene, Cigna, CVS/Aetna, Elevance, Humana, Molina and UnitedHealth) saw big drops in their stock price with two others (Centene and Molina) also falling to 52-week lows. The companies’ stock is continuing to tank today as I write this.
When Denial Becomes a Liability
UnitedHealth has historically been the first of the companies to release quarterly earnings, but it stepped back as leader of the pack this quarter after that giant’s recent troubles on Wall Street. UnitedHealth missed financial analysts’ profit expectations last quarter and withdrew its profit guidance for the year, an unprecedented move for that company, which terrified its shareholders. UnitedHealth’s stock price has lost nearly 55% of its value since reaching a high of $630.73 last November.
Like UnitedHealth, Elevance had been a Wall Street darling until a business practice common in the health insurance game – refusing to pay for patients’ medically necessary care – finally caught up with it.
I’m talking about prior authorization, the benign sounding term that covers a number of ways a health insurer banks money by saying no to a doctor’s plea to cover a patient’s treatment or medications. The fundamental problem is that by refusing to pay for care a patient needs, that patient likely will get sicker and wind up needing even more expensive care down the road. Insurance company beancounters know that can happen, but they also know there is a decent chance that that potentially high-cost patients will not even be enrolled in one of the company’s health plans when the day finally arrives that they have to go to the hospital, which, of course, might have been avoided if the initial treatment had been approved in the first place.
We’re not just talking about a stay in the hospital. One permutation of prior auth is called step therapy in which an insurer demands that a patient try other medications on the insurer’s list of preferred drugs (its “formulary”) before approving the drug a doctor believes will work best. Sometimes it’s called “fail first.” In other words, a patient must endure pain and suffering for weeks or months taking an ineffective drug on an insurer’s formulary – the price of which the insurer has negotiated to its financial advantage with a drug maker – before the insurer will agree to cover the medication the doctor believes will be more effective. The doctor will then have to persuade the insurer that the insurer’s preferred drug failed. We’ll dive deeper into that insurer-induced nightmare in a future post, but know for now that it is a big and expensive time-suck that doctors have to endure while insurers can keep unused premium dollars in their investment accounts.
The Conversion That Changed Everything
But let’s go back to Elevance, which until recently was called Anthem and before that WellPoint. Many of its subsidiaries still use the term Anthem in its branding, like the biggest under its corporate umbrella, Anthem Blue Cross of California. All of those Blues plans operated on a nonprofit basis until a savvy executive named Leonard Schaeffer, who was CEO of Anthem of California back when it was still a nonprofit, pulled off a deal that would put him on the path to considerable fame and fortune, a first-of-its-kind “conversion” that would prove to be a major reason why the U.S. has the most complex, expensive and inefficient health care system on the planet.
According to his official bio on the website of the Leonard D. Schaffer Fellows in Government Service, which is affiliated with some of the country’s most prestigious universities, Schaeffer was recruited as CEO of Blue Cross of California in 1986 when, we are told, it was near bankruptcy. We’re also told that Schaeffer “managed the turnaround of Blue Cross of California and the IPO (initial public offering, i.e., converting it to for-profit status) creating WellPoint in 1993. During his tenure, WellPoint made 17 acquisitions and endowed four charitable foundations with assets of over $6 billion. Under Schaeffer’s leadership, WellPoint’s value grew from $11 million to over $49 billion.”
One might think from reading that last sentence that Schaeffer himself wrote big personal checks to endow those foundations, but establishing those nonprofit foundations (which includes the California Endowment, the California Health Care Foundation and the California Wellness Foundation) was demanded by California regulators as a condition of their approval of the IPO. The money was referred to as a conversion fund (converting from nonprofit to for-profit status), and it came from the proceeds of the IPO.
But Schaffer did indeed make a ton of money from the deal and WellPoint’s subsequent acquisition by a rival company that also owned recently converted Blues plans, Anthem, in 2004.
One of the organizations that opposed the WellPoint-Anthem deal, Consumer Watchdog, wrote at the time that:
Payments to WellPoint executives after the company’s buyout by Anthem Inc. could top $600 million if regulators and shareholders do not modify the acquisition terms, according to documents received from California regulators by the Foundation for Taxpayer and Consumer rights under a Public Records Act Request late Tuesday.
The documents detail potential payments in excess of those estimated by the company to shareholders at $200 million in a recent proxy. Executives will receive cash bonuses worth between $146 million and $365 million under the proposed terms of the company buyout by Anthem, in addition to over $251 million in stock options. WellPoint CEO Leonard Schaeffer has already begun exercising his stock options as of June 1st at sweetheart prices – earning him $16 million on that one day alone and increasing the size of his shares by hundreds of thousands.
When we look back at the history of health insurance in this country, we can thank this one man for the rapid shifting of Americans out of what historically had been nonprofit health insurance plans that initially were community-rated, meaning they charged everybody the same premium, regardless of gender, health status, occupation or address, and did not use gimmicks like prior authorization to boost profits. Being nonprofits, they couldn’t even book profits, although many of them did amass millions more in “reserves” than regulators required for solvency reasons.
I was working at Cigna when WellPoint joined the club of big for-profit insurers in 1993, along with Aetna, Humana (where I also previously worked), UnitedHealth, which was a relatively small player back then, and giant “multiline” insurers like MetLife, Prudential and Travelers. All of those last three decided to sell their health insurance operations to UnitedHealth and Aetna, putting those companies on the path to becoming the behemoths they are today.
And Schaeffer would wind up being one of America’s richest men, and, to his credit, he has been personally philanthropic. We know that because his name shows up all over the place in U.S. health care think-tank world. Indeed, his name is now associated far more with groups and institutions engaged in public policy than the “platinum parachute,” to use Consumer Watchdog’s term, he got when he and a few colleagues engineered the sale of WellPoint to Anthem. As his bio notes:
In 2009, Schaeffer established the Schaeffer Center for Health Policy and Economics at the University of Southern California, which emphasizes the interdisciplinary approach to research and analysis to support evidence-based health policy. In 2015, he established the Schaeffer Fellows in Government Service program which has supported 418 undergraduates to date in high-level, summer government internships. In 2004, he established the Schaeffer Institute for Public Policy & Government Service. He has also endowed chairs in health care financing and policy at the Brookings Institution, Harvard Medical School, the National Academy of Medicine, UC Berkeley and USC.
If Schaeffer still owns shares in Elevance, he is a bit poorer today than he was yesterday morning, but he’s probably still doing OK. Shares of Elevance’s stock have increased 1731% in value since they started trading on the New York Stock Exchange in October 2001, even with the company’s very bad Thursday on the Street.
The healthcare industry is still licking its wounds from $1 trillion in federal funding cuts included in the One Big Beautiful Bill Act (OBBBA) signed into law July 4.
Adding insult to injury, the Center for Medicare and Medicaid services issued a 913-page proposed rule last Tuesday that includes unwelcome changes especially troublesome for hospitals i.e. adoption of site neutral payments, expansion of hospital price transparency requirements, reduction of inpatient-only services, acceleration of hospital 340B discount repayment obligations and more.
The combination of the two is bad news for healthcare overall and hospitals especially: the timing is precarious:
Economic uncertainty: Economists believe a recession is less likely but uncertainty about tariffs, fear about rising inflation, labor market volatility a housing market slowdown and speculation about interest rates have capital markets anxious. Healthcare is capital intense: the impact of the two in tandem with economic uncertainty is unsettling.
Consumer spending fragility: Consumer spending is holding steady for the time being but housing equity values are dropping, rents are increasing, student loan obligations suspended during Covid are now re-activated, prices for hospital and physicians are increasing faster than other necessities and inflation ticked up slightly last month. Consumer out-of-pocket spending for healthcare products and services is directly impacted by purchases in every category.
Heightened payer pressures: Insurers and employers are expecting double-digit increases for premiums and health benefits next year blaming their higher costs on hospitals and drugs, OBBBA-induced insurance coverage lapses and systemic lack of cost-accountability. For insurers, already reeling from 2023-2024 financial reversals, forecasts are dire. Payers will heighten pressure on healthcare providers—especially hospitals and specialists—as a result.
Why healthcare appears to have borne the brunt of the funding cuts in the OBBBA is speculative:
Might a case have been made for cuts in other departments? Might healthcare programs other than Medicaid have been ripe for “waste, fraud and abuse” driven cuts? Might technology-driven administrative costs reductions across the expanse of federal and state government been more effective than DOGE- blunt experimentation?
Healthcare is 18% of the GDP and 28% of total federal spending: that leaves room for cuts in other industries.
Why hospitals, along with nursing homes and public health programs, are likely to bear the lion’s share of OBBBA’ cut fallout and CMS’ proposed rule disruptions is equally vexing. Might the high-profile successes of some not-for-profit hospital operators have drawn attention? Might Congress have been attentive to IRS Form 990 filings for NFP operators and quarterly earnings of investor-owned systems and assume hospital finances are OK? Might advocacy efforts to maintain the status quo with facility fees, 340B drug discounts, executive compensation et al been overshadowed by concerns about consolidation-induced cost increases and disregard for affordability? Hospital emergency rooms in rural and urban communities, nursing homes, public health programs and many physicians will be adversely impacted by the OBBBA cuts: the impact will vary by state. What’s not clear is how much.
My take:
Having read both the OBBBA and CMS proposed rules and observed reactions from industry, two things are clear to me:
The antipathy toward the healthcare industry among the public and in Congress played a key role in passage of the OBBBA and regulatory changes likely to follow.
Polls show three-fourths of likely voters want to see transformational change to healthcare and two-thirds think the industry is more concerned with its profit over their care: these views lend to hostile regulatory changes. The public and the majority of elected officials think the industry prioritizes protection of the status quo over obligations to serve communities and the greater good.
The result: winners and losers in each sector, lack of continuity and interoperability, runaway costs and poor outcomes.
No sector in healthcare stands as the surrogate for the health and wellbeing of the population. There are well-intended players in each sector who seek the moral high ground for healthcare, but their boards and leaders put short-term sustainability above long-term systemness and purpose. That void needs to be filled.
The timing of these changes is predictably political.
Most of the lower-cost initiatives in both the OBBBA changes and CMS proposals carry obligations to commence in 2026—in time for the November 2026 mid-term campaigns. Most of the results, including costs and savings, will not be known before 2028 or after. They’re geared toward voters inclined to think healthcare is systemically fraudulent, wasteful and self-serving.
And they’re just the start: officials across the Departments of Health and Human Services, Justice, Commerce, Labor and Veterans Affairs will add to the lists.
Administrative waste, denials, and deadly incentives — the U.S. model shows what happens when profit rules.
The United States is the only country where a health insurance executive has been gunned down in the street. But that’s not the only thing that’s unique about American health insurance.
Almost all of our peer countries – advanced, free-market democracies — have health insurance companies. In some cases (Germany, Switzerland, Japan), private health insurance is the chief way to pay for medical care. In others (such as Great Britain), private insurance works as a supplement to government-run health care systems. But there’s a fundamental difference between health insurance elsewhere and the U.S. system.
In all the other advanced democracies, basic health insurance is not for profit; the insurers are essentially charities. They exist not to pay large sums to executives and investors, but rather to keep the population healthy by assuring that everyone can get medical care when it’s needed.
America’s health insurance giants are profit-making businesses. Indeed, in the insurers’ quarterly earnings reports to investors, the standard industry term for any sums spent paying people’s medical bills is “medical loss.” They view paying your doctor bill as a loss that subtracts from the dividends they owe their stockholders.
When I studied health care systems around the world, I asked economists and doctors and health ministers why they want health insurance to be a nonprofit endeavor. Everyone gave essentially the same answer:
There’s a fundamental contradiction between insuring a nation’s health and making a profit on health insurance.
Health insurance exists to help people get the preventive care and treatment they need by paying their medical bills. But the way to make a profit on health insurance is to avoid paying medical bills. Accordingly, the U.S. insurance giants have devised ingenious methods for evading payment — schemes like high deductibles, narrow networks of approved doctors, limited lists of permitted drugs, and pre-authorization requirements, so that the insurance adjuster, not your doctor, determines what treatment you get.
Other countries don’t allow those gimmicks. In America, the patient pays twice — first the insurance premium, and then the bill that the insurer declines to pay. That’s why Americans hate health insurance companies — as reflected in the tasteless barrage of angry social media commentary aimed at the victim, not the perpetrator, of the sidewalk shooting in 2024 of UnitedHealthcare’s CEO Brian Thompson in New York City.
Another unique aspect of U.S.-style health insurance is the huge amount of money our big insurers waste on administrative costs. Any insurance plan has administrative expenses; you’ve got to collect the premiums, review the patients’ claims, and get the payments out to doctors and hospitals.
In other countries, the administrative costs are limited to about 5% of premium income; that is, insurers use 95% of all the money they take in to pay medical bills. But the U.S. insurance giants routinely report administrative costs in the range of 15% to 20%.
When the first drafts of the Affordable Care Act (“Obamacare”) were floated on Capitol Hill in 2009, the statutory language called for limiting insurers’ admin costs to 12% of premium income. Then the insurance lobby went to work. The final text of that law allows them to spend up to 20% of their income on salaries, marketing, dividends, and other stuff that doesn’t pay anybody’s hospital bill.
There is one American insurance system, however, that is as thrifty as foreign health insurance plans. Medicare, the federal government’s insurance program for seniors and the disabled, reports administrative costs in the range of 3% — about one-fifth as much as the big private insurers fritter away. And Medicare’s administrators — federal bureaucrats — are paid less than a tenth as much as the executives running the far less efficient private insurance firms.
Americans generally believe that the profit-driven private sector is more efficient and innovative than government. In many cases, that’s true. I wouldn’t want some government agency designing my cell phone or my hiking boots.
But when it comes to health insurance, all the evidence shows that nonprofit and government-run plans provide better coverage at lower cost than the private plans from America’s health insurance giants.
If we were to make basic health insurance a nonprofit endeavor, as it is everywhere else, or put everybody on a public plan like Medicare, the U.S. would save billions and improve our access to life-saving care. Then Americans might stop celebrating on social media when an insurance executive is killed.
On the one hand, the alternative to traditional Medicare is still popular among consumers, who have been lured by the promises of lower out-of-pocket costs and increased supplemental benefits.
On the other hand,Medicare Advantage profitability is on the decline, as shown in recent quarterly reports from the large insurers. The headwinds, executives said during recent earnings calls, have been due to greater than expected utilization of benefits and lower than expected reimbursement from the government.
Adding to MA’s margin challenges are providers who are making the decision to cut their ties with MA plans rather than deal with delays in prior authorization and claims payments.
Moody’s Investors Service said this year, and an HFMAsurvey from March indicates 19% of health systems have discontinued at least one Medicare Advantage plan, while 61% are planning to or considering dropping Medicare Advantage payers.
Until recently, the story of Medicare Advantage was one of ascendancy. Just last year it hit a milestone: More than half of eligible Medicare beneficiaries are now in MA plans. So why is business taking a step back?
WHY THIS MATTERS
There are many factors at play, but a big one is the 3.7% rate increase for 2025 that Medicare Advantage plans will receive from the Centers for Medicare and Medicaid Services. The federal government is projected to pay between $500 and $600 billion in Medicare Advantage payments to private health plans, according to the 2025 Advance Notice for the Medicare Advantage and Medicare Part D Prescription Drug Programs released in April.
The payment rate was considered inadequate by insurers, who were also troubled over other key factors, including a 0.16% reduction in the Medicare Advantage benchmark rate for 2025, which represents a 0.2% decrease.
“AHIP has strong concerns that the estimated growth rate in the Advance Notice – an average of 2.44% – will lead to benchmark changes that are insufficient to cover the cost of caring for 33 million MA beneficiaries in 2025,” AHIP president and CEO Mike Tuffin said in April. “The estimate does not reflect higher utilization and cost trends in the healthcare market that are expected to continue into 2025.”
According to Karen Iapoce, vice president Government Programs at ZeOmega, the cost of running an MA business is increasing due to the burdens being placed on health plans.
“If you sit inside with a health plan, they’re asked to do a lot with not as much bandwidth as they had before,” said Iapoce. “For example, health equity requires plans to have new regulatory guidance they need to meet. There’s a host of measures around health equity. Our plans are not in the business of really understanding how to manage transportation, how to manage housing, so they’re working with other entities. This requires an expert to sit in with the health plan … and then track and report. On the business end, they want to show an ROI, but that could be six months or a year down the line.”
Because of that, she said, the benchmark rate is likely insufficient to cover the projected increase in administrative and other costs. Iapoce said the benchmark rates represent the maximum amount that will be paid to a person in a given county; this is used as a reference point for calculation. If a plan is higher than the benchmarks, the premiums end up going to the beneficiary. More commonly, the plans bid below the benchmark, and the difference represents the rebate plans will receive. But they also factor into risk adjustment.
“The plans are getting into these contract negotiations, so they have to know what goes into that benchmark,” said Iapoce. “I might not be a high utilizer, but you may be. If we’re bringing in a community of high utilizers, there’s no one offsetting that. There’s no balance.”
Richard Gundling, senior vice president, content and professional practice guidance at HFMA, said MA plans started running into these issues when the program crossed over the threshold of more than 50% of beneficiaries.
“When a Medicare Advantage plan comes in, then all the extra administrative burdens come into play,” said Gundling. “So you have prior authorizations, all the issues around lack of payment and denials. Patients get caught in the middle, and in particular elderly patients think they’re still on traditional Medicare.
“It used to be that healthier beneficiaries went into Medicare Advantage,” he added. “Sicker beneficiaries tended to stay in traditional Medicare. That’s not the case anymore, and so there’s a higher spend.”
Gundling said beneficiaries are likely flocking to MA with visions of lower costs and increased benefits such as eyeglasses and hearing aids, and many don’t realize the tradeoffs, such as prior authorizations and network restrictions.
MA remains popular with seniors, but studies show the plans cost the government more money than original Medicare.
A 2023 Milliman report showed annual estimated healthcare costs per beneficiary are $3,138, compared to $5,000 for traditional fee-for-service Medicare, and over $5,700 if a traditional Medicare beneficiary also buys a Medigap plan.
MA membership has grown nationally at an annual rate of 8% to approximately 32 million, while traditional Medicare has declined at an average annual rate of 1%. As that has happened the percentage of people choosing MA has grown to 49% from 28%, data shows.
Yet Medicare Advantage profitability is on the decline, Moody’s found in February. That’s largely because of a significant spike in utilization for most of the companies, which Moody’s expects will result in lower full-year MA earnings for insurers. Adding to that is lower reimbursement rates for the first time in years that are likely to remain weaker in 2025 and 2026, which is credit negative.
Moody’s analysts contend that MA may have “lost its luster,” citing as evidence Cigna’s efforts to sell its MA business, even after a failed merger with Humana.Cigna this past winter announced it had entered into a definitive agreement to sell its Medicare Advantage, Supplemental Benefits, Medicare Part D and CareAllies businesses to Health Care Service Corporation (HCSC) for about $3.7 billion.
Iapoce said Medicare Advantage may be a victim of its own success.
“Because of all this great promotion about what a Medicare Advantage plan can do for you, you’re seeing an increase in enrollment, or more people moving over, and the demographics are starting to change,” she said.
For many consumers, the appeal of an MA plan is the same as that of an online retailer like Amazon, said Iapoce. Such retailers offer one-stop shopping for a variety of goods, and the perception is that MA essentially offers one-stop shopping for a variety of healthcare services and benefits.
But while this massive shift is happening, it puts providers in an awkward position, said Iapoce.
“Their reimbursement is almost being dictated, in essence, by a health plan,” she said. “It almost feels like the payer has the upper hand over the provider. Think: I’m a provider. It’s my job to get this female with this particular age and condition a mammogram, and the health plan has told me to get her a mammogram. But you, as the health plan, get the money for it. I, as the provider … what am I getting? What’s it doing for me? It becomes this very tense situation, and the provider is probably the entity that is running on the thinnest of staff.”
Gundling expects that despite some “growing pains,” MA will remain viable and continue to grow.
“Nobody’s going to stay still,” said Gundling. CMS has to consider, ‘Are we paying the health plans appropriately for the types of patients they have?’ And then health plans will need to look at their medical utilization rules – ‘Are we overdoing pre-authorization or denying things appropriately?’ And providers need to say, ‘This is a market we need to continue to grow.’
“There’s still going to be a role for it,” he said. “It’s just that we’ve introduced a larger population into it, and I think that’s where a lot of the surprises come in.”
THE LARGER TREND
CVS reportedearlier this month that healthcare-benefits medical costs, primarily due to higher-than-expected Medicare Advantage utilization, came in approximately $900 million above expectations.
Last month, Humana said it expected membership may take a hit from future Medicare Advantage pricing resulting from the CMS payment rate notice. Humana is actively evaluating plan level pricing decisions and the expected impact to membership, president and COO James Rechtin said on the call.
Elevance Health, formerly Anthem, reported a 12.2% earnings increase for Q1, but company margins have not been as affected as those insurers that are heavily invested in the MA market. Fewer of its members are in MA plans compared to other large insurers Humana, CVS Health or UnitedHealth Group, executives said.
Speaking of Andrew Witty, the UnitedHealth chief spurred a freakout last week on Wall Street after he said the company was beginning to see a “disturbance” in its Medicaid medical costs. More people on Medicaid are going to the doctor and hospital, which eats into the insurance company’s profits.
The biggest insurers that run state Medicaid programs — UnitedHealth, Elevance Health, Centene, and Molina Healthcare — all saw their stocks take a dive after Witty’s disclosure. For the past year, the surge in medical services has mostly been confined to older adults in Medicare Advantage plans.
Wall Street largely did not account for that trend creeping into Medicaid, which covers low-income people.
This switch is largely a function of the government’s Medicaid “redeterminations” process, Centene CEO Sarah London said at a banking conference Friday. During the pandemic, states didn’t have to kick people off Medicaid if they no longer were eligible. But over the past year, states had to redetermine if someone still qualified for coverage, and to boot those that no longer did. As fewer people remain enrolled in Medicaid, the ones who have stayed are sicker and are getting more care.
Looking ahead, London told investors not to worry. That’s because Centene and other insurers will get more money from state Medicaid programs (translation: taxpayers) over the next several months, through routine payment updates, to match how sick its enrollees are. The explanation worked: The stocks of all the Medicaid insurers rose on Friday.
“We know how to do this,” London said. “This dynamic of redeterminations is unprecedented right now because of the scale. But matching rates to acuity in Medicaid is normal course.”
I wrote Monday about how the additional Medicare claims CVS/Aetna paid during the first three months of this year prompted a massive selloff of the company’s shares, sending the stock price to a 15-year low.
During CVS’s May 1 call with investors, CEO Karen Lynch and CFO Thomas Cowhey assured them the company had already begun taking action to avoid paying more for care in the future than Wall Street found acceptable.
Among the solutions they mentioned:
Ratcheting up the process called prior authorization that results in delays and denials of coverage requests from physicians and hospitals; kicking doctors and hospitals out of its provider networks; hiking premiums; slashing benefits; and abandoning neighborhoods where the company can’t make as much money as investors demand.
On Tuesday at the Bank of America Securities Healthcare Conference, Cowhey doubled down on that commitment to shareholders and provided a little more color about what those actions would look like and how many human beings would be affected. As Modern Healthcare reported:
Headed into next year, Aetna may adjust benefits, tighten its prior authorization policies, reassess its provider networks and exit markets, CVS Chief Financial Officer Tom Cowhey told investors. It will also reevaluate vision, dental, flexible spending cards, fitness and transportation benefits, he said. Aetna is also working with its employer Medicare Advantage customers on how to appropriately price their business, he said.
Could we lose up to 10% of our existing Medicare members next year? That’s entirely possible, and that’s OK because we need to get this business back on track,” Cowhey said.
Insurers use the word “members” to refer to people enrolled in their health plans. You can apply for “membership” and pay your dues (premiums), but insurers ultimately decide whether you can stay in their clubs. If they think you’re making too many trips to the club’s buffet or selecting the most expensive items, your membership can–and will–be revoked.
That mention of “employer Medicare Advantage customers” stood out to me and should be of concern to people like New York Mayor Eric Adams, who was sold on the promise that the city could save millions by forcing municipal retirees out of traditional Medicare and into an Aetna Medicare Advantage plan. A significant percentage of Aetna’s Medicare Advantage “membership” includes people who retired from employers that cut a deal with Aetna and other insurers to provide retirees with access to care. Despite ongoing protests from thousands of city retirees, Adams has pressed ahead with the forced migration of retirees to Aetna’s club. He and the city’s taxpayers will find out soon that Aetna will insist on renegotiating the deal.
Back to that 10%. Aetna now has about 4.2 million Medicare Advantage “members,” but it has decided that around 420,000 of those human beings must be cut loose. Keep in mind that those humans are not among the most Internet-savvy and knowledgeable of the bewildering world of health insurance. Many of them have physical and mental impairments. They will be cast to the other wolves in the Medicare Advantage business.
Welcome to a world in which Wall Street increasingly calls the shots and decides which health insurance clubs you can apply to and whether those clubs will allow you to get the tests, treatments and medications you need to see another sunrise.
As Modern Healthcare noted, Aetna is not alone in tightening the screws on its Medicare Advantage members and setting many of them adrift. Humana, which has also greatly disappointed Wall Street because of higher-than-expected health care “utilization,” told investors it would be taking the same actions as Aetna.
But Aetna in particular has a history of ruthlessly cutting ties with humans who become a drain on profits. As I wrote in Deadly Spin in 2010:
Aetna was so aggressive in getting rid of accounts it no longer wanted after a string of acquisitions in the 1990s that it shed 8 million (yes, 8 million) enrollees over the course of a few years. The Wall Street Journal reported in 2004 that Aetna had spent more than $20 million to install new technology that enabled it “to identify and dump unprofitable corporate accounts.” Aetna’s investors rewarded the company by running up the stock price.
I added this later in the book:
One of my responsibilities at Cigna was to handle the communication of financial updates to the media, so I knew just how important it was for insurers not to disappoint investors with a rising MLR [medical loss ratio, the ratio of paid claims to revenues]. Even very profitable insurers can see sharp declines in their stock prices after admitting that they had failed to trim medical expenses as much as investors expected. Aetna’s stock price once fell more than 20% in a single day after executives disclosed that the company had spent slightly more on medical claims during the most recent quarter than in a previous period. The “sell alarm” was sounded when the company’s first quarter MLR increased to 79.4% from 77.9% the previous year.
I could always tell how busy my day was going to be when Cigna announced earnings by looking at the MLR numbers. If shareholders were disappointed, the stock price would almost certainly drop, and my phone would ring constantly with financial reporters wanting to know what went wrong.
May 1 was a deja-vu-all-over-again day for Aetna. You can be certain the company’s flacks had a terrible day–but not as terrible as the day coming soon for Aetna’s members when they try to use their membership cards.
Speaking of Lynch, one of the people commenting on the piece I wrote Monday suggested I might have been a bit too tough on Lynch, who I know and liked as a human being when we both worked at Cigna. The commenter wrote that:
After finishing Karen S. Lynch’s book, “Taking Up Space,” I came to the conclusion that she indeed has a very strong conscience and sense of responsibility, not totally to shareholders, but more importantly to the insured people under Aetna and the customers of CVS.”
I don’t doubt Karen Lynch is a good person, and I know she is someone whose rise to become arguably the business world’s most powerful woman was anything but easy, as the magazine for alumni of Boston College, her alma mater, noted in a profile of her last year. Quoting from a speech she delivered to CVS employees a few years earlier, Daniel McGinn wrote:
Lynch began with a story to illustrate why she was so passionate about health care. She described how she’d grown up on Cape Cod as the third of four children. Her parents’ relationship broke up when she was very young and her father disappeared, leaving her mom, Irene, a nurse who struggled with depression, as a single parent. In 1975, when Lynch was 12, Irene took her own life, leaving the four children effectively orphaned.
During her speech, several thousand employees listened in stunned silence as Lynch explained how her mom’s life might have turned out differently if she’d had access to better medical treatment, or if there’d been less stigma and shame about getting help for depression. She then talked about how an insurance company like Aetna could play a role in reducing that stigma, increasing access to care, and helping people live with mental illness.
I’m sure when she goes home at night these days, Lynch worries about what will happen to those 420,000 other humans who will soon be scrambling to get the care they need or to find another club that will take them. Their lives most definitely will turn out differently to appease the rich people who control her and the rest of us.
But she is stuck in a job whose real bosses–investors and Wall Street financial analysts–care far more about the MLR, earnings per share and profit margins than the fate of human beings less fortunate than they are.
HENRY KOTULA 